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BoC listening to wrong voices in ‘dead cash’ debate

Bank of Canada Governor Mark Carney prepares to appear before the House of Commons standing committee on Finance on Parliament Hill in Ottawa on Tuesday, Feb. 12, 2013.

FRED CHARTRAND/THE CANADIAN PRESS

Earlier this week the Toronto Star reported that corporate Canada is still not investing money quickly enough for the Bank of Canada's liking. The Governor of the Bank of Canada, Mark Carney, made waves last summer when he criticized Canadian business for sitting on piles of "dead money"; this week he doubled down by stating that he "absolutely" stands by his earlier remarks. Mr. Carney's talk of dead money was incorrect last summer and is doubly so today.

I have discussed Mr. Carney's dead money theory in the past (see here and here ) and it has been debunked by a number of writers at The Globe, including Sean Silcoff and Scott Barlow . In summary, the data show that corporate Canada has been making significant investments. Cash holdings are a poor way to gauge investment levels, as companies have the opportunity to finance through debt. In a period of low nominal interest rates, holding onto cash and financing through debt makes sense, as cash has an option value and the current cost of holding cash is incredibly low.

The Star piece contained the following summary of the "dead money" controversy:

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"[Mr. Carney's] remark last year about corporate Canada hoarding billions of dollars in 'dead money' touched a nerve with the business community, which insisted his analysis was misleading and that it was wise for companies to be cautious at a time of world economic uncertainty."

Last summer the Bank of Canada was telling corporate Canada that it should invest more and sit on less cash, because in their view the economy was improving. Corporate Canada pushed back, suggesting that there was still a great deal of downside risk to the economy. The Bank of Canada's economic forecasts proved to be wildly optimistic and the business community's concerns, in retrospect, look downright prescient.

It is puzzling to me why Mark Carney would continue to tell corporate Canada that their investment decisions are wrong, given how off the mark the Bank of Canada's forecasts were. I can understand Mr. Carney's frustration, as an increased rate of investment spending by Canadian business would improve Canadian economic performance. The Bank of Canada would be better served, however, to listen to corporate Canada and the bond market , rather than assuming firms are making mistakes.

MikeMoffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, Western University

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