Quantitative Easing

GAIL LETHBRIDGE: The economic turmoil is here to stay

If the global economy were considered a fairy tale, we would go from Goldilocks to the Big Bad Wolf.

Goldilocks is actually a term used by some economists to describe an economy that is “neither too hot nor too cold, but just right”, as Goldilocks herself put it while tasting the three bowls of porridge.

It would be an economy that neither grows nor contracts too quickly. Inflation and unemployment are low, while growth is stable. Perfect, in other words.

Goldilocks has been our friend for about 10 years. She got things done well, with a little help from her friends, quantitative easing and rock bottom interest rates, which pulled us out of financial meltdown and saved our financial institutions from disaster. .

Most economists and financial watchers knew that at some point we would have to stop printing all that money and keep interest rates at historic lows.

But, hey, we appreciate that manufactured stability and nobody really wanted to spoil the party and spoil the fun.

Then someone called the cops. A pandemic with its shutdowns, war in Ukraine, disrupted supply chains and soaring energy prices has arrived – and the party has come to a screeching halt.

Suddenly Goldilocks was kicked out and the big bad wolf of inflation was howling at the door.

The trauma of the gas pump and the shock of the tills woke us all up to the new realities of an inflationary cycle. Now the new conversation is, “So how much did it cost you to fill your tank this week?”

The trauma of the gas pump and the shock of the tills woke us all up to the new realities of an inflationary cycle. Now the new conversation is, “So how much did it cost you to fill your tank this week?”

Central bankers around the world are now perched on the horns of dilemma as they play a game of economic Jenga, trying to find the delicate balance to enact a “soft landing”.

They are cautiously pushing up interest rates to stem the big bad wolf of inflation. Small increases seem huge for a world that has become so used to low rates.

As they dispense the anti-inflation drug, they are aware that the rising price of borrowing money is a job killer, which could leave the economy in the dire straits of losing-losing d high inflation and high unemployment.

Canada’s inflation rate is now 6.8%, the highest in decades.

Governments have no say in how the central bank manages interest rates because central banks are independent of government.

That said, governments still have control because they are accountable to worried voters who are seeing their purchasing power diminish. Some blame governments for fueling inflation by borrowing and spending to support the economy at the height of the pandemic.

Pierre Poilievre, candidate for the Conservative leadership, is one of them. He says he would fire Bank of Canada Governor Tiff Macklem and make the bank answerable to the Attorney General, which would kill the bank’s independence.

Politics will be politics when voters are scared and angry about high prices.

This week, Deputy Prime Minister Goldilocks of Canada, Chrystia Freeland, acknowledged the struggles many Canadians are having with the cost of living crisis.

She touted an $8.9 billion package already announced earlier this year in the federal budget. Aid is designed to protect the most vulnerable from the ravages of inflation.

But no new program has been announced. That’s because Freeland is also trying to keep the other big bad wolf of debt out of the door of the Canadian economy.

It swelled as a result of COVID spending. In April, the government forecast a deficit of $52.8 billion. This is a significant drop from the $327.7 billion deficit at the height of the pandemic.

The deficit figure will not be helped by anti-inflationary interest rates. The government cannot control interest rates, but it can fight inflation by pumping less money into the economy and reducing consumer spending.

So, the battle between Goldilocks and the Big Bad Wolf will be with us for quite some time.