A conversation with Stephen Poloz

Stephen Poloz: And, you know, it’s like landing a plane in the fog. Like you say, I love metaphors. So landing a plane in the fog, and you really don’t know where the runway is until you feel the wheels touch. And then you’re like, okay, there it is. And you don’t want to do that too hard. And that would be going below.

Ian Pollick: Good morning everyone and welcome to a very special edition of Curve Your Enthusiasm. Listen, my co-host needs no introduction, but I’m going to do it anyways. I am very pleased to be joined by Stephen Poloz, the 9th Governor of the Bank of Canada. As is pretty custom on my show for the sake of embarrassing my co-host, a little bit, I’m just going to note some select highlights in his very long list of accomplishments. In addition to spending seven years as the Governor of the Bank of Canada, actually, that was his second stint at the bank. Your initial stint at the bank, Steve, lasted for 14 years. When you left, it culminated in you being the Chief of the Bank’s Research Department. I guess you have something with the number 14, because you also spent 14 years at Export Development Canada as Chief Economist, Head of Lending, and President and CEO. And prior to that, you spent four years at BCA research as Managing Editor of the International Bank Credit Analyst. Now, you’re doing a lot of very important work across different segments of the Canadian private sector. You do have a new mandate in working with Canadian pension plans. And we’re going to discuss that a little bit later on in the show. And finally, I’d be remiss if I didn’t say this for every participant in the Canadian bond market. Stephen has never met a metaphor that he does not like. Steve, thank you very much for joining us today. How are you?

Stephen Poloz: It’s my pleasure to be here, Ian. Thanks.

Ian Pollick: Well, we’re going to have a lot of fun. So let’s just kick into this. And I think the elephant in the room here is trade uncertainty following the U.S. presidential election. Canada lived through a period of that trade uncertainty in 2016, 17 and 18. And that’s a period of time that you remember very well. My first question to you is, how are we supposed to think about the challenges associated with that trade uncertainty with the United States? And what does it actually mean for monetary policy?

Stephen Poloz: Well, you’re right, that is the elephant in the room. For the past two weeks, people have been talking about almost exclusively. I’ll start with a premise that you lay out there. It’s true that we lived through a long period of trade uncertainty during the last Trump administration. It actually began before he was elected president in 2015 when candidate Trump first said he would tear up NAFTA first thing, then took almost all the four years that he was in office to renegotiate the deal. But ask yourself, did trade uncertainty actually go away after that? I don’t really think so. In fact, in a few weeks after signing the new USMCA, President Trump threatened to levy tariffs on Canada again, almost immediately. And there was no progress really on the trade front during the Biden administration. And so for the last year or so, we’ve been living again under those gathering clouds of the requirement to reopen that agreement, regardless of who became president. And now Trump’s renaissance suggests it won’t be a routine renewal. So the result has been that business investment in Canada has been weak in almost all sectors, basically since 2015. Now I know there are a number of other contributing reasons to this, but companies I talked to began actively creating or expanding their U.S. based businesses during those years. That investment spending builds a natural hedge against future trade disruption, whether it’s by tariffs or some other action. And at the very least, it means that for a meaningful negotiation, you know, you can table that. You can say, well, the tariff on a Canadian company is also going to hurt the American workers who work for that company in the United States. So it kind of makes things a little bit more balanced, I think. That’s kind of a natural hedge that’s being built. I think basically we need to be more aggressive on this front. We have things the U.S. wants, so we should be going on the offense with our demands rather than just playing an organized defensive game.

Ian Pollick: And so let me ask you this though, from the central banker’s perspective, trade policy is something obviously that monetary policy cannot control. It’s not an input into it. When I look back at gross capital formation, when I look at manufacturing capital spending, both exceptionally weak. Now from the central banker’s perspective, are we looking through this? Are we supposed to augment this with easier financial conditions? How did you think about it at the time?

