Portico Press

Central banks respond to stagnating domestic and international markets.

The Covid 19 pandemic caused significant reductions in global trade, economic growth, and international cooperation.  The realities of a global recession loomed over economies as governments attempted to resolve both domestic and international challenges caused by the pandemic.  While the focus of this piece shall include US perspectives, as they are the most dominant economic power in the world, it will draw it back to how the Bank of Canada and Federal government contributed to our current economic state.  The US Federal Reserve worked efficiently to address the economic problems that plagued domestic markets, and the mounting fears of global illiquidity.  The combination of the Federal Reserve’s domestic and international approach proved successful at securing an economic resurgence on a global scale.  The “soft landing” sought by the reserve has now tentatively been proven, but mounting pressures on living costs caused by inflation has left economists and governments puzzled for what is next.  A brief description of the illiquidity crisis gives a better understanding of how we got here.

Economics can seem daunting, but in its mix of fancy terms and complex theories it can be explained, like all things, as a sum of its parts.  We learned during the 2008 crisis that when the money in our economies stops moving it becomes illiquid.  The arteries of our countries block up like a heart attack.  In an attempt to create a healthy economy the central banks of our countries lower the interest rates to let it loan money to major banks cheaper, so that down the line banks can loan it to us for cheaper as well.  This pushes money into our economy, from a solid mass to the healthy liquid state as we know it.  But what happens when there is too much money pushed in, without economic production increasing? Well we end up with what can be seen as “shrinkflation.”  A portmanteau referencing the shrinking packaging for your gum, bags of pasta, and larger dents at the bottom of your sports drink.  A decline in the mass of products purchased, and an increase in the price of these items.  A nefarious mix of opportunistic greed and a reality that more money in a system that has not grown means that money is just worth less.  

The massive stimuli offered by the central banks focused on the primary issues of; unemployment, interest rates, and sector specific packages to stave off insolvency.  The programs created by the US Fed were enacted under the Coronavirus Aid, Relief, and Economic Security Act, referred to as the CARES act.  In Canada we received an “alphabet soup” of support stimulus; CERB, CRB, CESB, CWLB, and more.  These programs reflected the diverse challenges presented to an increasingly isolated economic order, one guided by increasing domestic demand for liquidity.  While the American and Canadian examples use different acronyms their differences are limited.  They sought to put federal dollars, printed out of an anticipated operating deficit, into the hands of citizens affected by lockdowns and poor economic conditions.  The onset of the pandemic caused a steep decline in total global economic growth, as the dust settled, economies revealed sector specific damages.  Sectors most affected were transportation, tourism, and service based industries.  In the US, and most other developed countries, these damages produced high unemployment and constraints on liquidity.  Despite the precipitous drop of the US and Canadian interest rates, bank lending began to dry up and now has returned higher than pre-pandemic levels.

The Canadian central bank, alongside its American counterpart, has steadily pushed its interest rates since the reopening of global markets with the goal of tempering inflation.  In Canada however, the rate hikes have surpassed expectations as inflation has remained, as the lascivious economics terms name it; sticky.  Currently, as of August 21 2023, we sit at 7.2%.  A rate that has created untenable mortgage payments for home owning Canadians.  For many the idea that mortgage payments have gone up seems a laughable problem of the landowning class, but those costs are being trickled down into every rental agreement made across this nation.  The result has been a downward pressure put on the Canadian economy, coupled with a federal government posting billions in an operating deficit.  So what is next?  Well, put simply: austerity.  A term that is defined by its characteristic “sternness or severity”, in political and economic circles it equates to spending cuts on social services and tax increases.  What has been an attempt to avoid catastrophic illiquidity has now created an economic landscape that might once again lead Canadians to hold onto their cash for a hope of greener pastures down the road.