If Canada faces a combination of increasing prices and faltering economic growth, the Bank of Canada can’t do much to fix that killer combo.
“In that moment you have a tradeoff between a slowing economy (and) rising unemployment, and rising inflation at the same time. Obviously monetary policy can’t buffer both of those,” said Stephen Poloz, the governor of the Bank of Canada, in its July monetary policy report.
Both he and Senior Deputy Governor Carolyn Wilkins described the situation as being similar to the era of stagflation, which none of you under the age of 40 would recall. That was the 1970s, in which unemployment increased, real wages stagnated or fell, and inflation got out of control. Central bankers finally killed off that economic slump with high inflation-killing interest rates (and the resultant 1982 recession), and since then they have not only keeping heady growth going in the 1980s through the 1990s, but also bear most of the responsibility for keeping the world economy going after the 2008-09 world financial crisis.
Time and again since 2009 governments have relied upon the creativity of central banks to invent some new way of getting money into the economy so that it wouldn’t seize up and throw millions into unemployment and the world into depression. It’s been impressive to see, with the U.S. Federal Reserve employing “Quantitative Easing” and the European Central Bank embracing negative interest rates. It’s worked, at least as far as keeping Western economies going at a weak and listless pace. That’s been a triumph. But that game is almost over. The central banks are almost out of tricks.
Poloz and Wilkins essentially put out a plea for the world to back away from its present protectionist course to avoid recreating 1970s-like stagflation, but who knows if anybody outside Canada is listening. Other central banks have been offering their own takes on this theme, discussing the challenge of trying to use monetary policy to balance the threats from both economic increasing weakness and trade war-provoked price increases. Many politicians haven’t wanted to hear of their plight. U.S. President Donald Trump has threatened to fire the Fed’s governor and replace him with somebody more likely to try to goose quick growth, and Turkey’s president has said much the same thing.
Beyond increased price pressure and sagging economic strength from trade tussles, the real problem here is governments refusing to take on their responsibilities for boosting growth, if that’s what they truly want. Or bringing economies back to some sort of normalcy. Central banks are supposed to be simply monitoring growth and inflation and prescribing preventive interest rate medicine in order to keep everything on an even keel. They aren’t supposed to be doing open heart surgery and organ transplants on dying patients, but that’s what governments have been asking them to do.
If governments want better growth right now, or to protect growth, they might need to get out there and build some things. How about some affordable housing in the world’s unaffordable cities? How about some pipelines? How about dredging some silted-up flood-prone rivers, boosting capacities at ports and creating a real national transportation system? (Yes, I know, they’re working on all those things, but not nearly as aggressively as they need to if they want to create real economic growth.)
Or if they are secretly concerned about debt-fuelled spending and grotesque market distortions created by central banks’ efforts, they should rein them in and let them know they’re not responsible for saving us all. Maybe it’s time to clear Western economies of a lot of bad debts and tortured misallocations of capital and get our economies back to a more reasonable situation.
But right now central bankers seem a lot like Prometheus, chained to his rock and anxiously watching that eagle flying in.