Stephen Poloz: Yeah, well, at the time, we’ve pinpointed it as one of the major reasons why the economy was underperforming. And there are two dimensions to that, which I think you’re hinting at. One is that the economy has less demand in it today because you’re not investing as much and you’re not creating as many jobs as you would be as opposed to investing in the United States where you’re creating jobs. That’s one thing. But the other side of it is that it also means that Canada’s potential output slows down because we’re not investing in more capacity in Canada. And so that, of course, means that even though you’ve got less demand in Canada, you’ve also got less supply than you otherwise would. It basically means that you don’t have a disinflationary process that’s underway. But you think you think, demand is weak, you’ve got disinflation happening. Yes, to some degree, but less degree than you think, because the supply side of the economy is actually slowing down or maybe even shrinking. So it does complicate things. And of course, you just know that overall your whole economy is underperforming. It’s just not doing its thing that it would do, you know, under mother nature if it had more certainty in the trade outlook. Trade being extremely important for our future.

Ian Pollick: And so let’s just take that and run with it a little bit because you’re in this environment now where let’s say trade uncertainty means that we’re stuck in second or third gear. We can’t rev up all that much. And it brings up a very big point. And we know that the Canadian economy has demonstrated this very structural underperformance and really particular to other small open economies. And whether we’re looking at per capita growth, capital deepening, productivity, standard of living, what do you think are some of the primary issues that are contributing to this serial underperformance? And how do central bankers have a role to play in this?

Stephen Poloz: Well, it’s true. We’ve been underperforming most, almost all other OECD countries, not just the small open ones. And the easiest comparisons are with the U.S., which, of course, is the leader in all this. I think about this as like a flock of Canada geese, right, where the U.S. goose happens to be in the lead. And we keep ratcheting ourselves back in that v formation, flying slower and slower relative to the U.S. I think it’s kind of ironic that the lead Canada goose is the U.S. But anyway, that’s just the kind of the metaphor kind of falls apart there. But so we’ve seen our GDP per person lagging far behind the U.S. And in fact, it’s actually declined outright in the post pandemic period, which is quite rare. It’s very rare for that to happen. So this does connect directly to your first question, right? Because economic growth comes from people and it comes from productivity. We’ve been growing our population fairly rapidly. So there’s been some economic growth, but economic output per person has been falling. And that’s because our productivity has been weakened since 2015 and even has gone down in the past couple of years. Now there’s a whole menu of things that people would like to talk about under this header. And so let me just mention I don’t know, three or four that I think are the most important ones. As you and I just discussed, our business investment spending has been weak, and that’s the primary place where, you know, capital deepening or widening, that’s where productivity is usually going to come from. But some of this is also because of the extra layers of permitting processes we have in Canada. Federal rules, provincial rules, municipal permits. We have a very thorough environmental review processes. We have Indigenous reconciliation consultation processes. These are all well-intentioned and I think most of us are proud of them. Well, let’s just admit that we’re not very efficient about getting these things done and, you know, investments just really lag and an investor can go anywhere. Canada looks like a challenging place to do business given all this compared to other places. On top of that, we have higher taxes, especially on individuals and I want to emphasize this too, government is bigger today. In the post pandemic period, government has become bigger. The federal government is spending a higher percentage of our total economy. And we know from our textbooks that that crowds out the private sector. So all those new government jobs have zero productivity growth associated with them. And what they do is they replace private sector jobs that used to have positive productivity growth. I know that probably sounds like a boiling the ocean here. There are so many things that go into this, but the question is, how do you fix any of it or all of it? I mean, it’s really hard to fix all of it. And but lots of things you could do, like talk about more certainty around trade, as we did a minute ago, lower those tax rates, make government more focused and leaner and streamline those permitting processes. Well, those are nothing to do with the central bank, right? So I mean, the central bank is kind of providing an environment to the best of their ability that’s a favorable one to invest in. Low and stable inflation. Part of that creates a relatively stable economy. That’s all part of the yield that you get from that policy framework. But that’s about all that the central bank can really do. And it certainly can’t do anything about those impediments to investment or the things that slow down. You know, the fact that we took almost 12 years to do the Trans Mountain pipeline is just an illustration of what I’m talking about. For all those years, we’re pouring money into the ground and nothing’s happening. So it’s a negative productivity here in Canada. And then when you turn the pipe on, suddenly you get point three, point four, maybe as high as point five percentage points of GDP productivity growth over a course of two quarters. And that’s amazing. When an lNG facility goes online, the same thing will happen. So we’ll get some productivity from these things. But it’s not going to fix the trend line.

