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The empty patio of a closed restaurant is seen on Montreal's popular Crescent Street on June 8, 2020.

Paul Chiasson/The Canadian Press

This week, the designated arbiter of such matters declared that the United States economy officially entered a recession in February. And no sooner had the National Bureau of Economic Research made its determination, many analysts declared the downturn to be already over.

Say what? Some 40 million Americans lost their jobs in the weeks following the shutdown of most parts of the U.S. economy in March, while millions more were deemed by the U.S. Bureau of Labor Statistics to be “employed but absent from work” as a result of federal wage subsidies. Several more million workers saw their hours slashed by half or more.

On this side of the border, the 75-per-cent Canada Emergency Wage Subsidy (CEWS) has allowed about two million Canadians to remain on the job even though their employers are not operating at anywhere near capacity levels. That figure is far below the number of people Prime Minister Justin Trudeau’s government expected to be helped by the CEWS, suggesting many cash-starved businesses cannot afford to pay even 25 per cent of worker salaries.

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Another eight million Canadians have come to depend on the $2000-a-month Canada Emergency Response Benefit (CERB) to get by. Ottawa will need to extend the CERB beyond its July expiry date, perhaps until the end of the year, to help millions of gig workers for whom there are no jobs.

And some excitable Wall Street types think this recession is over? That the gradual reopening of the North American economy means that happy days will soon be here again?

Think again. Except for hair salons, which face a weeks-long backlog of clients, most other service-sector businesses can expect months of sluggish demand. Many such businesses will discover they are no longer viable in a world ruled by strict physical-distancing and sanitization protocols, all while cash-poor consumers are watching every penny.

It does not really matter if the recession is technically over. All that means is, things aren’t getting worse, for now. But we remain in a very deep hole, perhaps the deepest in a century. Even if the economy begins to grow again soon, it is likely to remain significantly smaller at the end of 2021 than it was at the beginning of 2020.

What began as a supply shock stemming from the forced closings of businesses has been transformed into a demand shock, as job insecurity slashes consumer confidence and purchasing power, and debt loads that looked manageable only a few months ago suddenly become unsustainable.

The government-mandated shutdowns aimed at slowing the spread of the deadly coronavirus have saved countless lives around the world. But they have also put millions more at risk due to joblessness, poverty, hunger, deferred medical care and depression. Even the best intentions can lead to undesirable outcomes, as evidence linking the CERB to an increase in overdose deaths mounts. It will be up to historians to determine whether we botched it.

“We’re doing a fair job of getting through these first few months, more than a fair job,” Federal Reserve Chairman Jerome Powell said this week as he delivered a downbeat assessment of the months to come. "The question is that group of people that can’t go back to work quickly, what about them? "

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Indeed, what about them? If the Fed and U.S. Congress have nearly unlimited monetary and fiscal firepower, with the U.S. dollar’s status as a global-reserve currency likely to be strengthened in this crisis, the same cannot be said of the Bank of Canada and our federal government. Many advocates of Modern Monetary Theory might posit otherwise, but their hypotheses have never been tested in the real world (outside of failed states) and it would be beyond risky to try now. Both Ottawa and the central bank are already testing the limits.

“Interest rates are at historic lows, Glen,” Mr. Trudeau replied this week to a CTV News reporter who asked him if he had a plan for dealing with all the debt his government is taking on to deal with the pandemic-related downturn. The response betrayed a basic misunderstanding of the workings of financial markets, which can be fickle friends to deficit-spending governments. They will turn on you on a dime once they decide you have crossed the line.

The reason interest rates are low is because central banks have artificially kept them there, distorting the prices of just about everything from stocks and houses to government bonds. Canada’s central bank is now buying up federal bonds and provincial-debt securities, effectively printing money, all while promising to stop the presses when the economy picks up.

Let’s just hope the markets don’t try to call its bluff before that happens.

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