I'm sorry. I'll speak more slowly and try to be a little clearer.
To put that in perspective: to maintain an inflation rate around two per cent and allow a bit of a margin to prevent deflation, the money supply should grow at five to six per cent per year. We are currently...above that. Meanwhile, the current policy interest rate is at just 0.5 per cent, well below even the most conservative estimates of the “neutral” rate—the rate consistent with full employment and stable inflation, which the bank estimates to be 1.75 to 2.75 per cent. Conclusion? Monetary policy is highly inflationary right now.
South of the border, after hedging its bets for the last year, the U.S. Federal Reserve has begun an aggressive raising of rates. Last week, the Federal Open Market Committee, the Fed’s policymaking body, raised the policy rate to 0.5 per cent, and it has promised seven more rate hikes, with the goal of getting to 2.8 per cent by...next year. Fed Chairman Jerome Powell has said he is “acutely aware of the need to return the economy to price stability and determined to use...tools to do exactly that.”
That U.S. inflation is running hotter than ours, at 7.9 per cent, is no reason for complacency. Unfortunately, Bank of Canada Governor Tiff Macklem was vague in his comments March 3 before the House of Commons Standing Committee on Finance. Commenting on the previous day’s...hike, he made no specific commitment regarding future hikes; nor did he commit to...ending quantitative easing by reducing the bank’s holding of government bonds.
Now, that's interesting. The bank has actually begun some of its swaps to provide additional liquidity to banks with respect to overnight moving of money that the banks need to carry on their business.
To put this in context, the challenge here is that during or around COVID, the Governor of the Bank of Canada said that interest rates would be “low for a long time.” Millions of Canadians agreed with that and took action and based their financial lives on that.
The largest bill that most middle-class Canadians will face every month is their mortgage. When someone as esteemed as the Governor of the Bank of Canada says that interest rates will be low for a long time, it seems a reasonable conclusion or action to not lock in your interest rate but instead to have a variable rate, thereby reducing your costs. They believed that the Governor of the Bank of Canada was correct when he said that interest rates would be low for a long time, and that cost Canadians billions of dollars. Those dollars went to bondholders and bankers, at the cost of Main Street in great towns like Port Hope, Cobourg, Orono, Newcastle, Brighton and Campbellford, among many others.
This was a really serious error in judgment and a mistake. If the governor didn't know, he should not have said anything, and I think that's quite clear.
What happened was that interest rates quickly went up to levels not seen in 40 years. Governor Macklem, at the time, did say that the bank is determined to control inflation, but it is hard to understand how a policy stance that is clearly inflationary will allow him to hit his target. The danger of moving too slowly is that inflation gets baked into people's expectations, thereby setting a wage-price spiral reminiscent of the stagflation that bedevilled the 1970s. Stagflation is still something that is possible. As I said, on a GDP per capita basis, over seven quarters Canada has experienced one of the longest recessions since the Great Depression.
While Canada may not be in a recession on a national basis, on an individual basis, as I said, Canadians most definitely are. We would have two successive quarters of negative economic growth on a per capita basis. At least with half a check mark, we would achieve that component of stagflation.
The other elements, which are high inflation and high unemployment, are just hovering below those thresholds. Of course, inflation is at 2.7%—and we'll see how that goes forward, as of course inflation is a month-over-month metric—and a spike in gas or fuel prices or a spike in housing prices could certainly drive up inflation going forward, giving that a full check mark.
The other area is unemployment, and that has started to tick up recently, to 6.1%. The most recent unemployment report says that we were flat, but it's been on a generally upward trend for the last year. We are certainly not out of the woods with respect to stagflation.
I'll move forward from there. As interest rates crested, we saw even worse economic growth going forward, and that then caused our governor, Tiff Macklem, to actually pause interest rate increases. We'll read from this article from Bloomberg on the Bank of Canada decision. It says:
The Bank of Canada today held its...overnight rate at 5%, with the Bank Rate of 5¼% and a deposit rate of 5%. The Bank is continuing its policy of quantitative tightening.
The global economy is slowing, and growth is forecast to moderate further as...increases in policy rates and the recent surge in global bond yields continue to weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this global growth outlook is little changed from the July Monetary Policy Report...the composition has shifted, with the U.S. economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further. Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand....