Ian Pollick: No, like these are step functions, right?

Stephen Poloz: That’s right. They’re one offs in that sense. But they aren’t one offs in the past because you’re pouring the money in steadily for years and years and years. That’s the negative productivity. So if you took 10 years to do something that say in the United States took one year or two years, that’s an enormous difference in your productivity trend line.

Ian Pollick: For sure. So I think, I just want to ask you very quickly to comment on this kind of step function productivity, because I think a lot of people who are looking ahead to 2025 say, well, look, how do I square some of this productivity with some of the immigration rules? And so it’s this idea that, you know, output per worker, it’s going to be helped in part because many of these temporary workers and students that won’t qualify for permanent residence slots will lose their low value added jobs or move to part time. And so that picks up this pro-psychological productivity, but again, it’s a step function. And so you don’t seem to have as many step functions that treat this very, very natural organic flow of productivity in Canada.

Stephen Poloz: Yes and no. I’m just going to intervene a little because those university students who come from abroad to get an education here, first of all, that’s a fabulous export. We earn a really good check from the people who are buying those educations. So that’s a very good thing. That’s a good business to be in and it’s not a good business to disrupt. And secondly, you know, without those immigrants, we would have zero growth in our workforce and we can’t grow our economy like that. And so our very best channel, most highly qualified channel of immigrants is people who are spending three or four years at a college or university here in Canada, decide they like the place and decide they want to stay. Those are high productivity individuals. They will go into all kinds of jobs across the economy. They’re not going to be working at the corner store once they’ve got their degree. They’re going to be in demand. I think, as usual, there’s unintended consequences with just about everything that you do as a government. And so there’s a lot of downside risk in dealing with the immigration in this way and using the universities as kind of one of the channels. I think if you instead said to a university or college, provided that you can guarantee the availability of housing for those international students for their four years, so you’re not impacting the local housing environment, then you can bring in as many as you wish. That would be a pretty simple rule to follow.

Ian Pollick: Well, let me ask you this, right? Because I think we’ve spent some time leading up to this very big question. So we talked a little bit about capital deepening, some of the structural problems in Canada, and we really talked about productivity. And so what we’re really talking about in a lot of these questions is potential GDP and potential growth and linked at the hip to potential growth is this idea of the neutral rate. And so, you know, the whole world, every developed market who is easing policy rates has one objective, which is either get to neutral or maybe a little bit below because there’s a lot of disinflationary progress. And, you know, in the Canadian context, I guess my question to you is, you know, whether you believe or not that r-star A has risen, has it risen because of some temporary or structural changes since the pandemic? And I’ll ask you a couple of questions afterwards, but as a starting point, do you believe that the neutral rate of interest is real? I know you can’t touch it, you can’t trade it, but do you believe that it’s higher?

