How inflation may come back to bite the middle class that stimulus is meant to protect.
Government stimulus is, by definition, intended to stimulate economic activity, something that should be welcomed by those who fear loss of their livelihood or economic ruin due to COVID-19. unfortunately, in the coming years, one unintended consequence of the short-term injection we’ve seen during the pandemic will likely be the hollowing out of the very middle class it sought to protect.
The problem with government mandates is that they require policy-makers to think and act in very small snippets of time — one month, one quarter, or one term.
unfortunately, while a short-term injection of cash may help someone make rent, feed their family or hold on to their house, this same injection may, in fact, put those daily expenses even further out of reach in the long run. A proper assessment of the effects of a stimulus plan must be measured three to five years down the road.
It is undeniable that, over the past few decades, we have witnessed a considerable widening of the chasm between the “haves” and the “have nots.” This phenomenon is observable in wealth and income data and, without assigning responsibility, is widely accepted as a social trend. It is so evident that our current government has made supporting “the middle class and those working hard to join it” central to its fiscal policy since being elected in 2015. unfortunately, that fissure is set to pull further apart over the coming years.
How so? The injection of nearly $500 billion, when all is said and done, into the Canadian economy has allowed for lower-wage earners to meet their monthly liabilities and stay afloat during a turbulent and stressful time. The spirit of this financial support is laudable; the problem, however, lies in the size and speed of this broadbrush capital injection.
This enormous amount of stimulus, coupled with near-zero interest rates, will undoubtedly increase the value of assets for those who are the “haves” in this country. Canadian citizens with financial assets (the TSX was up 5.59 per cent in 2020 during COVID) or “real assets” such as a home, cottage, rental property or land, will see their purchasing power keep up with inflation, as Western economies let their economies “run hot” in the coming years. In fact, many central banks are beginning to follow the u.s. lead on “average inflation targeting” to allow inflation to run above the generally accepted two per cent target rate that has been a foundational policy piece since the Bank of Canada adopted the policy 30 years ago.
Those who understand financial markets and borrow responsibly — key word: responsibly — in a low-interest-rate environment can keep up with inflation and use debt as a wealth creator over the next few years. It is simple math that if inflation is two per cent and your borrowing cost on, say, a fiveyear mortgage is also two per cent, then the money is effectively free.
If, for example, someone is working hard, making a reasonable Canadian wage and doing their best to save for their first big life purchase, such as a home or condo, they are already facing an uphill battle with near-zero yields in a savings account.
This person is being left behind, because the dollars they are saving are not keeping up with inflation and are actually worth less over time. That hard-working person is now making a near-zero yield on a savings account, while losing two per cent in purchasing power to inflation each year. rising inflation will exacerbate this outcome even further, and revisiting the sky-high inflation rates that Canada witnessed in the 1970s would be cataclysmic for a large portion of the population.
The longer view on the result of this stimulus is that it could end up hollowing out the middle class, as the “haves” continue to keep up with inflation and the “have nots” are left behind as their dollars continue to lose value over time.
It’s typical that this kind of wealth discrepancy is blamed on affluent Canadians, and yet it is the very “compassionate” policies that injected this capital into the marketplace that will be the root cause of the devastation and divide. Lest we forget that any government policy that looks no deeper into the future is at best, short-sighted, and at worst, destructive.
Government intervention was undoubtedly necessary to combat the effects of the pandemic, but we must continue to hold all our political leaders to account when it comes to spending, regardless of party, to ensure the long-term financial health of our country
Further economic divide is an awful possible outcome. yes, with a vaccine on its way, we will likely see our economy rush forward with high current savings, pent-up demand and lower debt levels. This will likely be a short- to medium-term outcome, with longer-term inflation being the real wild card that we, as a country, will be left to grapple with.