Opinion: Anti-inflation policy is all about the money

 

When the current inflation began the Bank of Canada assured the public it was caused by the pandemic’s temporary disruption of supply chains and would not last. But the price increases persisted and the Bank changed its mind and has begun raising interest rates to reduce the demand for goods, services, and assets and try to prevent a dreaded wage-price spiral. That the Ukraine war has disturbed key markets has not helped.

In contrast, the academic economists known as monetarists have insisted from the start that the inflation was due, not to temporary disruptions in supply or to international tensions, but rather to an excess supply of money the Bank of Canada itself created. This view is based on Milton Friedman’s conclusion, after studying past inflations around the world, that “Monetary policy is not about interest rates; it is about the growth of the (broad) quantity of money.” Combatting inflation requires adjustments to the money supply, not changes in interest rates.

Canada’s money supply, as measured by “M3,” grew by 32 per cent (from $2.5 trillion to $3.3 trillion) between the second quarters of 2019 and 2022. During the same period the country’s GDP increased 22 per cent. If the Bank had kept the ratio of money to GDP constant, the money supply would have increased 22 per cent or $0.6 trillion, not 32 per cent or $0.8 trillion, which implies the excess money supply held by the Canadian public in 2022 was some $200 billion.

Since this extra $200 billion was more than Canadians needed to carry out their financial affairs, they disposed of it by spending it on goods, services and assets. But all this new demand was not accompanied by an equivalent increase of production, which is what would have happened under normal conditions when Canadians earned money in return for producing goods and services. In fact, the Bank of Canada created this excess money supply with the stroke of a pen. The result — “more money chasing the same amount of goods” — led to inflation.

It’s probably counter-intuitive and it’s certainly ironic that spending by some Canadians to lower their money holdings does not decrease the overall money supply. The reason is that the money that sellers of the goods, services and assets receive becomes their own excess money holdings. When they in turn spend it, the surplus money is shifted to another set of sellers — and so on and so on in a vicious cycle. It is like a hot potato no one wants to hold that is passed around the room from person to person. In the end, the excess money supply is eliminated only when inflation reduces its real value or central bank operations soak it up directly.

The Bank of Canada created the excess supply mostly in the second quarter of 2020, when M3 grew eight per cent, four times its normal growth of about two per cent. Why did it do that? To provide the federal government with the money it needed to bring financial relief to needy Canadians affected by the pandemic. That burst of government spending was justifiable on moral grounds. What was not justifiable was the Bank’s failure to reduce the money supply to non-inflationary levels after the emergency relief payments were no longer needed.

While some Canadians spent the excess money, others have been using it to finance a period of leisure. Their withdrawal from the labour force helps explains why there is the shortage of labour that has led to higher wages, inflation and the beginnings of a wage-price spiral.

Monetarists believe another important problem confronts the Bank of Canada. It can only set nominal rates of interest. But borrowing and spending are determined by real rates. If expected inflation is eight per cent, an apparently high nominal rate of interest of six per cent in fact becomes a real rate of minus two per cent. You could borrow $100 at six per cent, buy an asset, sell it a year later for $108, repay the $100 loan, pay the $6 interest due and enjoy a net profit of $2. When real interest rates are negative borrowing always pays and lending becomes a mug’s game.

But inflationary expectations are not observable. So the Bank does not know what real rate is implied by the nominal rate it sets. Operating in the dark in this way can lead it to set nominal rates too low, which unintentionally creates inflationary increases in demand, or too high, which risks unnecessarily large reductions in demand and a recession.

Canadians can only hope the Bank of Canada’s interest rate policies will get inflation under control promptly, despite the problems identified by monetarists. If not, we are in for a deeper recession, higher unemployment and lower economic growth than necessary.

Herbert Grubel is an emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

Published in the Financial Post, Oct 20, 2022  

 

To understand and forecast inflation, follow the money

 

To understand and forecast inflation, follow the money

Former Bank of Canada Governor John Crow was once asked whether the money supply had been used in the Bank’s economic model and forecasts he had just presented. His response was that although money was not in the model he regularly looked over his shoulder to be sure the money supply was not growing too quickly. During his time in office, both the money supply and prices grew at satisfactorily moderate rates.

Current Governor Tiff Macklem should have spent more time looking over his shoulder. In the first year of the COVID epidemic the money supply, as measured by “M3,” increased at an average annual rate of 13.4 per cent, almost double the rate during the preceding nine years. Even so, most academic economists and advisers to central bankers have blamed the current inflation — 8.1 per cent year-on-year in June — on disruptions in the global supply chain, COVID after-effects, the war in Ukraine but not excess money creation. In the press conference last month at which he announced a hike in the Bank’s target interest rate of 100 basis points, Governor Macklem did not mention the money supply once. Nor was the issue raised during later media interviews.

 

But money is crucial to inflation. In the words of Milton Friedman: “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.” History shows that inflation follows excessive growth in the money supply with a lag, usually about two years.