Stephen Poloz: Yeah, well, I definitely think it’s a real concept. Usually the way I would think about it, in fact, I’ve laid out this fairly good detail in my book. It’s got this equilibrating mechanism, which has got people on the one side, you’ve got growth in population on one side, and therefore workforce. And those people with a certain, on average, rate of time preference. That is how fast do they want things or are they willing to be patient, save for things and so on. That’s kind of driving that one side of r-star. And the other side is being driven by that core growth rate in the economy, which is being heavily influenced by productivity trends. And so here’s the thing, that can be a very steady process for a very long time. In fact, I think of r-star as hardly ever moving, you know. It might move half a point up or half a point down. And those fluctuations normally would come not suddenly, but would be more like the tide ebbing and flowing. That tide is driven by technology. So if you believe like I am, like I do, that we are now into the fourth industrial revolution, and that’s likely to give a significant boost to productivity for all of us over the next 10 to 20 years. Just as the third one did, we estimate 10 to 15 percentage points of GDP over a 10 to 15 year period. So a percentage point per year, serious stuff. I think this one’s more likely to be bigger than the computer chip industrial revolution. So more jobs at risk of disruption and so on. So let’s suppose it does deliver that productivity, then you might expect r-star to be pushed up, you know, modestly over the next 10 to 15 years. And like I said, that might be half a point like that. Does that that half point matter much to monetary policy? I don’t really think so. I think what you don’t know whether you’re at r-star or not, unless all the other conditions fall into place. So like I said, you know it when you’re there. But you’re not 100% sure unless you’re there. And it’s like landing a plane in the fog. Like you say, I love metaphors. So landing a plane in the fog, and you really don’t know where the runway is until you feel the wheels touch. And then you’re like, okay, there it is. And you don’t want to do that too hard. And that would be going below. I think when we set aside the actual r-star, then it looks like everybody’s heading there. Economies will stop contracting around a few months after we hit r-star. It’s important to bear that in mind that if we get to r-star, we still have a lot of downward pressure on the economy in the pipeline because it takes a good 12 months. So right now, you know, we raise interest rates during 22 and 23. You know, that full story doesn’t get told until mid 25. So interest rate cuts in 24 aren’t doing anything in 24. We may see the glimmers of a housing recovery, let’s say, but it’ll be a full year before we have the actual impacts on the economy. And another year after that, before we see what the full consequence would be for inflation.

Ian Pollick: Well, let’s just play a little more 3d chess here because I think the added complexity in a small economy is that you have the flexible exchange rate. And so when you think about, can you think about the neutral rate in a country like Canada without considering that flexible exchange rate?

Stephen Poloz: Yeah, the smaller you are, the more likely your r star comes from outside anyway. So in our case, you know, it would be almost impossible to believe that r-star would be significantly different from U.S. r-star, but it could be with a dynamic. It could be a little bit in the context of the Canada geese I talked before. So if you’re lagging behind, it may take for a while for you to catch up in that slipstream. And so r-star, though, is what it is more or less given to us with a few differences around the edges. And that would be consistent with the U.S. And so that does mean, therefore, that you’ve got to take the exchange rate into account because it is possible for you to move your interest rate significantly away from r-star, provided that you’re willing to accept whatever those consequences are for your exchange rate. That’s the point of having a flexible exchange rate so that you can make policy with respect to your own economy, regardless of what may be happening in the U.S. Just say, let’s suppose the U.S. continues to be really strong given a combination of new fiscal initiatives, you know, from the next to the U.S. administration and a great supply side, you know, really good investment spending and strong productivity growth. If it remains in that track and Canada has, you know, say another 12 months’ worth of weakness built into the pipeline, then you would see Canadian interest rates possibly, well, at least they’re going to go lower than the U.S. and they may have to go maybe a little bit below neutral, like you suggested. I’m not sure about that. But the point is the gap between Canadian rates and U.S. rates could widen noticeably further under that scenario.

Ian Pollick: And so I want to press you on this a little bit, and I don’t want you to talk about current policy and let’s just stick to this in general terms. But one of the most oft asked questions from clients is, is the Fed a binding constraint from the Bank of Canada in the status quo environment? And we’ve heard the current governor talk about the divergence, but we’re not near the limitations of that divergence. How should we actually be thinking about what that limitation is? Is it only a sole function of the currency gets cheaper, therefore you have a secondary level of inflation pass through. But if you’re cutting that much, don’t you have disinflation in the domestic economy that offsets it? How should we actually be thinking about this?