In Canada, there is growing evidence that past interest rate increases are dampening economic activity and [reducing] price pressures. Consumption has been subdued, with softer demand for housing, durable goods, and many services. Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada's population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side in wage pressures....
That has now started to go the other way. We have seen, as I said, unemployment go to 6.1%.
The next article is written by Mr. Philip Cross. Of course, he is no stranger to this finance committee. He's appeared several times and has written about some of the economic pain that Canadians are experiencing. I think he's the first one to write that in the last 10 years we are experiencing the worst GDP per capita that we've seen since the Great Depression.
I'll read from his article, published on July 14, 2023, entitled, “No, you won't tame inflation with more government spending”. It says:
A recent research report from the Bank of Canada makes the improbable claim (based on analysis of U.S. data) that more government spending could reduce inflation, so long as the spending boosts aggregate supply in the economy. Though the relationship between government spending and inflation is complex, the idea that more spending could actually lower inflation does seem far-fetched.
In an economy in which the Bank of Canada has identified aggregate demand exceeding aggregate supply as the main driver of inflation, any additional government spending will fuel inflationary pressures—unless its stimulus to supply exceeds its boost to demand.
Let's unpack that a little bit, because I do believe that this is a misconception that many on the left have. While the relationship is complex, the basics of inflation are fairly simple. If you're producing more money, if you're printing more money than you're increasing your economic output, you have an increase in inflation. If you are printing less new money than you are creating goods, you will see a lowering of inflation.
Unfortunately in Canada, as Carolyn Rogers talked about, our productivity is in a “break the glass” moment. What Ms. Rogers is talking about is the fact that Canadian productivity relative to our peers, most notably the United States of America, is reducing, and reducing quite materially. When that happens, we have a Bank of Canada that has the printing presses in overdrive, flooding the economy with cash. At the same time, our ability to produce goods and services was stagnant if not declining. The reality is that now we have more money and fewer goods to buy with it. What the reality is, in this lap and a hundred out of a hundred times, is that you get more inflation.
We'll continue on. It reads:
But somebody has to explain how exactly such a neat trick can be executed. It won’t be easy. The inflation that erupted during the pandemic surprised central banks, whose models of the economy’s supply side do not extend much beyond using the unemployment rate as a proxy. The supply potential of the economy clearly changed more during the pandemic than policy-makers anticipated. According to the IMF, however, this was not from disruptions in global supply chains but because governments in North America paid millions of workers to stay home, even as Russia’s invasion of Ukraine raised energy prices.
For years, we’ve heard repeated claims that more government spending would pay for itself. Outlays for infrastructure projects were supposed to improve our capital stock, while expanding child care would boost the labour supply. But instead of government spending paying for itself, we’ve seen persistent government deficits and a steady erosion of per capita GDP growth. The OECD secretariat is pessimistic about Canada’s long-term growth potential, projecting we will trail all OECD countries through 2050.
Just to break from the text for a moment to clarify that, the OECD is predicting Canada to have the worst economic growth through to 2050. That has a real impact on Canadians. At that level of growth, we would cease to have an advanced economy. Our economy would fall well out of the G7, which would lower the prosperity for all Canadians.
That is consistent with, as I said, the failed socialist experiments in the past. You nearly always get high inflation, low growth and poverty. The folks who suffer the most aren't the individuals who are at the top of the society. They aren't the folks like Justin Trudeau and other very wealthy individuals who have a trust fund to fall back on. They are Canada's most vulnerable. They're the ones who ultimately pay the price for these socialist policies that reduce growth and reduce economic opportunity.
I'll continue. Mr. Cross uses some colourful language later on, but we'll just power through that.
He wrote:
This latest claim that more government spending can lower inflation looks only at government spending on goods and services, however, not transfers. But while most transfers do reach their intended target (usually households), government spending on goods and services is administered by the civil service, whose sticky fingers latch on to sizeable amounts of money for programs intended to serve the public.
These are his words, not mine. He continues:
For example, the huge increase in health-care spending that followed the recommendations of the 2002 Romanow Report did not improve the supply of health care in Canada. Instead, most of the money was diverted to higher pay for government workers.
If more government spending really did help lower inflation, the veritable orgy of spending during the pandemic should now have us mired in a 1930s-style deflation.