Is Today's Canada a True Democracy?

 

Tuesday, December 21, 2021

Is Today's Canada a True Democracy?

Some people allege that Canada is a democracy. Let us look more closely.

• Canada has an unelected Head of State who is a foreign Monarch, named for life. That sounds very much like the Middle ages, doesn't it?

• Just as in the U.K., Canada also has an unelected 'Chamber of Lords', called the 'Senate' in Canada, where the oligarchy that rules Canada from Toronto and Ottawa places the servants of the system to oversee the elected House of Commons and amend or reject laws it doesn't approve of.

• The Canadian government can function after only receiving some 20 percent of support from the electorate, as is the case with the current minority liberal government, and still contend that it has a 'mandate' to change Canada profoundly. 

• The Canadian confederation has been substantially centralized since the fundamental changes made to the Canadian Constitution by politicians—without a referendum—in 1982. Canadian provincial governments, which previously had exclusive rights in the 1867 Constitution, such as the Quebec government regarding language, culture and education, have been forcefully placed under the tutelage of unelected judges named and paid solely by the federal government.

• Indeed, to complete this pyramid of power, Canada has a Supreme Court and other federal courts, filled with lawyers, among whom some have donated or rendered services to the party in power. These courts can not only revise the form of laws, but also change them substantially, or annul laws that have been democratically voted by governments, especially by provincial governments.

• And to top it all off, the Canadian federal government owns and operates its own radio and TV networks, in French and in English, which can spew out government propaganda at will.

A democracy? Canada's system of government is, at best, closer to being an oligarchic form of government, in which ordinary citizens do not have much to say, because the pyramid of power is inverted with the ultimate political power at the top, and not at the level of the sovereign people. We are far from a system of government "of the people, by the people, and for the people", in which the supreme political power in society rests with the citizens.

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P.S. We could add that the Canadian federal government has access to its own central bank, which can print money at will and impose a stealth inflation tax on the people.

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ADDENDUM

Friday February 3, 2023

The Canadian political system and democracy in Canada

The Canadian federal system is based on the Constitutional Act of 1982, which, along with the Constitutional Act of 1867, forms the Canadian constitution.

These two fundamental laws were acts of the British Parliament, before being applied to Canada. Since 1867, Canada is a political federation formed initially by four founding British colonies (Quebec, Ontario, Nova Scotia and New Brunswick) and called 'The Confederation of Canada'. Nowadays, the Canadian federation includes ten provinces and three territories.

The 'Constitutional Act of 1982' was adopted by the British Parliament, in 1982, and by the Canadian Federal Parliament and by nine provincial parliaments thereafter, but not by the Parliament of Quebec.

The 1982 constitutional law was not submitted directly to the population for approval. It does not mention the word "democracy", and its Preamble states that the Canadian political system recognizes the "supremacy of God".

Accordingly, the Canadian political system is a federal parliamentary constitutional monarchy.

The Head of State is an unelected monarch, as well as being the head of the Anglican Church. The House of Commons is elected by popular vote, but the Canadian Senate is unelected and its members are appointed by the government of the day.

Referendums can be submitted to the people, but they are only consultative.

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Professor Rodrigue Tremblay, 
emeritus professor of economics, 
Université de Montréal

The 'Night of the Long Knives' of November 4-5, 1981, and the Canadian Federal Constitutional 'coup de force' of 1981-1982 Against Quebec*

By Rodrigue Tremblay, professor emeritus of the University of Montreal and former minister

"One of the saddest constancies in the conduct of those in power is the utter inability that they all seem to acquire to admit the slightest mistake. They prefer to stumble of "run away" rather than simply admitting that they were wrong, that is to say that they are human. René Lévesque, Le Journal de Montréal, Dec. 1970.

"There were indications and polls that the government had for several months, and in most cases, they raised fears of a defeat of the sovereignist option. Nevertheless, the Parti Québécois had decided without possibility of repeal, and whatever the circumstances, that the consultation would take place during its first term. Wanting to give itself an obligation of result, the party created a calendar obligation!" Claude Morin, Les prophètes désarmés, Boréal, 2001, p. 209-210.

"In the assault on Québec by Ottawa in early November 1981, the aggressor was Pierre Elliott Trudeau... The gravedigger of Quebec's veto power was ultimately the current Prime Minister of Canada. — The justifications that Mr. Trudeau multiplies on this subject are pure intellectual boasting, a lying demagoguery." Claude Ryan, Le Devoir, Dec. 1982.

November 4-5 marks the 40th anniversary of events that have profoundly impacted the history of Quebec and its place in the Canadian Confederation.

It was, indeed, during the night of November 4-5, 1981, that secret negotiations—which took place at the Château Laurier in Ottawa, between the Canadian federal government of Pierre Elliott Trudeau (1919-2000) and the premiers of the nine English-speaking provinces, but in the absence and without the knowledge of the government of Quebec—led to the acceptance by the former of the constitutional project of the sitting Canadian Prime Minister. 

The entire constitutional process was a failure of democracy. The Canadian government did not hold any pan-Canadian referendum, or even a special election, to obtain the approval of the sovereign people for its 1981 constitutional project, which was subsequently incorporated into the Constitution Act of 1982, and which was never signed by the Quebec government.

In addition, Mr. Trudeau's project did not include, as had been promised during the 1980 Quebec referendum campaign, that the insertion of a Charter of Rights and Freedoms in the Canadian Constitution would take into account the "distinct French character of the Quebec society" and that the government of Quebec had the responsibility to protect and promote this distinctiveness, while respecting fundamental freedoms.

• The thread of events that led to the exclusion of Quebec from the 1981 constitutional agreement and the Constitution Act of 1982

What triggered the Canadian constitutional negotiations process was the decision of the Government of Quebec to hold a constitutional referendum on May 20, 1980, in the hope of obtaining a 'mandate to negotiate, on an equal footing, a new constitutional agreement between Quebec and the rest of Canada', according to the principle of the right of peoples to self-determination.

However, a number of important political events occurred in Quebec in the winter and spring of 1980, after the referendum question was adopted, on December 20, 1979.

First, federal elections were held on February 18, 1980. The results gave strong electoral support to Pierre Elliott Trudeau, who regained the post of Prime Minister. The Liberal Party of Canada (PLC) obtained 68.2% of the votes in Quebec and elected members in 74 of the 75 Quebec ridings.

Second, the federal government decided to get directly and massively involved in the Quebec referendum campaign by holding debates in the House of Commons on the Quebec government's proposals, beginning on April 15, 1980.

The debates in Ottawa spanned two weeks, and they allowed Prime Minister Pierre Elliott Trudeau to partially eclipse Claude Ryan, the leader of the "No" campaign. Trudeau personally intervened also on April 25, 1980, when he wrote an 'open letter to Quebecers', in which he promised that he would do everything in his power "to reform the Canadian Constitution" in the event of a victory of the "No", but without specifying the content and direction of such a reform.

