By James Langton
(March 24 – 16:50 ET) – Dr. Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., is a convert to the new economy. In a paper today she outlines the emergence of the new economy and her belief that the North American central banks will engineer a soft landing that averts a stock market disaster.
Cooper calls the Canadian economy’s paradox of booming output coupled with low inflation a “too-good-to-be-true story” that has occurred thanks to the development of the Internet and advances in biotechnology. She believes the economy is “in the early days of an upwave in the long cycle.”
This upwave will come on the back of a knowledge-based economy rather than a goods-based one. “This stands traditional economic theory on its head,” she says. Without the physical capital constraints of yore, Cooper declares economic models such as the Phillips curve — low unemployment equals high inflation — dead. Knowledge is the new form of critical capital and knowledge builds on itself. Unlike physical capital, it doesn’t clog supply chains. That’s why the economy has been able to sustain its seemingly miraculous performance.
Cooper says there is some excess valuation in stocks but fundamentals remain sound. She expects several rate rises on both sides of the border in an effort to slow 6% growth to the 3.5% range, and notes that the oil shock may do some of the central banks’ work for them.
Eventually, she proclaims, “inflation fears will prove exaggerated and interest rates will ultimately resume their decline. If this outlook unfolds, the widely feared stock market meltdown will prove to be only a bad dream.”