The U.S. economy shrank at an annualized rate of 33 per cent in the second quarter of 2020, marking the worst three-month contraction in more than 70 years of comparable record-keeping. After showing some signs of life in June, consumers are pulling back as regionalized outbreaks of COVID-19 spike upward and it becomes clearer that the pandemic is far from over.
The economic news is similarly depressing on this side of the border. While Canada has done a better job of controlling the coronavirus, our economy has been whacked not just by the shutdowns, but by plummeting oil prices. This week, French energy giant Total SA simply wrote off its investments in the oil sands. In 2020, even Alberta is set to become a “have not” province.
And yet, the stock market has barely noticed. After hiccuping in March, equity indexes have stabilized near the record levels they hit at the beginning of the year. Though unemployment has surged, and corporate profits plunged, stocks and bonds have been on a tear. Even the real estate market is acting as if the worst economic downturn in our lifetimes is no big deal.
Raise your hand if you agree there is something seriously wrong with this picture.
During the global financial crisis of a little more than a decade ago, governments and central banks across the developed world joined forces to prevent a recession from turning into a depression. Their actions worked, to the extent that the global economy soon stabilized. But that episode marked the beginning of an extended period of monetary intervention that had never really ended before the pandemic struck, and which has now gone into overdrive.
Where governments and central banks once only intervened to smooth out the business cycle, they now try to play God and prevent markets from doing what markets are supposed to, which is to allocate resources and set prices. But by forcing interest rates to near-zero levels and buying unlimited amounts of government and corporate bonds, the U.S. Federal Reserve Bank has only distorted prices, created asset bubbles and made the rich much richer.
The extreme levels of monetary intervention that began a decade ago, and which the Bank of Canada has embraced wholesale since the pandemic began, have created the illusion that financial and real estate markets are always a one-way bet. That is a dangerous fantasy for policy makers to peddle, and one that undermines the very basis of our capitalist economies.
They have led us to believe that – thanks to the superpowers they alone possess – this pandemic need not be disruptive, even though centuries of history prove otherwise. “Our message to Canadians is that we will be there to provide monetary stimulus for an extended period to support the recovery and return inflation to its 2-per-cent target,” Bank of Canada Governor Tiff Macklem recently tweeted, sounding much like a politician promising a free lunch.
Central governments in the developed world borrowed an astounding US$11-trillion in the first five months of 2020 alone, or 70 per cent more than the average amount of debt issued over that period during the previous five years. The Organization for Economic Co-operation and Development predicts the ratio of central government debt-to-gross domestic product will rise by 13.4 percentage points this year alone to 86 per cent – and the figure could rise further if the pandemic endures and governments roll out even more stimulus measures.
With all this new debt swishing around on top of all the debt accumulated by governments, corporations and consumers over the past decade, normally functioning markets should be in turmoil, especially since no politician or central banker anywhere seems to have a plan for a return to normal times. But central bankers have replaced investors as the principal buyers of government debt, printing unfathomable amounts of money to do so.
Politicians and academic economists insist there’s nothing to worry about, since, you know, interest rates are really, really low. But they are only low because the extreme monetary intervention of the past decade has turned into an artificial feeding tube that central bankers are terrified of withdrawing because they know what would happen if they did.
All this monetary medicine is actually making our economies sicker in the long term. “Governments need to recognize that constant intervention to prop up the economy and financial markets is not achieving its intended purpose,” Morgan Stanley global strategist Ruchir Sharma wrote in a recent Wall Street Journal essay. “The widespread assumption that the recovery would have been even weaker without Fed support ignores the mounting evidence that its interventions are doing more to boost the stock market than the real economy.”
The Bank of Canada has now followed the Fed, with largely the same results. Which is great, I guess, if you’re already rich.
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Konrad Yakabuski