Stephen Poloz: Yeah, well, so you’ve laid it out perfectly. That makes it very complicated. And bear in mind, it’s not just snapshot. It’s a movie. It’s dynamics. And the dynamics move at different speeds. So if you have a certain amount of excess capacity in the economy, that’s putting downward pressure on inflation until the excess capacity goes away. So inflation will drift down. But if somewhere along the way, then this divergence happens or some other, let’s go back to your earlier question. Our negative productivity growth over the last couple of years is leading to quite a fast rise in our unit labor costs in Canada relative to the united states. And that’s one of the best long-term fundamental determinants of that purchasing power level of the Canadian dollar. So that means the foundations of the Canadian dollar are eroding quite rapidly right at this moment. Exchange rates don’t react to those things, you know, month by month or quarter by quarter, but it sort of creates kind of an overhang effect. And then a catalyst comes along, you know, and possibly the Trump renaissance is such a catalyst that suddenly causes the Canadian dollar to react. And then it can catch up to those different fundamentals. So it’s a bit of a, you know, it’s like, it does way works. It comes and fits and starts. And so with that kind of as a background, that catalyst could come from anywhere. There’s some downside risk building into the CAD. And maybe we’re experiencing a little bit of it, you know, right now when we look out the window. Now, when the CAD goes down, it, of course, causes import prices to go up. But that’s a one-time effect, right? It’s easy enough for me to say it’s going to raise the cost of living again, right? So it does. It does raise the cost of living again. People say, that’s inflation. I say, well, it is inflation, but it’s usually pretty transitory. The t word, there you go. You know, so look, you know, by 24, we discovered that sure enough, The inflation coming from Putin’s invasion of Ukraine really was transitory. The transitory is defined by approximately two years. And so that’s why the disinflation has been so abrupt. And so if we had that, you’d have say you have disinflation coming from the economy with excess supply, a little bit of inflation coming back in through a weaker Canadian dollar. And then what would happen is at a certain point, things would re-equilibrate and the Canadian dollar might recover that lost ground. And that would push those prices back down again, but inflation rate would be converged on what the output gap or the excess capacity gap dictated. So that’s how complicated it is. Putting that all into a model, which has not done well to explain what’s happened over the last three, four years and hoping that it would suddenly explain it perfectly over the next couple of years, of course, is an exercise worth doing, but also respect that it’s just a guess. And so you can’t be into the decimal points with this. So the point you’re making is well taken, but it does not become sort of a constraint, in my opinion. It would be a constraint in the sense that if most of the macro models I learned were driven by the one made by Rudi Dornbusch, who was one of our famous monetary economists. And so he predicted that because exchange rates move fast and, you know, and the economy moves slow, that dynamic combination meant that exchange rates would very often overshoot where they would eventually go. They would go, it would overreact to whatever the news was, and then gradually come back to where they should go. And if that’s the case, then you are taking extra volatility into your inflation rate. And also, of course, you’re maybe undermining the currency. You’re not completely neutral on this question that you’re raising. I mean, everybody has their own take on this. My sense, I always looked at the Canadian dollar as kind of the stock price of how the Canadian economy is doing. And so, of course, you want the fundamentals to be good and therefore the Canadian dollar to be good. But when the economy is underperforming, then that’s time for the exchange rate to do some of its work. And what that does is it spreads the monetary stimulus beyond housing and investment. Well, investment hardly reacts to interest rates, but housing, let’s say, and spreads it out to the export sector. And therefore it can help companies have a stronger value proposition, sell more stuff, maybe invest more too.

Ian Pollick: You don’t know this about me, but you deeply grounded how I answer this question to people, because I often tell people there is no magic level of the currency. I often get asked, well, you what if the bank does this and the Fed doesn’t do that and dollar CAD is at 150? Like what’s that level the bank cares about? And I always said, well, I think it’s the speed and not the level because I will point back to the 2015 example with when we had the cauliflower crisis and we had dollar CAD move very aggressively and all of a sudden, cauliflowers cost $12 at your local grocer. And that was a reason for the bank to slow itself, but it was not necessarily because you had a fundamental problem, but you had this overshoot that happened rapidly.

