Central banks are intrinsically conservative to keep our money safe: Don Pittis

Which is the best economic strategy:delayed gratification, or live for today?

In the era of Donald Trump, it seems inevitable that the entrepreneurial urge to make hay while the sun shines is headed for a collision with the restraining forces of central banking.

Canada's chief central banker, Stephen Poloz, who releases the Bank of Canada's latest monetary policy statement later this week,has always made his preference known. When it comes to guarding Canada's monetary and banking system, he's a conservative.

Modern political designations have confused our terminology, especially in the U.S.

Conflict and advantage

In an earlier era, the job of conservatives was to keep things the same. Liberals were theparty of unrestrainedfree markets.

Regardless of changing names and allegiances, the two strategies have often been in conflict and each has itsadvantages.

Healthy economies are a mixtureof both approaches in varying proportions.

Seen through the eyes of their opponents, one side is namby-pamby, restrictive, anti-growth. The other is exploitative, mercenary, even destructive.

In their own eyes, one side is saving the world from its worstimpulses, prioritizinglong-term benefits before quick rewards. The other sees itself grasping opportunities before they disappear, putting current welfare beforethatof anuncertain future.

In Canada, the division can beseen between those who oppose pipelines and those who support them, those who fear climate change and those who think the economicbenefits of fossil fuels outweigh any future risk.

This is why Prime Minister Justin Trudeau'spipeline compromise last weekdelighted no one.There was no Solomon-like decision that satisfied bothsides.

Central bank conservativism

Some institutions, including central banks,are intrinsically conservative in the preservationist sense.

Their job is to preserve the banking system and the value of the currency.

"The story in every country that's experienced very high or even hyperinflation is one where a central bank has been forced to follow the dictates of a government that has compromised its independence," U.S. chief central banker Janet Yellentestified to the Senate last month.

Even among people who think they understand money, it's a bit of a mystery how central bankspreserve thevalue of those flimsy rectangles we use as a medium of exchange. As we have seen in many other times and places, it's not automatic.

For many people who use our currency, central bankers areunsung heroes in their quiet task of making sure our money keeps its value.

To some extent it's a confidence game. Even as the U.S. Federal Reservepoured moneyinto the market by buying bonds with invented cash, the world continued to believe that those bits of paper retained their worth.

Yellen's stern look, and the assumption that she would begin to raise interest rates in an instant should the currency be threatened, turnsthe con into actual confidence.

Spooky powers

Whether she actually does it or not, Yellen'spower to raise interest rates at her next meeting, just over a week from today, gives her an almost spooky authority over all the money in the world. Polozhas similar power, though it is more limited.

Last week DavidDodge, a former governor of the Bank of Canada, worried publicly that the conventional strategy used by central banks seems to have lost its effect.

That includes the technique he described as"leaning against the wind" raising rates in the face of a hot economy and lowering them during a cooling economy.

He proposed instead that the world's central banks should raise rates in concert, while governments increase spending at the same time, to break the world economy out of its doldrums.

Beside its similarity to herding cats, getting central banks to raiserates across the board might be in direct conflict with the Trump camp who want to run their economy hot.

President-elect Trump and many of his supporters appear to have turned against the restraininghand of the central bank, whose role Yellenrecently described as"to do things that are not immediately popular for the health of the economy."

That kind of restraint, whether higher interest rates or tight banking regulation, will almost inevitably find itself unpopularwith Trump's no-holds-barred entrepreneurial capitalism. It will clash with the Wild West economics that many have seen as a traditionalvirtue of Americangrowth.

But if the Trump team's attempts to strong-arm the Fed for the sake of short-term economic gratificationseem to threaten the banking system or the value of the U.S. currency, it may faceheadwinds from the preservationist conservatives in their own party.

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