Indeed, Mr. Trudeau did not explicitly state whether such a reform would go in the direction of the nine autonomist recommendations for a 'renewed federalism' proposed by Claude Ryan, even if many Quebecers believed that this was going to be the case. The proposals of the "No" camp had been made explicit in a constitutional policy document called the Beige Book, which the PLQ published on January 9, 1980. These proposals were presented as an alternative to the manifesto of the "Yes" campaign entitled 'Equal to Equal'.

Canadian Prime Minister Pierre Elliott Trudeau was not registered with the "No" committee, as made mandatory by the provisions of the Quebec Referendum Act that tightly restricted all campaigning to the designated "Yes" and "No" committees with set budgets. Nevertheless, Trudeau intervened during an important rally for the "No" camp on May 14, just days before the vote, and made commitments that strongly contributed to the defeat of the "Yes" option.

Trudeau announced:

"If the answer to the referendum question is NO, we have all said that this NO will be interpreted as a mandate to change the Constitution, to renew federalism. I make a most solemn commitment that following a NO vote, we will immediately take action to renew the Constitution and we will not stop until we have done it. I make a solemn declaration to all Canadians in the other provinces. We, the Québec MPs, are laying ourselves on the line, because we are telling Quebecers to vote NO; [...] and we will not agree to your interpreting a NO vote as an indication that everything is fine and can remain as it was before."

In the end, on May 20, 1980, the constitutional mandate sought by the Lévesque government was rejected with a "No" vote of 59.56% against a "Yes" vote of 40.44%.

• The consequences of the 1980 referendum defeat for the Lévesque government and for Quebec

After its defeat, the Lévesque government made a number of strategic mistakes vis-à-vis the Canadian federal government, which had emerged as the big winner in the referendum fight, and which wanted to go ahead with constitutional changes as soon as possible.

The Lévesque government did not offer its resignation. Indeed, a government that loses a plebiscite must normally resign, because a plebiscite defeat is, in some ways, more important than an electoral defeat. To everyone's surprise, the Lévesque government did nothing. It acted as if such a defeat was a minor setback and that it could remain—even without a mandate—Quebec's negotiator vis-à-vis the Canadian government.

Even after Pierre Elliott Trudeau published his "open letter to Quebecers", on July 15, 1980, in which he admitted, not without a certain arrogance, that the "constitutional changes"  to come would go int the direction of a centralized and unitary Canadian federalism, the Lévesque government stayed pat. It made no protest against what appeared to be a clear betrayal of the promises made implicitly and explicitly during the referendum campaign.

When the Prime Minister of Quebec attended the first federal-provincial conference, held in Ottawa on September 15, 1980, to officially begin major negotiations on upcoming constitutional changes, he could not claim to have a mandate to propose constitutional changes in the name of the people of Quebec, since such a mandate had been refused.

Similarly, when the Supreme Court of Canada, chaired by Bora Laskin (1912-1984), a personal friend of the Canadian Prime Minister, ruled on September 28, 1981, that the Trudeau government only needed the support of a "sufficient number" of provincial governments to proceed with its constitutional reform—and not their unanimous acceptance, as had been the case before—the government of Quebec found itself quite helpless and in a position of great vulnerability.

Indeed, the Lévesque government's strategy to oppose the federal government's unilateral constitutional goals consisted in joining with seven other English provincial governments to form the so-called Group of Eight.

However, this interprovincial opposition front was very fragile and in serious danger of collapsing, as a result of the complacent interpretation by the Supreme Court of Canada. Indeed, it was obvious that the Trudeau government had only to agree to the few requests from the English-speaking provinces to secure their support.

This was made all the easier since, without having previously consulted his colleagues in the Group of Eight, Prime Minister Lévesque had openly accepted Pierre Elliott Trudeau's trap proposal to hold a double pan-Canadian referendum on the Charter of Rights and Freedoms and on an amendment process, an idea that profoundly displeased the English-speaking premiers and which they would want to avoid at all costs.

The breakup of the Group of Eight occurred on the night of November 4-5, 1981... and we know the rest.

• The consequences of the federal constitutional coup de force of 1981-1982 for the people of Quebec and for the French-Canadian nation

Three major consequences for the people of Quebec and for the French-Canadian nation as a whole followed the federal constitutional coup of 1981-1982.

1- Quebec's elected Parliament has since been placed under the arbitrary tutelage of a "government of judges", unelected and appointed by the sole Canadian government. [N.B.: In the German federal system, for example, the members of the German Constitutional Court are appointed equally by the Bundestag (the German parliament) and by the Bundesrat (a council of ministers of the Länders, or provinces)].

In such a context, it has become problematic for the Quebec government to legislate in the areas of language, culture, secularism and education, all domains that in the past fell under its exclusive jurisdiction. The most obvious example is the Charter of the French language, better know as "Bill 101", which was amputated of large provisions at the hands of federal courts.

2- Insertion of the political ideology of multiculturalism in the constitutional Act of 1982, (N.B.: Canada is the only country in the world which has put such a political ideology in its constitution), coupled with the adoption of a federal policy of super massive immigration and of population replacement overwhelmingly biased towards English Canada. Ultimately, the latter policy poses a threat to the relative political power and the the very survival of the French-Canadian nation.

3- A move toward increased political centralization at the federal level tends to de facto make Quebec—the only state where francophones form a majority in North America—a domestic colony, subject to the political diktats of English Canada. The result is a major breach of history and democracy.

Conclusion

The constitutional changes leading to an agreement during the 'Night of the Long Knives' on November 4-5, 1981, in spite of the formal opposition of the Quebec government, and which were subsequently introduced into the constitutional Act of 1982, have considerably reduced the sovereignty of the Parliament of Quebec in its areas of its competence.

Because of the new Canadian constitutional context imposed upon Quebec in the post-1982 period, the Quebec government is facing many obstacles in its primary mission to preserve Quebec's future as the only majority French-speaking society in North America.

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* This text is partly drawn from the author's book in French: « La régression tranquille du Québec 1980-2018 », Montréal, Fides, 2018, 344 p.

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Monday, November 1, 2021.

