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Rudyard Griffiths: The leaders won’t be talking about this issue. It may be the most important one

Commentary

As a federal election gets underway rest assured that the most consequential policy issue facing the country will not be a subject of polite political debate.

This singular topic isn’t being swept under the carpet and away from legitimate political discussion because it’s a divisive cultural or linguistic issue. Quite the contrary. The near total silence of the punditocracy and political class on this key issue is deeply ingrained behavior; the culmination of decades of assumptions about one critical national institution and its supposed indefinite license to function beyond “politics” for the betterment of Canadians.

The debate we urgently need to have but won’t during the coming campaign is the profound effect of our central bank and its monetary policy on our economy and politics. 

To state the obvious, the Bank of Canada’s impact on our day-to-day lives over the last eighteen months has gone from moderate to extreme. As interest rates were manipulated to record lows by the central bank, already frothy pre-pandemic home prices have soared twenty five percent, the stock market is hitting dramatic, all time highs and economic inequality is exploding.

As important as these immediate and oversized effects of central bank interventions are for all of us, they are but symptoms of a more profound, high-stakes reworking of our economy by a single institution whose policies consistently elude sustained public scrutiny and political debate.

Take the basic rate of interest. The exclusive purview of the BoC, rate setting performs the essential function of connecting present and future value. To state the obvious, money in the future is less desirable than money in the present as the latter is inherently risky. Will the company I am investing in still be business in five years? Can I get repaid a loan I am about to make? Interest rates allow everyone to assess risk.

Government rates are especially important by enabling market participants to compare the return on a private investment to the proscribed interest for highly secure government bonds. These calculations, happening millions of times a day, are the longstanding genius of modern markets and the essence of their ability to allocate society’s resources efficiently.

Enter first the Great Financial Crisis and then COVID and we now find ourselves in a world of central bank manufactured interest rates. Across the board, from federal to provincial to corporate debt, the Bank of Canada is engineering rates lower by racking up, a latest count, almost half a trillion dollars of debt instruments on its balance sheet. The long term, deleterious effects of the continued artificial suppression of interest rates cannot be understated.

The signal markets need to avoid malinvestment (e.g. interest rates that reflect actual market participants’ assessment of credit risk and return on capital) has been lost in the noise of unprecedented central bank intervention. Every month the economy endures the artificial suppression of rates, more of your savings are allocated to unproductive, if not failed, enterprises, that otherwise would have been shuttered in an efficient market.

Politicians, through their profligacy, are de facto setting interest rate policy.

This clearing function of markets and the critical role played by non (or less) engineered interest rates is essential to boosting productivity, new business formation, economic growth and rising living standards. Just look at Japan and Europe in terms of the profound costs of aggressive central bank rate manipulation; a generation and more of sclerotic economic growth and critical national industries plagued by one in five “zombie” companies able only to service the interest on their debts, not repay the loan principal.

Current monetary policy, with almost no debate, is eroding the key reason for why we tolerate the less than desirable externalities of free(er) markets from inequality to ownership concentration to state capture. We have long suffered these and other “tragedies of the commons” because markets work miracles in terms of our single greatest economic challenge: the efficient allocation of capital across society. Nothing has, or will ever, do it better.

Yet thanks to unquestioning support for massive, unceasing central bank repression of interest rates we can now enjoy a capitalism producing negative externalities and inefficient markets.

Barring some exogenous shock that challenges current monetary orthodoxy and central bank supremacy, Canada is slow walking into a twilight era of managed capitalism and all the economic underperformance this will entail.

Alas, no party platform or national leader has much of anything to say about the country’s pernicious, now decade-long acceleration towards a central bank coordinated economy and a low-growth economic order that will negatively impact everything from the social safety net to healthcare spending to our ability to fight climate change.

Much of the quiescence of our political class towards monetary policy lies with the much-vaunted concept of central bank independence; a hallmark of post-Depression era economics that helped usher in decades of economic growth. Its key insight was that economies run far better when self-interested politicians aren’t determining the rate of inflation or the relative value of a currency (look at Turkey today). Leave these important decisions to an impartial referee outside politics who is tasked with managing currency, inflation and employment.