Stephen Poloz: That’s exactly right. And so it’s worth it to go cautiously so that you don’t have to live through an overshoot. And now an overshoot can last a while, right? So it’s better if you can avoid it. You kind of lean such a way that you mitigate that risk of an overshoot. The more you do that, then the more, of course, you’re maybe compromising your more fundamental goal. So that’s kind of the gray zone that you’re in. But it’s the short-term movements of the exchange rate, which can come and go in the form of volatility, whereas the movements of the economy are much more gradual, right? They don’t get the reaction that’s so immediate. So it’s a sensible trade-off to think about.

Ian Pollick: For sure. Now you used a word recently and you said the word renaissance. This is perfect for my next question because one of the things that we have seen over the past 30 years is this very secular decline in bond premiums, the additional compensation that people require to own a long duration asset as opposed to rolling over a series of treasury bills. And against that, you’ve seen this large fiscal expansion that’s never been able to be penalized. And you are seeing this mini renaissance of the bond vigilante to a certain degree, where the bond market now in an environment of high term premium, higher, longer term interest rates, higher overnight rates does have the ability to start penalizing some of those serial fiscal bad actors. You kind of saw it in the 2022 in the United Kingdom. We saw it in France early this year. We saw a very mini glimpse of it in the United States. And so when we think about longer term interest rates generally being higher because there’s more bond supply. The bond supply is a function of unfunded fiscal expansion. How do central bankers wrap their heads around this from a financial conditions perspective? And you know, the reason I’m asking you this is I often get asked, well, what about five year mortgage rates in Canada? I’m like, well, you know, this was the only hiking cycle in history that you had cuts price at the same time, which meant that rates actually never rose that as much as they should. And there’s symmetry to that. And so can you expect a five year mortgage rate that’s priced off of a five year bond to fall as much as policy rates are falling when you have this dynamic? And so I’m just curious, how does a central banker think about this? Or have you thought about this?

Stephen Poloz: Yeah, well, I’ve thought about it quite a lot. So you’ve posed the question well. By the way, in your premise, you talked about that long secular decline in yields and risk premia. And that I think of as a downtrend in r-star, during that, from when I was a kid till, say, the global financial crisis, give or take. That secular decline was a period of falling risks and what was happening was in the late 70s, early 80s, we kind of had the peak point at which baby boomers like myself were borrowers. So with the peak demand for that, give it to me now, I want my house now. So that disequilibrium creates that upward pressure on r-star. And it happened to coincide with a major inflation that started in the 70s. And so you kind of got this peak for two reasons, right? Both the r-star and the inflation premium. And so both of those premiums have come down for the last 20 years or longer. And so the question is therefore, you know, what’s next? Well, during that period, you’ve put your finger on it. One of the biggest things that has happened is that governments have moved towards a very, very high level of indebtedness. In fact, not just governments. Everybody’s got more debt than they had back then. But governments in particular. And so when you have governments out there every day, now historically, governments have never actually paid back debt, right? What they do is they grow out of their indebtedness. Even after major wars, mostly it’s economic growth, which reduces the indebtedness of government so that allows old bonds to expire, but they’re always being replaced with new ones. And when we see signs like you’ve cited, like the UK and in France, these little bouts of call it indigestion, where you’re just given the fundamentals, you’re choking on how much debt is being offered to the market. And so those are warning signs that we have to take seriously. Most of us think that around 100% of GDP is kind of like you’ve entered the gray zone where it’s uncertain whether you’ve got a sustainable situation, a debt situation or not. The U.S. is far above that now. And the risk that we face coming up next is, you know, the things that the new administration talked about doing, if they did them all, raising tariffs, which raise prices. Careful not to say raise inflation, but it’s going to, in the first instance, raise inflation at a time where there’s a lot of inflation angst, right? So it kind of adds to that sense of instability. But on top of that, the risk is that because we start that with an unsustainable fiscal track and we’re going to layer on massive tax cuts on top and no obvious plans to reduce spending, that means an even less sustainable track and that the possibility of serious indigestion for treasuries is there. When there is serious indigestion, you know, central bank tends to try to compensate. The fed would kind of take the pressure off some of those auctions. You know, to maintain order, that’s job one for a central bank, maintain order in financial markets. The inflation objective is kind of a pretty modern add-on to central bank responsibilities. And so the risk is pretty real that especially would be coming up to a change in Fed chair and maybe a year or a bit more than a year. You know, Trump has said things around that that suggests, you know, he might be more interested in having somebody who’s more flexible, let’s say, as Fed chair. So that does open the risk of fiscal dominance, where the Fed is basically, you know, kowtowing to the fiscal authority. I don’t really put it high on my list, but I got to say the things that are being said are real and if they’re all fall through on, we’ll all have to be prepared for a higher inflation track, at least in the U.S., as a possibility. But, this is what happened in 1970. And the 1970s really can happen all over again. Back then the U.S. couldn’t really pay for the Vietnam war. Nixon tried to persuade the Fed to keep interest rates low to make it easier. It came time to replace the Fed chair. And they did with a very willing Fed chair, Arthur Burns. And I think that laid the foundations for the great inflation of the seventies.