*** To receive new postings of Dr. Tremblay's articles, 

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© 2021 Dr. Rodrigue Tremblay

Disorderly Retreat from Afghanistan: The U.S. has become an Overextended Military Empire posing a Serious Threat to its long-term Security

 Disorderly Retreat from Afghanistan: The U.S. has become an Overextended Military Empire posing a Serious Threat to its long-term Security

By Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"If a state overextends itself strategically—by, say, the conquest of extensive territories or the waging of costly wars—it runs the risk that the potential benefits from external expansion may be outweighed by the great expense of it all." Paul Kennedy (1945- ), British historian, (in 'The Rise and Fall  of the Great Powers', 1987)

"As distinct from other peoples, most Americans do not recognize—or do not want to recognize—that the United States dominates the world through its military power. Due to government secrecy, our citizens are often ignorant of the fact that our garrisons encircle the planet. This vast network of American bases on every continent except Antarctica actually constitutes a new form of empire—an empire of bases with its own geography not likely to be taught in any high school geography class." Chalmers Johnson (1931-2010), American author and professor of political science, (in an article in TomDispatch, 'America's Empire of Bases', Jan. 15, 2004).

"The task facing American statesmen over the next decades, therefore, is to recognize that broad trends are under way, and that there is a need to "manage" affairs so that the relative erosion of the United States' position takes place slowly and smoothly, and is not accelerated by policies which bring merely short-term advantage but longer-term disadvantage." Paul Kennedy (1945- ) British historian, (in 'The Rise and Fall of the Great Powers', 1987).

In 1987, British historian Paul Kennedy (1945- ) wrote a geopolitical book about how great powers rise and fall, in which he studied how economic and military factors can accompany or cause previously dominant  nations to lose their great power status. His main conclusion is that sooner or later a great hegemonic power will become overextended and its economy will struggle to keep its big military machine going. Indeed, an empire can increase its resources by launching wars abroad, at least for a while. However, sooner or later, a situation of permanent war and the military occupation of foreign lands result in more costs than benefits.

There are 193 countries that are members of the United Nations. But one country, the United States, operates an extended network of hundreds of military bases around the world, by far more than all the other countries taken together. Professor David Vine, in his 2020 book "The United States of War" established the total number of American military bases overseas to be close to 800 bases in more than 70 countries. This is enough to place the United States as the first truly global military empire in the history of the world.

Such a widespread collection of foreign military bases has two main consequences. First, it makes sure that the United States is likely to get involved in many foreign conflicts. And, second, it requires an important chunk of the U.S. public budget to be allocated to maintaining such a large military apparatus.

As a matter of fact, in the proposed total 2021-2022 U.S. budget ($6.8 trillion, of which $3.0 trillion or 44% is a deficit), $740 billion is allocated to the U.S. Department of Defense (DOD). However, U.S. military expenditures are much higher than those allocated to the Pentagon. For instance, the 2021 proposed budget for the U.S. Department of Veterans Affairs (VA) amounts to $243 billion. One must also add the nearly $100 billion that the U.S. Department of the Treasury spends on pensions for retired military personnel. Then there is the C.I.A. budget, which was $85.8 billion in 2020 and might possibly be higher in 2021. This amounts to $1,168.8 billion of military-related expenditures, or more than 17% of the total U.S. budget for 2021-2022.

· The overload of the office of American president

For many people, the American debacle in Afghanistan would seem to be proof that President Joe Biden is inept and incompetent, and that his advisers are clueless when it comes to making good decisions and to properly assessing a situation. This is a somewhat unfair appreciation of the circumstances. They are neither imbecile nor incompetent, but they could be overworked and distracted.

In fact, a case can be made that the function of American president has increasingly become way too complex and demanding for a single individual to handle, especially since the United States has assumed a global military role. The U.S. president has only twenty-four hours in his day like anybody else.

Indeed, the American head of state is obliged to manage a huge bureaucracy; he must tackle important domestic issues (pandemic, budget, Congress, etc.); and, as if this were not enough, he must also play the role of an emperor on the international scene and deal with Iran, China, Taiwan, Russia, Iraq, Syria, Yemen, Israel, when not with North Korea, Somalia or Ukraine, etc. At the same time, the few trusted advisers who assist him are called upon to tackle many issues simultaneously. The president and his advisers can easily get distracted by the multitude of international problems that confront their administration.

· The United States and the fall of Saigon in 1975 and of Kabul in 2021

It may be informative to compare two important American military failures, in 1975 and in 2021

· The fall of Saigon on April 30, 1975

The first instance when a major military expedition turned into a genuine fiasco for the United States occurred in 1975, with the fall of Saigon, capital of South Vietnam. The city could no longer benefit from the protection offered by the US Air Force, since an agreement to withdraw American forces had been concluded two years earlier. The date of April 30, 1975, marks the hasty and chaotic withdrawal of the last 6,000 Americans to leave SouthVietnam along with 50,000 Vietnamese, after Saigon fell to the North Vietnamese army.

Indeed, it's very important to underline that in Paris, on January 27, 1973, the American Secretary of State Henry Kissinger signed an armistice treaty, called the Paris Peace Agreement. This agreement was concluded between the United States and South Vietnam, on the one hand, and the northern Democratic Republic of Vietnam (DRV) and the Viet Cong, on the other hand. The agreement called for "an immediate cease-fire, the withdrawal of American military personnel within two months, the release of American prisoners, the end of the bombardments and the reunification of Vietnam by peaceful means."

The goal was to allow the United States to extricate itself "with honor" from the Vietnamese quagmire. However, it was nothing more than a soft surrender on the part of the United States. The "peaceful reunification" clause between the North and South Vietnams was untenable. It was, in fact, not respected by the DRV and its allies, even if it was paramount to the Nixon administration.

· The fall of Kabul on August 15, 2021

The parallel between the fall of Saigon on April 30, 1975, and the fall of Kabul on August 15, 2021, is troubling. In both cases, the U.S. government had previously entered into an agreement with the enemy to withdraw its armed forces from the country, leaving the government in place without military air protection. Similarly, in both cases, the withdrawal of American civilians and local allies took place in an atmosphere of haste and chaos.

The difference between the two is that in the case of Afghanistan, Donald Trump's administration left the Afghan government—and even NATO allies—outside of the negotiation process. The Trump administration signed an Accord of armistice with the Taliban, on February 29, 2020, in Doha, Qatar. The so-called "deal" was signed between American Special peace envoy Zalmay Khalilzad (under the supervision of U.S. Secretary of State Mike Pompeo) and the Taliban leader Mullah Abdul Ghani Baradar.

The glaring absence of the Afghan government at the negotiating table greatly undermined its credibility. The fateful date of February 29, 2020, also marks the beginning of the demoralization and disintegration of the Afghan army, which felt abandoned and which could henceforth anticipate losing US military air cover and assistance in their fight against the Taliban.

The Feb. 2020 Trump-Taliban agreement called for the United States to reduce its forces from 13,000 to 8,600 over the next three to four months, with the remaining U.S. forces to be withdrawn in the following 14 months, or by May 1, 2021.