Events like harvest failures, epidemics, floods, earthquakes, and wars do of course reduce supply and increase the prices of goods and services affected by these abnormal events. But these price increases disappear once normal conditions return. If they were to persist, consumers spending more on the higher-priced goods would have less income to spend on other goods, whose prices would fall correspondingly, leaving the average of all prices unchanged. Inflation, a persistent increase in the overall price level, can therefore only occur if increases in the money supply precede or accompany these disturbances.

What causes the money supply to increase? The first way involves commercial banks extending loans to private borrowers, granting them a corresponding amount of new current account deposits, which count as money in government statistics. These commercial banks see their assets (the loans to the borrowers) increase by the same amount as their obligations (the new money in the deposit accounts that the banks have created for the borrowers).

A second way the money supply can increase results from actions of the Bank of Canada. During COVID, the bank bought government bonds held by investment institutions. It paid for them by creating new deposits for the sellers. This added directly to the money supply and increased the central bank’s assets and liabilities by the same amount. Known as “Quantitative Easing,” (QE) this policy likely helped keep interest rates low: when a central bank buys bonds that makes things easier for people and firms trying to borrow money.

Both commercial and central banks in effect create money out of thin air. The ability of the commercial bank to do so is constrained by regulations and interest rates set by the central bank, which influence private lending and thus the growth in demand for loans. The Bank of Canada, however, faces no limits on its money creation other than public and political pressures when the economy underperforms or inflation develops.

The total amount of money created by Canada’s commercial banks and the Bank of Canada is known as M3. The share of money created by the Bank of Canada in the decade before COVID was three per cent but soared to 46 per cent in 2020-2022, which implies strongly that expansion of the money supply moved dramatically from the market-determined actions of commercial banks to the politically determined policy of the Bank of Canada.

The two lines in the nearby graph show six-month moving averages of monthly observations of year-over-year growth in inflation and money supply, with the twist that while the inflation numbers are current the money supply data is from two years earlier, which makes it possible to judge how much it may influence subsequent inflation.

In the early years, as the graph shows, fluctuations in both variables were moderate. Even so the correlation between them was surprisingly strong, given other, non-monetary factors that also affected prices. The correlation after early 2020 is unmistakable, however, and supports the “monetarist” view that excessive growth of the money supply is the underlying source/driver of the current inflation.

What does the model say about future inflation? The vertical line marks May 2022, the latest data available at the time of writing. The single line to the right of it shows the M3 created over the past two years, which, according to the monetarist model, will largely determine inflation in the coming two years. The line suggests inflation will peak this autumn when the high 15.2 per cent M3 growth has worked its way through the system. The subsequent reduction of M3 growth will exert some downward pressure on prices — but only for a short time since the slowdown has now been replaced by another period of accelerating M3.

We conclude that inflation could accelerate again in mid-2023 and continue well into 2024. As always, this projection may prove to be wrong if other powerful economic developments occur — another wave of the pandemic, for instance. Still, analysts would be wise to take the possibility seriously.

Excess growth in M3 in recent years was caused by the perceived need to finance record fiscal deficits, which QE did. These deficits and their monetization were made politically possible by the government’s adoption of two revolutionary new ideas in economics.

The first was that budgets no longer had to be balanced over the business cycle. Rather, deficits were fine so long as they did not bring the debt-to-GDP ratio above a certain, reasonable level. In fact, overall government debt has risen rapidly above any reasonable level from 86.8 percent of GDP in 2019 to 117.8 in 2022.

A second idea underlying the extraordinary growth in the money supply was politicians’ ready acceptance of “modern monetary theory,” which argues that governments can issue unlimited amounts of money in their own currency without risk of bankruptcy so long as inflation does not result. Inflation obviously has resulted, but this view has been used to rationalize unprecedented peace-time levels and growth in deficit spending.

These theories are now being tested in the real world. The correlation between excess money creation and inflation seen in the graph suggests they are likely to fail. But only time, and possibly considerable economic distress, will bring the final judgment.

Financial Post

John Greenwood is chief economist of the International Monetary Monitor in London. Herbert Grubel, MP from 1993-97, is emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

This article was published in the Financial Post on August 9th, 2022. It is found at:

https://financialpost.com/opinion/opinion-to-understand-and-forecast-inflation-follow-the-money

Ten reasons Canadians are unhappier

Ten reasons Canadians are unhappier

I was surprised but not shocked when the latest international survey of happiness found that Canadians have become considerably less happy. In 2012, when the survey was first published, we were the fourth-happiest country in the world. This year we are 15th.

The index of happiness used to create this ranking is based on survey respondents’ subjective assessment of where on a scale of zero (least happy) to 10 (most happy) they find themselves. As in all surveys that rely on the use of subjective criteria, the results should be treated skeptically. But since the same reasons for skepticism exist for all countries in the survey now and ten years ago, the causes for this drop in our ranking deserve consideration.

The happiness of every individual is influenced by many things that are highly personal but it is possible to identify some factors that are almost certainly shared by most Canadians. For example:

• Inflation has caused real incomes to fall, recently at 8.1 per cent annually, with more price increases expected in the coming months. Policies to stop inflation are likely to cause significant economic problems.