Flash forward to the decade of excessive monetary policy that followed the global financial crisis followed by extreme government suppression of interest rates during COVID, and it’s now a valid question whether central banks are still independent.

This we know: central bank-enabled indebtedness, fueled by ultra-low interest rates and unprecedented bond purchases, has exploded in last eighteen months.

In Canada, debt-to-GDP (government, corporate and personal) increased by an astonishing 80 percent in first year of pandemic (7); a record among all advanced economies. It is this colossal debt overhang that prompts the Bank of Canada’s Tiff Macklem to make statements like “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.”

Translation: there will be no normalization of ultra-low interest rates. They will be suppressed indefinitely through large-scale bond purchases to allow our high debt, “zombified” economy to avoid a credit reckoning of truly epic proportions.

Our political class has caught onto this reality and herein lies the real reason for their cross-partisan and conspicuous silence on the risks of the country’s monetary extremism. There is no exit for the central bank from its cheap money policy and ipso facto there is no fiscal check on government policy. 

Extend CRB by a month for $3 billion — why rush? Bail in Newfoundland’s Muskrat Dam to the tune of $2 billion — it’s what federalism demands. $8 billion to settle First Nations drinking water court case — we lost, we paid. $2.5 billion for seniors who saw no decline in OAS/GIS — hey don’t they deserve something too? And on, and on and on….

All these expenditures will be paid for by issuing new debt that the central bank will print money to purchase or risk rates rising not only for the now heavily indebted federal and provincial governments but debt engrossed corporations and consumers (fully one third of Canadians are financially insolvent). A “long time” to quote Tiff Macklem is just that, an indefinite period.

If this doesn’t sound to you much like the behavior of an “independent” institution, you are not alone. The proverbial bank vault is wide open and the very thing that independent central banking was supposed to prevent is tragically coming to pass: politicians, through their profligacy, are de facto setting interest rate policy and the central bank, trapped by the tsunami of debt its has enabled, can’t do anything about it.

Eventually, Canada’s experiment, as a small country, with a path dependent and radical monetary policy will end badly. To state the obvious, the Canadian dollar doesn’t enjoy reserve currency status. No one needs anything we have that they can’t purchase elsewhere in USD, yen or euro. This most certainly includes government debt, which the world will be awash in for years to come, that we will continue to sell at artificially low rates, in a currency backed by an economy two thirds the size of California with a record of poor productivity growth.

Sooner possibly than later, we will experience either a significant currency deprecation relative to our peer nations (thereby importing inflation) or suffer one of the most painful debt workouts in our history (including the painful popping of the housing bubble) or a malicious combination of both that is too awful to contemplate.  

None of these policy decisions — choices that could have a profound effect on our individual quality of life in the years to come — will be debated during the election with any rigor or substance. Instead our political leaders will close their eyes, link hands and hope that central bank’s magical money tree will continue to shower the country in financial largess for as long as it takes for them to get (re)elected.

Oh Canada indeed.

The quality of Vinho Verde wines is on the rise, but the prices are not

Commentary

The last working trip I took before COVID shut down the world was to the city of Porto and the surrounding countryside of Northern Portugal to investigate the wines of Vinho Verde.

Porto was vibrant and full of tourists. The city was having a something of a moment and it was fun to be caught up in that energy. It was the end of October, and the nights were cool and breezy from the Atlantic and the days were warm when the sun shone and balmy when the clouds came in off the ocean.

In the wine world, Porto, which situated at the mouth of the Douro River, is best known for its namesake fortified wine, Port. It’s made from big flavoured red grapes from upriver. But while the English named Port Houses still dominate the left bank of the river with their giant 18th and 19th century warehouses, the city is itself in an entirely different wine region.

That’s Vinho Verde, known for its refreshing whites. Like Porto’s rejuvenation, the wines of Vinho Verde are changing for the better, though thankfully, they remain some of the best bargains on the wine store shelf.

Vinho Verde means “green wine,” and it was traditionally made to be drunk young. The traditional style, which can still be found, was for a low alcohol, slightly sweet and slightly fizzy and highly acidic wine. In the 21st century, like in much of Portugal, the producers of Vinho Verde are opting to make wines that fit better to modern tastes: bone dry and a bit rounder on the palate.