For their part, the Taliban pledged to put an end to attacks against American and coalition forces ❲but not against the Afghan army❳, prevent terrorism, including the obligation to renounce al-Qaida and "prevent this group or others from using Afghan soil to prepare attacks against the United States or its allies."

Trump's former Security adviser, Gen. H.R. McMaster, has since called Trump's "deal" with the Taliban a "capitulation deal", because it was clearly paving the way for the Taliban to regain power in Kabul. As McMaster put it, "The Taliban didn't defeat us. We defeated ourselves!"

· A joint responsibility Trump-Biden for the 2020-2021 Afghan disaster

Initiated in October 2001, by Republican George W. Bush, both incumbent Joe Biden and former President Donald Trump wanted to end the U.S. military involvement in Afghanistan, without paying too much attention to the consequences. They believed that a military withdrawal without conditions could be done smoothly, and they counted on the collaboration of the Taliban to do so. —This was largely wishful thinking.

President Joe Biden was anxious to focus more on the current frictions that the United States has with Iran, China and Russia, and he endorsed the agreement reached by Donald Trump's government in February 2020, for a complete and definitive withdrawal of the American military forces from Afghanistan, no later than May 1, 2021.

He announced his decision on April 14, 2021. i.e. that the U.S. and NATO troops were going "to be out of Afghanistan before we mark the 20th anniversary of that heinous attack on September 11th", and that he was pushing back the final date for a complete withdrawal to August 31, 2021.

The option of extending the presence of a reduced U.S. military mission in Afghanistan until the country was truly stabilized and that there would be no possibility for a resurgence of al-Qaeda and the Islamic State (ISIS)—and above all the Islamic State group in Khorasan (ISIS-K), as suggested by former American officials—was not retained.

Let's add that the Biden administration left behind billions of dollars of military equipment recuperated by the Taliban!

Neither Trump nor Biden figured out that this would betray twenty years of a direct American commitment in Afghanistan, and that a complete and precipitous military exit would leave many thousands of Afghans who had worked for the U.S. government in clear danger for their lives. Similarly, they didn't seem to have considered the worst-case scenario: that the Taliban would rapidly overthrow the pro-American government in Kabul and that total chaos would ensue. (N.B.: The C.I.A., for one, had predicted the collapse of the Afghan government and a quick Taliban victory if all American troops were to withdraw from the country.)

Nevertheless, even though both Trump and Biden were involved in planning the U.S. military exit from Afghanistan, it was the Democratic president who made the final decisions that led to the—preventable—August 2021 fiasco. This is why despite Biden's denial, it's likely that it will be the Democrats who will suffer an electoral backlash for his crisis mismanagement, in the 2022 and 2024 elections. It remains to be seen how important such setbacks will be.

· Conclusion

The experience of the last fifty years has shown that the idea that prevailed after World War II, that the United States could count on its military supremacy to impose democracy and capitalism on other countries, is past due. No country, whatever its military might, can impose its will on other countries forever. This was an imperial idea that American neocon thinkers resurrected after the fall of the Soviet Empire (USSR) in December 1991, but nothing good came of it.

Since Bill Clinton's administration (1993-2001), successive U.S. governments  have abandoned the United Nations and its peacekeeping mechanisms. They replaced U.N. operations with those of NATO, which are more flexible, for sure, but also much less legitimate. — This was a mistake. — A return to the legitimacy of a reformed United Nations Organization would seem to be the road to follow in the coming years, if the world is going to avoid falling back into destructive conflicts.

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Monday, September 6, 2021.

*** To receive new postings of Dr. Tremblay's articles, 

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© 2021 Dr. Rodrigue Tremblay

A Chaotic US Exit from Afghanistan: American Emperors have no clothes

 

Comment

by Dr. Rodrigue Tremblay

A Chaotic US Exit from Afghanistan: American Emperors have no clothes

Monday, August 16 2021

The Afghanistan war was a botched operation from day one, when George W. Bush invaded that country, in October 2001, "because something had to be done after the 9/11 attack on the United States". Then, George W. Bush sealed the issue for the future when he withdrew a large number of U.S. troops from Afghanistan to invade the country of Iraq, in March 2003, with his big lie about "weapons of mass destruction" in that country.

After terrorist Osama Bin Laden was assassinated in Pakistan, on May 2, 2011, President Barack Obama could have called for the end of the Afghanistan military adventure and declare victory. He did not, because he knew full well that without U.S. military support, the puppet Afghan government would collapse, and he would have to take full responsibility for the disaster.

And in February 2020, then President Donald Trump made an ominous 'deal' with the Islamic taliban, in Doha, Qatar, fixing the date of May 2021 for a complete withdrawal of American troops from Afghanistan. Even though President Joe Biden extended that date to late summer 2021, he more or less followed Trump's plan of withdrawal, no matter what.  N.B. : The Trump-taliban agreement was to be implemented after the November 2020 election, which Mr. Trump expected to win.

Now, President Joe Biden is likely to be the only one bearing the full political cost of twenty years of a bad American foreign policy by previous administrations.

Granted, the Biden administration should have better anticipated the chaos to follow a precipitous American withdrawal from Afghanistan and better planned in consequence. The images of sheer chaos seen around the world will follow the United States for years to come.

That will make it easier for Donald Trump and Republicans in the U.S. Congress to dump the entire responsibility for the disaster on the sitting president, on his Security advisor Jake Sullivan and on his Secretary of State Anthony Blinken. 

Who says that politics is a fair and honest game?

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The Economic Aftermath of the War Against the Pandemic: Inflation, Recession, deflation, Stagflation or Secular Stagnation?

 

by Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." John Maynard Keynes (1883-1946), British economist, 1936.

"All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment." John K. Galbraith (1908-2006), in 1994.

"Sooner or later a crash is coming and it may be terrific. The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt." Roger Babson (1875-1967), American entrepreneur, economist and business theorist, on September 5, 1929.

After forty some years of disinflation and declining interest rates, there is some confusion about whether or not this long disinflationary decline is about to end, to be replaced with a creeping up of real wages, prices and interest rates.

This could certainly be the case in the wake of the current post-pandemic economic recovery. In the longer term, we can foresee a context of significant demographic changes, while economic and financial globalization will continue to show signs of abating, and could even be reversed in the years to come.

These changes will produce negative shocks on labor supply and be accompanied by upward price pressures. All of this, of course, in the context of significant climate change and rising adjustment costs.

Similarly, it is also possible that major economies will experience creeping inflation, at least in the coming few years, as this has happened after the economic dislocations of a war.

After World War II, for instance, the six-year period of reconstruction, from 1946 to 1951, was characterized by an average inflation rate of 6.4% in the U.S. This was the result of a combination of both demand-pulled inflation and cost-pushed inflation. Many governments and central banks had injected a lot of money in the economy during the war, but because of rationing, people were allowed to spend only part of their incomes and were forced to save a higher proportion of their incomes than they otherwise would. Inevitably, saving rates were very high. Consequently, after the war, there was a lot of pent-up demand, and increased spending pushed prices up.

