Now that the inflation hawks have prevailed, the Bank of Canada is rolling out its big guns, raising interest rates with great gusto to slay inflation.
While there are celebrations inside Bay Street investment houses and think-tanks, there should be no joy among ordinary Canadians over this banking bravado — those interest rates will also plunge us into a deep economic abyss.
And as we sink into it, let’s not be under any illusion that what’s happening is unexpected, that this dark hole wasn’t what was intended for us.
In fact, the Bank of Canada has a history of reckless extremism, of playing fast and loose with the economic security of millions of Canadians. Its current brass-knuckle actions against inflation hearken back to its earlier anti-inflation zeal, bordering on fanaticism, that helped trigger the recession of the early ’90s.
To be clear, when the Bank of Canada raises interest rates as aggressively as it is currently doing — and more aggressively than other central banks in the West — it does so in order to squeeze the vitality out of the economy. This is sometimes compared to taking away the punch bowl at a party, but that puts too pretty a face on it.
Basically, the higher rates disable or kill most moving parts in the economy. Eventually that slows down inflation too.
It’s the AR-15 method of inflation control.
Bank of Canada governor Tiff Macklem tried to assure us last month that the bank is aiming for a soft landing. He might as well have offered us some valuable swampland in Florida.
His goal is to get inflation down to the bank’s target rate of two per cent. But that means using interest rates to reduce the current inflation level by 6.1 percentage points — a whopping drop that the bank has never managed to engineer along with a gentle landing.
“If modern Canadian history is an indicator, there is a 0% success rate of reducing inflation by 6.1 percentage points and avoiding a recession,” notes David Macdonald, senior economist with the Canadian Centre for Policy Alternative.
Of course, we’re routinely told that inflation is a great evil that particularly hurts low-income people, who struggle with bigger grocery bills. True. But inflation also greatly impacts rich people.
That’s because inflation erodes the real value of money. Thus, people with a lot of money have a great deal to lose. If you owe the bank $50,000 and the inflation rate is eight per cent, then the real value of that debt shrinks by eight per cent a year.
That means you’ll be repaying that debt with less valuable dollars. Banks don’t like that.
That’s why banks, their shareholders and the rest of Bay Street demand that the central bank raise interest rates to kill inflation.
But killing inflation with higher interest rates drives up unemployment, which hurts ordinary people even more than inflation. And unemployment isn’t just a cruel by-product of the bank’s higher interest rates — it’s actually central to the strategy.
High unemployment disciplines workers. A large pool of idle workers makes other workers insecure and reduces their leverage to demand higher wages. This tames inflation, even as it diminishes the overall bargaining power of labour, quietly advancing a class war.
Of course, this anti-worker bias is never admitted. But inside banking circles, there’s a technical term for this strategy — the Non-Accelerating Inflation Rate of Unemployment (NAIRU) — that is, the amount of unemployment deemed necessary to keep inflation in check.
When the Bank of Canada experimented with extreme anti-inflation policy in the early ’90s, unemployment soared to 11.3 per cent as a recession threw hundreds of thousands of Canadians out of work.
We’re headed back in that direction, with little consideration being given to alternative ways to tackle inflation, like tightening mortgage regulations, limiting rent increases or imposing a windfall profits tax.
If the bank were to adopt a more moderate inflation target — four per cent was traditionally considered acceptable — we’d have a better chance of avoiding a devastating bout of unemployment. But not everyone wants to avoid that.
This column originally appeared in the Toronto Star.
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