The Commisáo of producers, who were my hosts and paid for the trip, regulate and guarantee the quality of the region’s wines. They would like consumers to shift the meaning of Vinho Verde from green wine to wine from the green country. The region takes up the very northwest corner of Portugal, where the cooling influence of the Atlantic is evident in the greenery of its hills. Grapes are grown on the hills that make up the river valleys in this part of the country. These include the Douro itself towards the southern limit of Vinho Verde, and the Minho, which makes up the northern border of the country with Spain. Cool air from the ocean travels up the valleys and keeps the white wine grapes from over-ripening and losing acidity. There is some red wine production in Vinho Verde, but most producers concentrate on the whites.

There are six grapes that can be used to make white Vinho Verde: Alvarinho, Arinto, Avesso, Azal, Loureiro and Trajadura. Most Vinho Verde is made with Alvarinho and some combination and permutation involving some or all of the other grapes, except Avesso (see why below). Alvarinho is the same grape the Spanish call Albariño, and the Rías Baxais wine region in Galicia, Spain is literally across the Minho River from Vinho Verde.

That Portuguese left bank of the river makes up the prestigious sub-region of Monção and Melgaço, named after two nearby towns. This is the headland, as it were of Vinho Verde, and all the larger houses will make an Alvarinho and/or Alvarinho blend with grapes from Monçao and Melgaço. When made in the modern style, often as a 100 percent Alvarinho wine, they are crisp and refreshing with notes of apples and lemons, and often a bit of a salty character winos like me call “minerality.”

Moving down the coast towards Porto, the wines of the Lima subregion are often dominated by, or made exclusively with, the Loureiro grape. The Lima River Valley is known for its fogs and is considered a particularly cool climate by Portuguese standards, as it is heavily influenced by the North Atlantic. These wines are often a little bit rounder and fuller than the ones dominated by Alvarhino, and can take on characteristics of all manner of citrus fruit and sometimes floral notes.

Loureiro is also widely planted across the whole of the Vinho Verde region, and more and more wineries are either making wines from just this grape. These are making their way to Canada and if you see a wine advertising that it’s the dominant grape in the blend on the label at your local shop, it’s probably from a forward thinking producer and it may well be worth a try.

The last variety of grape from Vinho Verde that I try and keep my eyes open for is Avesso. Avesso literally means “inside out,” but figuratively it means contrary or hard to get along with. This is because, although Avesso is prized for its depth of flavour that can move into flavours of quince or stone fruits, and its ability to take treatment in oak. It is notoriously hard to grow outside of a few prize vineyards.

Most of these vineyards are in the sub-region of Baião, in the Douro Valley. Baião is almost at the Southern limit of the Vinho Verde region and fairly up river from Porto, so it enjoys a warmer climate that suits this late ripening grape. It takes well to the hard granite soil there and at the Quinta de Santa Teresa estate, perched high above the river, I saw Avesso vines rooted in the rocks that were more than 200 years old.

Baião also borders the Douro region, famous for making Port and big red table wines. This spurs both rivalry from the producers of the former and investment from the successful producers of the latter. If I see Avesso mentioned on a wine label I take it as a pretty good hallmark of quality and indicative of a wine that’s likely to be interesting.

The classic pairing with Vinho Verde is seafood, of any kind. While I was in Northern Portugal, I also drank it with all sorts of bounty from the land, especially pork; often cured hams and sausages or stews and roasts. It also works well as an aperitif with salty snacks.

As a consumer, I am pleased to report that while the quality of Vinho Verde wines is on the rise, the prices are generally not. Many excellent wines from the region are well under $20 and very good ones go for much less. This makes these white wines from Northern Portugal a pretty low risk venture and often well worth a try.

Three reputable houses that are carried more or less across this country are Aveleda, Quinta da Lixa and Soalheiro.

The Comissão de Viticultura da Região dos Vinhos Verdes has an excellent website resource that goes in much wider and deeper than this column, with information on all the regions, grapes and producers. It can be found at vinhoverde.pt.