Also, industrial plants had to be refitted to produce private goods, and those costs also pushed up prices. Moreover, the real estate market was especially propelled by the demographic factor of the post-war baby-boom surge and by more accessible mortgages.

Today, in the wake of the war against the 2020-2021 global pandemic, the real estate market is also very hot, again propelled by a demographic phenomenon, this time by record immigration levels, accompanied by generous public emergency income support programs and by super low mortgage rates.

· Larger public deficits and growing public debts, and ultra-lax monetary policies by central banks

In order to fight the economic damage brought about by the 2020-2021 pandemic and the subsequent economic lockdowns, governments and central banks in major economies embarked upon aggressive income support programs, larger deficits and higher public debts, combined with important measures of money printing by central banks.

In the U.S., for example, the national debt (excluding total unfunded Social Security and Medicare promises) of the federal government ballooned from $22.7 trillion in 2019, to $28.2 trillion in May 2021, a 24% increase and a level that has pushed the U.S. national debt above 100% of yearly GDP.

Also in the U.S., the Fed purchased massive amounts of Treasury and mortgage-backed securities with newly printed money, as it did during the Great recession of 2008-2009. Indeed, on March 15, 2020, the Fed announced that it would be buying at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over "the coming months".

And, in December 2020, the Fed reiterated its policy of buying monthly 'at least' $120 billion of Treasury bonds and mortgage-backed securities ($80 billion of government debt and $40 billion of mortgage-backed securities), and this "until the economy recovers to 'full employment'".

However, there could be a problem in defining 'full employment', because millions of workers have decided to exit the labor force or to retire for good during the pandemic and the economic downturn.

Thus, the labor force could be smaller today than before the pandemic, resulting in a tight labor market and labor shortages in some trades, because, according to employers, some workers simply 'do not want to work', unless it is from home. Therefore, no matter how long the Fed keeps interest rates to the floor, it's dubious that all jobs lost during the pandemic recession will come back.

· The risk of financial bubbles

However, the massive purchases of securities by the Fed have pushed short-term interest rates to close to zero, while keeping longer-term interest rates artificially low. In so doing, the Fed (and other central banks) has created bubbles in bond prices, in stock prices and in real estate prices. And when such bubbles burst, a severe recession could logically follow.

The Fed's ultra loose monetary policy of excess liquidity has also resulted in the unusual situation of banks being awash with excess cash that they couldn't lend profitably, leaving them no other choice but to deposit most of it at the Fed, in the form of excess reserves. As of June 2, 2021, American banks' deposits totaled $15,802.6 billion (not seasonally adjusted), as compared to only $13,912.2 billion in March 2020, a 12% increase.

As an indication of such an ultra loose monetary policy, the Fed's balance sheet ballooned during the pandemic, going from $4.17 trillion in late December 2019, to $7.95 trillion in early June 2021, a huge 90% jump.

An extended ultra loose monetary policy can possibly feed inflation, or, if an economy is already in a recession or into an economic downturn, it can produce so much liquidity that the economy becomes mired in a liquidity trap.

· A liquidity trap and a debt trap

In my intermediate macroeconomics textbook, here is how I define John Maynard Keynes' liquidity trap: 

The monetary situation that prevails when short-term interest rates are way down and everyone anticipates a fall in the price of bonds and an increase in interest rates, so that any further increase in money supply by the central bank is not spent but is hoarded.

To extricate an economy from a liquidity trap, a central bank can gradually end its purchases of securities and let interest rates slowly rise. On the other hand, fiscal policy can become more aggressive in stimulating investments and aggregate demand.

Currently, central banks in the largest economies are at an impasse, as their persistent policy of artificially keeping interest rates close to zero—with even negative interest rates in Europe—has not only created a liquidity trap, it has also encouraged a general increase in debt levels, possibly creating a debt trap when rates are one day allowed to rise.

· Debt trap for monetary policy

Indeed, central banks are not immune from a situation of moral hazard or from a debt trap.

When a central bank pursues an easy money policy and keeps interest rates artificially low (and even pushes them into negative territory) over a long period, it creates an environment that incites not only governments, but also businesses and consumers, to take on heavy or excessive debt loads. This is the well-known case of Japan, where the economy has been bogged down by deflation and economic stagnation for more than a quarter of a century.

Both in Europe and in North America, central banks have been pursuing—since 2008, and even more since March 2020—very aggressive quantitative easing (QE) monetary policies. They have kept interest rates artificially low, a replica of Japanese monetary policy.

For example, in the United States, as in most developed countries such as Canada, total mortgage debt is presently very high, even as some other categories of debt, such as credit card debt, have slightly declined.

In so doing, central banks may have built for themselves a policy debt trap, because they may have reasons to fear that letting interest rates return to their normal level could trigger a wave of bankruptcies, and this would damage the economy. Central banks may have become prisoners of their own ultra loose monetary policy.

· Cycle analysis for the real estate market: The Kuznets' cycle

In the U.S., and especially in Florida and California for obvious demographic reasons, the 18-year Kuznets' cycle is well and alive. Previous tops in this cycle were in 1987 and 2005, while bottoms occurred in 1993 and 2011. If the cycle is as reliable nowadays as in the past, (with 12-year price upswings and 6-year price contractions), the year 2023 could see another major top unfolding in real estate prices in the U.S.

Considering that Fed chairman Jerome Powell has indicated that it is the Fed's intention to keep interest rates at rock-bottom levels for months to come, possibly until 2023, this would seem to coincide perfectly with the Kuznets' cycle rationale.

· What does this entail for future inflation, recession, deflation, stagflation and even 'secular stagnation'?

Let us keep in mind that the 2005 top in real estate prices was followed by the 2007-2008 subprime mortgage crises and the 2008-2009 Great recession, two crises in which the Fed played a major role.

Now, sixteen years later, it would seem that the Fed is going to keep the bubbles alive until 2023, through its purchases of securities and its ultra loose monetary policy. Therefore, inflation should keep creeping up for some months to come.

When the Fed stops its purchasing program, letting interest rates adjust upwards, this will be the sign that the bond market bubble and the real estate bubble are about to end. The stock market bubble could linger, but not much longer. However, when this happens, a severe economic recession could follow.

· Conclusion

The coming years should see major reversals in some important economic trends, especially in demographics and in globalization. The 2023-2025 period, in particular, should be watched closely. It could herald a period of stagflation, that is a period of slower economic growth, rising taxes and creeping cost-push inflation.

