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| An elderly woman wears a face mask while shopping in a supermarket in northern Germany in April. In 2008, government bailouts mostly poured into the financial sector but this time fiscal spending on consumers will have an inflationary effect, say some economists. (Wolfgang Ratta/Reuters) |
Finance Minister Bill Morneau’s borrowing plan may have wider consequences
If economics were as exact a science as some economists might like us to think, the debate about inflation would be over.
Currently, the mainstream view as gleaned from many credible economists and reports from financial journals is that inflation remains off the table — and 40 years of stable prices will continue.
In many ways that is reassuring; but there is another view. While the idea that we are nearing an inflationary turning point will be seen by many as contrarian, the arguments are by no means preposterous and are worth hearing even if just to confront and disprove.
If we do see a return to inflationary pressure and the rising interest rates that will be needed to contain it, Finance Minister Bill Morneau’s plan to borrow now for the long-term at low current rates may have other consequences.
Prices falling not rising
As the pandemic kills off jobs and spending power, as companies such as Brooks Brothers and David’s Tea last week joined many others in bankruptcy protection, most economists say the big worry right now is not inflation but its opposite, deflation.
Certainly in the short term, there are plenty of strong arguments for fearing falling prices — a trend considered ominous because it makes consumers hold onto their cash in expectation prices have even further to fall.
A decline in consumer demand from people staying home or living on reduced incomes should in theory lead sellers to hold prices down. Similarly a sharp decline in employment weakens the power of workers to bid up wages. Both are disinflationary.
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| Canada's Minister of Finance Bill Morneau answers a question about the Economic and Fiscal Snapshot in the House of Commons on Parliament Hill on July 8. If the economy picks up faster than expected, fiscal stimulus could help drive inflation. (Patrick Doyle/Reuters) |
Finance Minister Bill Morneau presented his fiscal snapshot last week, but his is not the only government borrowing to spend.
One fresh bit of independent evidence has arrived from the market in something called inflation-linked bonds; they have recently earned record gains compared to regular bonds.
“The performance is owed mainly to investors seeking protection from price pressures that may emerge from stimulus efforts and a return to economic growth,” reported business news service Bloomberg last week.
In other words, rather than just talk, some investors were laying down their cash in anticipation of a switch to rising prices.
Gains in those inflation-linked securities were especially remarkable because, for all the reasons mentioned above, consumer prices have actually been falling. That means economists who insist inflation is on its way are effectively looking through the current downturn to what comes next.
“The current recession is deeply deflationary for the next few quarters, but our analysis points to higher and more volatile inflation in the long-run, and we think the market is not priced for it,” said a report on inflation by the Man Institute, a subset of the British finance giant best known outside the financial world for its contributions to the Man Booker Prize.
Source: Don Pittis | CBC News
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