National Post (National Edition)

FISCAL MONETARY DRAGONS. CORCORAN,

- TERENCE CORCORAN

Far be it from this lowly toiler within the deflating news industry to presume to grapple with the mighty forces that shape our COVID-cursed political and economic system, but the snorting and twitches emanating from the twin dragons of economic policy — fiscal and monetary — are becoming more and more difficult to understand and ignore.

According to the convention­al views of their proponents, the Canadian and internatio­nal economies are being held together by necessary major expansions of government spending and central bank money creation. These unpreceden­ted interventi­ons, we're assured, are preventing the worst from happening while preparing us for a future recovery and a rebound into a new world that will be built back better.

There's no point in even mentioning numbers. Washington is unleashing US$1.9 trillion in new deficit pending. Ottawa's new debt figure, to be unveiled more precisely in a few weeks, will exceed a $1 trillion, with a large portion funded by the Bank of Canada with money it created out of thin air.

But don't worry, they tell us. Bank of Canada governor Tiff Macklem said the other day that the bank “is supporting spending in the economy by keeping interest rates low” and will add more support through its “program of large-scale government bond purchases.” In the end, he said, Canada's two per cent inflation target will be “substantia­lly achieved.”

Another round of BofC bond purchases, known in dragonland as “quantitati­ve easing,” is scheduled for next week when the bank will acquire two-year, five-year, 10-year and 30-year Government of Canada securities to add to its existing $350-billion stockpile of Government of Canada securities as part of the $400-billion mountain of money it has injected into the economy since the COVID lockdown began.

Despite the major expansion of monetary policy, the bank doesn't expect the Canadian economy to return to preCOVID levels until 2023. The objective, said Macklem, is “full employment,” which he appeared to install as a Bank of Canada policy objective that could be achieved without triggering inflation.

The concept of “full employment” isn't officially part of the bank's mandate, but Macklem seems to have adopted it without waiting for the mandate to be rewritten later this year. Instead, he's moved to adopt the U.S. Federal Reserve model under chairman Jerome Powell.

In comments this week, Powell assured everyone that the Fed has its hands on the levers that control tools that control inflation and employment. His message is that full employment is the first objective, with concerns about inflation on the back burner.

“It may take more than three years” before the Fed hits its two per cent inflation targets and full employment, and until then, interest rates will stay low and the Fed's purchase of government bonds will continue apace.

Inflation won't be a problem, said Powell. His words sent stock market values to record highs, with the Dow Jones Industrial Average jumping 430 points on Wednesday. But then on Thursday, another trend line shook things up. Yields on U.S. government bonds — a possible portent of coming inflation — sparked a reversal that sent the Dow down 600 points. Many economists, including Steve Hanke at Johns Hopkins University, warn that central bank money expansion is already way out of line with economic potential. Hanke says U.S. inflation could hit four per cent, well before the Fed's three-year full-employment target.

But don't worry. Which is what they also say about the other dragon, fiscal policy. Contrary to past economic theory, big government spending and ballooning national debt are now said to be just what the economy needs to get back on its feet. With low interest rates and central bank money creation, government­s can borrow trillions and not have to be concerned about interest rate costs.

In a Project Syndicate series titled “America's Stimulus Debate,” Robert Skidelsky — the famed biographer of John Maynard Keynes — argues that monetary theory is essentiall­y outdated and incapable of achieving objectives.

“Fiscal policy is the only game in town,” writes Skidelsky. The reason for turning to fiscal policy — big government spending and deficits — is simple, said Skidelsky.

“The case for fiscal policy is not only that it's a more powerful (because more targeted) macroecono­mic stabilizer than monetary policy, but also that government is the only entity apart from the financial system capable of allocating capital.”

On the other side of the stimulus debate are the late U.S. Treasury Secretary George Shultz and Hoover Institutio­n economists John Taylor and John Cogan. They argue that the mounting spending weakens the government's ability to carry out its core functions, including key global military roles.

“Sooner or later, people will look at the facts, see the destructiv­e path fiscal policy is now on, and recognize that they and the U.S. economy will be better off with a different approach.”

The big risk in big spending and debt was highlighte­d in Canada last week in an alarming report from the Conference Board of Canada. It described how government­s “spending like never before” will produce “massive and permanent” increases in debt levels.

While low interest rates may help, government­s in Canada will struggle to rein in their spending. Thanks to the fiscal stimulus dragon, “tax increases, spending restraint, or a combinatio­n of the two” by all levels of government will be “the only viable solutions going forward. Without additional tax or spending changes, government­s cannot continue to deliver on their current programs.”

But — they say — don't worry.

BIG RISKS. BUT DON'T WORRY, THEY SAY.

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