Indeed, after that period, the demographic shift could intensify. The 2023-2029 years will see the last baby-boomers retiring, while governments could be facing a looming post-pandemic budgetary crisis arising from the ballooned public debt and the increased costs of caring for an aging population.

Because of the demographic shock to be experienced in most advanced economies in the coming years, labor shortages are likely to linger on, pushing real wages and prices up. Businesses will have a growing incentive to accelerate the use of computer-assisted automation, robotization and artificial intelligence. Such a move will reduce the demand for some categories of labor and may keep some wages in check.

A wholesale reliance on mass immigration cannot solve a labor shortage, except in some well-identified sectors or industries requiring specific skills. The generous refugee and family reunification programs in place in many countries add more to the demand for labor than newly imported workers can do to alleviate the labor supply shortage, besides creating social problems.

Finally, let us also keep in mind that 2029 will mark the 100th anniversary of the beginning of the Great Depression (1929-1939). This could revive talks among economists about a potential era of 'secular stagnation', under the influence of negative structural demographic factors and a slowdown in economic and financial globalization.

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International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Wednesday, July 7, 2021.

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Unregulated Digital Cryptocurrencies VS Regulated National Currencies: Is There a Danger?

 

Unregulated Digital Cryptocurrencies VS Regulated National Currencies: Is There a Danger?

by Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions." Friedrich Hayek (1899-1992), (in a conversation, on Feb. 9, 1978).

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Milton Friedman (1912-2006), (in 'The Counter-Revolution in Monetary Theory', 1970).

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose." John Maynard Keynes (1883-1946), (in 'The Economic Consequences of the Peace'. 1919, Ch. VI, pp. 235-236).

A few years ago, after the 2007-2008 financial crisis, some clever people, whose identity is hidden behind the appellation of 'Satoshi Nakamoto', devised a decentralized electronic system of payments, which is independent of the existing traditional banking system. It is based on a new form of digital 'currencies' or 'electronic currencies', the 'cryptocurrencies'. Some observers have called the cryptocurrency innovation a sort of a new 21st Century digital gold rush.

The supply of a given electronic cryptocurrency is backed by a mathematically constrained scarcity and by a ledger technology that prevents counterfeiting. The demand is supported by a speculative faith of some buyers that other buyers are going to push the price of that cryptocurrency higher and higher. Cryptocurrencies can only be transacted and used as a means of payment within the narrow framework of an electronic network of decentralized registers, which are supported by powerful computers and the Internet.

There are presently as many as 7,000 such digital or virtual cryptocurrencies on the Web, and they serve as a playground for big and small speculators, besides being used as a convenient conduit to make international money transactions, in total anonymity. Even private companies, such as Facebook, are considering launching their own commercial cryptocurrency.

· The Bitcoin was the first cryptocurrency using the blockchain technology

The first cryptocurrency surfaced in 2009 with the Bitcoin, a decentralized and international private digital 'currency'. It is the product of the application of a relatively new computerized technology, the blockchain. In order to limit the supply, the maximum stock of Bitcoins in existence was mathematically and electronically set at 21 million units, so that any increase in demand, once that threshold has been reached, must involve the exchange of existing Bitcoin units or coins. This tends to push prices higher and higher.

· The complicated process of creating cryptocurrencies

The blockchain technology is a  computerized technology using chains of blocks containing data that allow information to be stored and transmitted through a large number of computers spread around the world.

Because of the speculative nature of each cryptocurrency market, its price, such as the price of one Bitcoin in dollars or other traditional currencies, is very volatile. It can fluctuate widely within a short span of time. This conveys the risk that big speculators, with access to large amounts of money and sophisticated trading techniques, could game the system and impose big losses on smaller or inexperienced speculators.

To a certain extent, the world of cryptocurrencies can be assimilated to an unregulated online casino for speculators, and this could lead to the creation of a speculative mania. The cryptocurrency craze is somewhat reminiscent of the Tulip mania in Holland in the 17th Century. At one time, for example, a single rare tulip bulb could be worth more than the price of a house!

· A serious problem: the process of creating cryptocurrency units requires huge amounts of energy

There is an important technical drawback to the process of creating cryptocurrency units: It requires enormous amounts of energy. As more and more cryptocurrency transactions need to be computerized, the network of computers required to solve the complex blockchain calculations must increase, along with the energy it takes to run them.

For example, a study done at the University of Cambridge, in the U.K., concluded that the network of computers used by operators or 'miners' in the process of generating units of the first cryptocurrency, the Bitcoin, consumes more electrical power, in one year, than that used by the entire country of the Netherlands, a country of over 17 million inhabitants.

As the cryptocurrency phenomenon continues to grow, it will require more and more computers to complete one cryptocurrency transaction, and each transaction will end up consuming more and more energy. For instance, a few years ago, a single Bitcoin transaction required as much electricity as 80,000 Visa card transactions. Nowadays, according to the Digiconomist website, a single Bitcoin transaction uses as much electricity to complete as 735,121 Visa transactions, (or 55,280 hours of viewing time on YouTube). And this is increasing on a daily basis. Such a heavy reliance on energy could severely threaten the long-run economic sustainability of the current process of cryptocurrency production.

· Economist Friedrich Hayek's libertarian principle of privately issued fiat currencies

Beyond the technical jargon, it is worthwhile to  know that the idea of having an international system of private money or monies, free of government interference, is an old libertarian dream. It is based on the belief that the private self-interest of competing private entrepreneurs can lead to a general welfare superior to that of government intervention, even when this involves the creation of money.

Indeed, in 1976, economist Friedrich Hayek (1899-1992), of the Austrian school of economics, published a pamphlet entitled The Denationalisation of Money, (with a refined version, published in 1978). Hayek advanced the radical idea that sovereign governments should forgo their central bank's legal monopoly to issue national currencies and leave the issuance of money to private entrepreneurs.

However, at the time, the idea of having competing private currencies was not well received.

Some saw in it the transfer, to private operators, of the public revenues that governments and their central banks receive in the money creation process, called seigniorage. Others feared that the idea of having multiple private currencies used as means of payments would create confusion and chaos in the economy.

It was also thought that private issuers of money would have an incentive to issue too much of it, and thus create inflation and a loss of purchasing power for the users. Many also anticipated that in times of financial crises, governments could not adequately intervene to stimulate production and employment, through an aggressive monetary policy, etc.

Some of these criticisms were the same arguments invoked in the 1930s to abandon the gold standard, a rigid commodity-based monetary standard, which tied national currencies to gold. It was thought that such a system had contributed in causing the Great Depression (1929-1939).

For some thirty years, after the Bretton Woods agreement of 1944, the world was placed under a gold-exchange standard, with the U.S. dollar remaining tied to gold, and most of the other national currencies tied to the U.S. dollar, with fixed exchange rates. However, after the first oil shock of 1973, the gold-exchange standard was itself replaced by the current monetary system of fiat money, i.e. a system of flexible government-regulated currencies, issued by a central bank that oversees the banking system. It is usually connected to other national currencies through flexible exchange rates, so as to maintain equilibrium in the external balance of payments.