Ian Pollick: I mean, it is interesting, especially for a small market like Canada, because we will have that spillover from U.S. treasuries into the Canadian bond market. And so it’s not a homegrown reason, but is one given proximity and just linkages, you can’t not ignore it. And so if that occurs at a time in the cycle where we are departing and we’ve spoken at length about that on this episode today, it just actually exaggerates some of the slowing and particularly in credit expansion in Canada.

Stephen Poloz: Yeah, the tariff plan, to the extent that it occurs, would be a stagflationary shock to the to the global economy. So slower growth and higher inflation. But if I can just go back for a second to 1970, those inflation pressures coming from the U.S. were obvious to most people. And so the Government of Canada dropped out of the Bretton Woods system, floated the Canadian dollar in May of 1970 so that Canada would not need to import U.S. inflation. And the Canadian dollar went up by well about seven or eight cents virtually within a couple of few months. That’s really rapidly. And so as a result, they were worried about the export sector. And in the end, we ended up importing the U.S. inflation into Canada and not allowing the exchange rate to move as much as it otherwise would have. And so there’s a big lesson there and I think the lesson would be taken to heart. I have confidence that Europe and Britain and ourselves, we would say, no, no, we’re not going to take that inflation into our economies. So our bond markets would have to adjust to those differences. We may have some higher yields in Canada just because the risks would be higher, the uncertainty would be higher. So the risk premium might be higher, but we would have a much stronger fiscal performance, I expect, as certainly we do now, and I would expect that to continue. And so that kind of mix would suggest that we’d be determining our own interest rates, our own mortgage rates, et cetera. But you’re right about that. I mean, when you think about how much the yield curve inverted in this past episode, that just means that as the yield curve goes back to normal, you don’t get nearly as much action in the middle of it, you know, in the five year, place where, you know, so homeowners have to understand that as we said back when rates were zero, we said this is not going to last. It’s an emergency thing. So when yields that drive mortgage rates are going to be permanently higher than what we experienced, I’d say between the Global Financial Crisis and the pandemic. So that you just have to understand that that’s going to cost more to service any level of debt.

Ian Pollick: Fully agreed. And so it also may delay some of the housing rebound that people are banking on. I want to move on a little bit because, you know, one of the new innovations in your life, which is interesting to all of us, is this mandate with Canadian pension plans. And I think it’s broadly misunderstood because I think if you ask the average bond market participant, they would say, well, you know, ex-Governor Poloz is mandating every Canadian pension plan to go buy bonds again. I don’t think that’s it. And so maybe I would like you just to expand like what is the mandate? Why are we doing it now? And what are the benefits of it?