· Governments of major countries could begin competing between themselves in adopting official digital currencies and possibly ban private cryptocurrencies altogether

Some ten countries have already banned trading in private cryptocurrencies. This includes: China, Iran, India, Bangladesh, Morocco, Thailand, Uganda, Zambia and Nigeria. The last country to do so is Turkey. Turkey's central bank recently announced that it is outlawing the use of private cryptocurrencies, such as the Bitcoin, in payments for goods and services, a ban that took effect last April 30. It warns speculators that cryptocurrencies present "irrevocable risks", as the market is volatile and there is a lack of oversight. It also cited their use in "illegal actions due to their anonymous structures". No doubt that other countries will follow their example.

Conversely, the governments of major nations have either announced that they intend to set up their own official digital currency or are studying the possibility to do so. For one, the Chinese government has announced its intention to launch an international digital Yuan, possibly to be in full operation for the Beijing Winter Olympic Games of Feb. 2022. Obviously, the new Chinese digital currency for international use could eventually represent a challenge to the U.S. dollar as the preferred reserve currency, and to counteract the practice of various American administrations to impose economic and financial sanctions on other countries for political purposes.

More generally, the advent of a digital Yuan could force other governments to get involved in creating their own international digital currencies. Already, the U.S. Fed has announced that it is studying the potential costs and benefits of developing a digital dollar. No doubt that other governments in the U.K., Europe and Japan would likely follow suit with digital versions of their own currencies, such as a "Britcoin", a "Eurocoin", a "Yencoin", etc.

A world of legal public digital currencies, traded internationally, could be just around the corner, even if money and capital markets are far from being able to operate with digital currencies. Nevertheless, such a purely monetary development could have profound effects on the existing private digital cryptocurrencies. Over time, it could also upend the international and domestic payment systems.

· Conclusion

The future may have in store a growing reliance on digital money, possible public digital currencies issued by a few major central banks. It should be obvious that if governments begin to compete in creating their own digital currencies, this could pose a serious challenge to the current cryptocurrencies in existence, the latter facing a real regulatory threat.

Similarly, in such a futuristic digital context, if it were to materialize, this would raise the issue of how to preserve individual economic freedom, when all financial transactions can be recorded and made available to governments, allowing them to track people's incomes, spending and investment in real time.

It would be ironic if the libertarian monetary innovation of private cryptocurrencies, designed to free users from government interference, were to lead to a world of public digital currencies. Governments would then have even more power over people than today. A resurgence of barter could ensue.1

________________________________________________

1. A book of fiction that foretells such a political plot is The Patriot Conspiracy, 2012,  (also found here).

________________________________________________________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Monday, May 10, 2021.

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The Clash Between Central Bankers and Investors Over Inflation and Interest Rates

 

The Clash Between Central Bankers and Investors Over Inflation and Interest Rates

by Dr. Rodrigue Tremblay

(Author of the book about morals "The Code for Global Ethics" and his book about geopolitics "The New American Empire")

"Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal making generates, and the press loves the stories that colorful promoters provide. At a point, the soaring price of a promoted stock can itself become the 'proof' that an illusion is reality. Eventually, of course, the party ends, and many business 'emperors' are found to have no clothes." Warren Buffett (1930- ), America investor, (in his annual letter of Saturday, Feb. 27, 2021).

"All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment." John K. Galbraith (1908-2006), Canadian-born American economist, (in 'A Short History of Financial Euphoria', 1994).

"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretend payment." Adam Smith (1723-1790), Scottish economist, father of modern economics, (in 'The Wealth of Nations', 1776, Part V, p. 1012).

Over the last few weeks, investors' sentiment about future inflation and future interest rates has changed. It seems that complacency about inflationary pressures in some parts of the economy is coming to an end.

Even during the economic slowdown brought about by the economic impact of the pandemic, some prices are clearly on the way up. Besides the exuberance in the financial sector where stock and bond prices are frothy, some important prices in the real economy are also strongly increasing.

· Sustained price pressures in some important economic sectors

For example, oil prices have increased by more than 50 percent since last year. Construction material prices (lumber, copper, steel, etc.) have skyrocketed by as much as 73% in one year. Because of a strong demand and higher construction costs, real estate prices and rents are rising. For instance, the median home price in the U.S. increased 15% in 2020, while average house prices increased 23% in Canada, during the same period. Food prices have also increased 3.8% in the U.S. and 2.3% in Canada in 2020, and are likely to continue their trend upward in 2021. Even some of the extra liquidity injected into the system has found its way into the cryptocurrency craze, a phenomenon reminiscent of the Tulip mania in Holland in the 17th Century!

The only place where there seems to be little inflation is in the official measures of inflation. In the U.S., the all-items Consumer Price Index (CPI-U) rose only 1.4% in 2020. Even the Producer Price Index (PPI) is up only 1.76% from one year ago. [N.B.: In Canada, the figures are 0.7% (or 1.3% for the CPI excluding gasoline) and 1.4% for durable goods, in 2020].

· Currently, the actual inflation rate could be severely underestimated by official figures

Three factors can explain the low inflation reported by official figures. First, one must realize that official inflation indexes are lagging indicators, because important shifts in consumer spending patterns are adjusted every two years. Therefore, during the 2020 pandemic, even though consumers did substantially alter their consumer spending, that shift has not yet been reflected in the official inflation measures.

Secondly, some important sectors (tourism, travel, hotels, restaurants, retail, art and culture, etc.) did experience substantial drops in demand, production and employment, and the prices of their services have declined, artificially pushing the official inflation indexes down. It can be expected that prices in those depressed sectors will bounce back, maybe with a vengeance, once the economic recovery takes hold.

Thirdly, the prices of oil and gasoline were very depressed during most of 2020, and they have since bounced back. Higher energy prices will most probably filter into future measures of inflation.

My tentative conclusion would be that official measures of inflation have seriously underreported the true inflation rate experienced by consumers during the 2020 pandemic.

Many investors have also reached that conclusion. They have realized that the easy-money monetary policies pursued by central banks to boost inflation toward the 2% threshold may have been pushed too far, and that interest rates have been kept ultra low for too long.

This does not mean that more fiscal stimulus is not needed to help workers who have lost their job because of the pandemic and may have trouble going back to their old line of employment.

· The clash between central bankers and investors

That is why there has recently been a clash between central bankers and investors about where inflation and interest rates are going to be, once the pandemic is a thing of the past and the economic recovery is well on its way.

The clash pits central bankers, who have been gradually pushing interest rates to ultra low levels with easy-money policies over the last 10 years, and investors, who fear that the after-pandemic economic rebound could be stronger than expected and lead to a resurgence of inflation.

This was epitomized last Thursday March 4, when U.S. Fed Chairman Jerome Powell ruffled investors by declaring that he had no plan to raise interest rates, i.e. not until labor-market conditions are consistent with "maximum employment and inflation is sustainable at 2 percent". The Governor of the Bank of Canada Mr. Tiff Macklem also seems to subscribe to Mr. Powell's thesis.

What is the basis for such a clash of perceptions? Essentially, there is a disagreement about how much excess supply there really is in the economy and  how robust the economic recovery will be after the pandemic has been vanquished.

On the one hand, central bankers would prefer to keep interest rates on the floor until the economy reaches its full employment level and a higher moderate rate of inflation is attained. On the other hand, investors remember that central banks are known to procrastinate and wait too long to tackle inflationary pressures, ending  up overshooting their inflation targets. Indeed, if central bankers wait too long to address inflationary pressures, sooner or later they must step on the monetary brakes, and interest rates shoot up, causing market disruptions.

The pre-1980 period, when central banks waited too long before fighting the creeping inflation, is a good example. In 1980, they pushed interest rates way up, and this brought about the deep 1980-1982 economic recession. [N.B.: In the U.S., the Fed funds rate hit 21% in June 1981, while in Canada, the Bank of Canada interest rate peaked also at 21%, in August 1981.]

Many investors believe that economic conditions are currently reminiscent of what happens after a war, when governments have built up huge debts, and there is a strong pent up demand on the part of consumers who wish to resume spending. By the end of the pandemic, they are forecasting a stronger economic rebound than the one some central banks are expecting.

· The Central bankers' rationale to keep easy-money policies a bit longer

Central bankers presently have two fears, which may explain why they would prefer to keep interest rates ultra low for a few more years.

First, the Fed sees that there are still 10 million fewer jobs today, in the United States, than there were in March 2020. [A similar soft labor market prevails in Canada, as there were 858,000 fewer jobs in January 2021 than in February 2020.] Central bankers think that some structural damage has been done to their economies, especially in the service sector and among young workers, and that it will take time to bring back full employment.

Secondly, the high levels of debt worldwide preoccupy central bankers. Indeed, they see the global financial system becoming overloaded with debt, at all levels, governments, corporations and consumers. They fear that any rise in interest rates would increase the burden of debt service and reduce aggregate demand and, possibly, trigger a financial crisis and an economic recession.

· Total global debt is historically very high

Global debt, private and public, is well on its way to reach the unsustainable threshold of 400 percent of global Gross Domestic Product (GDP) in 2021. When interest rates begin rising, this could cause havoc in many ways. Paradoxically, it was the artificially low interest rates of central banks that encouraged such over-indebtedness. And today, those same central banks find themselves trapped in their past policies, and they fear that if they reverted to normal interest rates, it could trigger a global debt crisis.

Indeed, in the aftermath of the Great Recession of 2008, central bankers were very innovative in finding new ways of accommodating politicians who wanted, all at the same time, large tax cuts, higher fiscal deficits, super low interest rates, and faster economic growth, without inflation. This was too good to last for very long.

Central banks in Europe, the U.S., and Japan began to load their balance sheets with government bonds and other financial assets, in the hope of controlling both nominal and real interest rates, and, in so doing, boost economic growth. For example, since March 2020, the NY Fed has been buying $120 billion in Treasury bonds in various maturities and mortgage-backed securities each month, in order to keep interest rates ultra low.

The U.S. Fed's balance sheet of financial assets, which was less than $1 trillion in 2008, now stands at $7 trillion. The Bank of Canada's balance sheet stood at C$51 billion in 2008 and now is at C$573 billion. - Central banks can do that (i.e. inject large quantities of new money into the economy), for a while, provided that deflationary pressures are such that inflation does not result. If interest rates start rising, the entire policy could begin unraveling.

Attempts to keep interest rates ultra low in such an environment could simply be impossible, without creating unsustainable financial bubbles.

· What could happen if central bankers keep interest rates ultra low for too long?

If central bankers nevertheless attempt to keep nominal interest rates artificially low by increasing the money base and the money supply, it would be like adding fuel to the fire. This will create even more inflationary expectations.

Since the mission of central banks is to prevent excessive inflation from taking hold, while keeping employment high, they have to be careful and make sure that an easy-money policy does not generate strong inflationary expectations.

Already, the unorthodox and unprecedented monetary policy implemented during the last decade has created huge financial bubbles in real estate, in the bond market and in the stock market, with little positive influence on the overall real economy.

It's possible that central banks have been pursuing short-run financial and economic gains at the cost of serious long-run financial and economic pain. Indeed, if they were to persist in creating bigger and bigger financial bubbles, sooner or later, the day of reckoning will take the form of financial crashes.

· Will consumers' extra savings lead to more spending after the pandemic?

It would seem logical to expect that consumers, both in the U.S. and in Canada, and elsewhere, are going to spend at least part of their extra savings, once the pandemic is conquered. Such a pent up demand is another factor that could boost the economy in the next few years.

This could create a period of economic and financial euphoria with booming markets, fueled by the central bankers' wholesale printing of money, possibly leading into 2023-2024, (provided, of course, that there is no third wave of virus variants).

· Extra high public debts will bring about slower economic growth in the future

Because of the economic impact of the pandemic, many governments around the globe are more indebted than ever, even more so than after World War II, with public debts in advanced economies being over 120 percent of GDP, and growing.

Such a high level of over-indebtedness is bound to be a drag on future economic growth. This is because high public debts tend to push long-term interest rates up, and higher borrowing costs discourage private capital investment and hurt productivity. Extraordinarily high public debts may force governments to raise taxes to meet their ballooning debt service requirements, and this could also be another drag on future economic growth.

Conclusion

Economic conditions in most advanced economies, especially in the U.S. and in Canada, but also in Europe, are at a crucial juncture. There is hope now that the pandemic's economic drag is about to end, because of the widespread vaccination programs implemented in most countries.

However, is it possible that a fear on the part of investors that inflation could quickly rise during a strong economic recovery, might push long-term interest rates way up? Or will central bankers be able to stick to their policies of ultra low interest rates for another year or two? Both outcomes carry their own risks.

___________________________________________________

International economist Dr. Rodrigue Tremblay is the author of the book about morals "The code for Global Ethics, Ten Humanist Principles" of the book about geopolitics "The New American Empire", and the recent book , in French, "La régression tranquille du Québec, 1980-2018". He holds a Ph.D. in international finance from Stanford University.

Please visit Dr Tremblay's site or email to a friend here.

Posted Tuesday, March 9, 2021.

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