Stephen Poloz: There’s a perception out there that our big pension plans, at least, under invest in Canada. And so this has sort of arisen, therefore, as a kind of a political issue and the government would like to address it. And if they are under investing in Canada, find ways to see if we can remedy that. So I began this with the notion that actually it’s really hard to, in fact, almost impossible to determine what exactly is the appropriate exposure to Canada of a major pension plan. Some would argue it’s the share of Canada and global capital markets, or maybe it’s the share of Canada and global GDP. And all the rest would be somewhere else. Those would be really, really low numbers, right? Now at the same time, you know, any pension plan, its liabilities are all Canadian dollars. So there’s definitely a home bias in the thinking because, you know, you want some matching between those liabilities and the assets that you carry because otherwise you’re exposing yourself to a major exchange rate disruption to your long-term benefits. So that’s all to say it’s a really hard thing. And I just don’t think there is an analytical or a concrete way to say they’re under or over invested in Canada. So I just set that aside. I’m not going to argue with people about that. I’m just saying I’m not here to tell you it’s too low or too high. But my mandate is from that, a fairly narrow one, is to consider the situation and come up with ideas that would identify and remove impediments to investing here in Canada and create a wider set of opportunities for them to invest in. And, you know, most of the pension plans would say to you, you know, we invest a lot in Canada. Some would argue too much. Others obviously argue not enough because the perception is reality. But the point is that we would invest more if we had more opportunities. And when you hear in the newspaper that a pension plan is investing, you know, say in an airport in, you know, in great Britain or someplace. I think, well, my goodness, why wouldn’t they invest in our airports here in Canada? Well, because they’re not allowed to. Well, okay, that sounds like a pretty big restriction, doesn’t it? And so, you know, that’s just an obvious example. And there are many other impediments that the pension plans have identified for us. And so we would like to find ways to remove some of those impediments. I won’t go into details at this point, because that would be to kind of mess up, you know, the process because we’re in discussions now about a menu of possibilities. So I’ll ask you to stay tuned. But on the opportunity side, it’s the same sort of thing. Like I just mentioned, airports. Well, you know, where’s that rule coming from? You know, there’s a lot of other things that they can’t really invest in. And there may be ways of interpreting rules or finding ways to modify rules to help them find different avenues to invest here in Canada, similar to investments that they make elsewhere. And so all that to say, these are carrots, not sticks. I think the little quote you gave me from the bond trader sounds like they’re only thinking about sticks, force them to do that or force them to do that. I’m basically, from the beginning, I’ve refused to even contemplate forcing them to do anything. But to lay out some more enticing things that would attract them. And by the way, they would attract lots of investors. So, you know, we talked at the beginning of this episode about our attractiveness as an investment place. It’s low. And so why would we be surprised if an investment plan is not the extra keen to invest in Canada when other investors, including companies investing in themselves, are not actually investing as much as they used to. So we need to do things for our environment and some there’s some things that are directly applicable to pension plans, but many other things that we could do to improve our investment environment. And then Canadian investment would go up inevitably.

Ian Pollick: For sure, and I mean, everything we’ve talked about today is hyperlinked to one another. And thank you, thank you very much for expanding on that. We’re getting a little bit long in the tooth here. Steve, I just want to say thank you very much for coming on the episode, but I also want to say thank you for something that you may not hear enough. And I want to say thank you for your service to our country, to our economy, for making our financial system better. You were there in good times and you were there in very bad times. And so with my, my sincerest gratitude and for all of our listeners, thank you for doing what you have done for us.

Stephen Poloz: Well, that’s very kind of you to say. It was a great ride anyway. You know, I got a lot out of it. So it was my pleasure.

Ian Pollick: Well, as did we. So listen, everyone, thank you very much for taking time to listen to us today. And remember, there are no bonds harmed in the making of this podcast.

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