• The cost of housing relative to income (affordability) is the most important component of inflation. It has risen sharply and has made Canada’s largest cities among the least affordable in the world.

• Canada’s federal debt has reached its highest peace-time level. When interest rates rise, as they are widely expected to do, the cost of servicing it and the consequent fiscal burden on taxpayers will increase as well.

• Health and health care have serious effects on Canadians’ happiness. Many of us cannot find a family doctor and face long waits to consult specialists and get access to emergency services, medical imaging and needed surgery. By these measures and in several other ways, we do very poorly in comparison with other developed countries offering universal, free health care to their citizens.

• Immigrants require housing, health care, education and public recreation facilities, all of which are in short supply. In the 1980s immigrants numbered about 100,000 a year. Their number has since increased steadily and will be 400,000 in 2023.

• Freedom of speech is essential to the functioning of liberal democracies but in recent years has become more and more restricted. Codes of political correctness dominate conversations in universities and on the pages of popular media. Violators of these codes are “cancelled” by self-appointed guardians, usually without the opportunity for self-defence.

• In the past, the main role of governments has been to create equal opportunities for success in life but now, increasingly, it is to equalize outcomes. In trying to do so, governments impose taxes and regulations that severely distort incentives to work, save, invest, take risks, and own property. Such policies not only decrease economic growth but are considered by many to be unfair.

• Another important aspect of this redistribution policy that many Canadians regard as unfair involves regulations requiring employers to give various forms of hiring preference to women and people from visible minorities even if other Canadians have the same qualifications, skills and work habits.

• In the past, the public could hold politicians accountable for the environmental and social policies they create. Now, under the new ESG system such policies will be made by businesses without the traditional accountability to the public.

• Canada’s federal government has promised to design policies consistent with “Great Reset”and “Build Back Better” paradigms for organizing the economy and society, creating worry that democratic, free-market capitalism increasingly will give way to government planning and massive redistribution of income.

Space does not permit the listing here of more of the many government policies that make many Canadians unhappy. But every year scholars construct the Economic Freedom Index, which measures a wide range of policies that affect happiness. They do so under the headings of: countries’ size of government; characteristics of the legal system and security of property rights; sound money; freedom to trade internationally; and regulation.

As it turns out, countries’ level of economic freedom is highly correlated with the level and growth of their per capita income, life expectancy and other important indicators of economic and social well-being, which in turn seem likely to determine happiness. By this measure, Canadians have not done well recently. The country’s ranking has fallen from seventh in the world in 2012 to 14th place in 2021.

A study by the OECD indicates what lies ahead. It forecasts that the growth in Canada’s per capita income in the year 2030 will be the lowest among all members of the OECD. Happiness is almost certain to follow the same trajectory unless we see a wholesale reversal of the damaging government policies of the recent past.

Herbert Grubel is emeritus professor of economics at Simon Fraser University and a senior fellow at the Fraser Institute.

 Published on September 14, 2022 in the Financial Post  found at 

https://financialpost.com/opinion/opinion-ten-reasons-canadians-are-unhappier

What's causing inflation? Bottlenecks or too much money?

 

Whether the recent increases in Canada’s consumer price index are temporary changes due to supply and labour shortages in some sectors or a more permanent problem driven by the excess creation of money is being hotly debated by economists at the moment.

The first explanation is favoured by economists at the Bank of Canada and some academics. They argue that September’s 4.4 per cent increase in the CPI was caused mostly by supply-chain bottlenecks that will soon end, allowing a prompt return to the targeted two per cent rate of inflation. They buttress their arguments by drawing on data showing that just three items — energy, food and housing — explain most of the increase in the index.

The second explanation is favoured by economists who have studied the history of inflations using the monetarist model popularized by 1976 Nobel Prize-winner Milton Friedman, who in a classic study of the monetary history of the United States found that “inflation is always and everywhere a monetary phenomenon.” These economists argue that the Bank of Canada has increased the money supply by an amount that in the light of experience is likely to lead to substantial inflation.

Which of the two views is right could not be more important for policy. If the price rises are temporary, there is no need for higher interest rates and tight fiscal policy. But if the monetarists are correct, the inflation will continue and even increase, requiring tighter monetary and fiscal policies — the more so the longer the excessively large money supply is allowed to persist. The corrective policies will involve recession and unemployment and require reductions in government spending — all of unforeseeable depth and duration.

So which is it? A recent paper by John Greenwood, former chief economist at Invesco, one of the world’s largest investment management companies, suggests the monetarist argument has some explanatory power. The nearby graph is from his paper, with Canadian data added.

It shows the percentage increase in each country’s consumer prices between December 2019, before COVID, and August of this year, paired with the percentage increase in its national M2 between December 2019 and July 2021. M2 is the most widely used indicator of the supply of money and a key determinant of national monetary conditions. The monetarist theory predicts that, all else equal, the greater the increase in the money supply, the greater future price increases will be.

The dots in the graph show that for the sample of the five countries there is a strong, positive relationship between the growth in M2 and inflation. The U.S. has both the highest inflation and the highest M2 creation. Canada has the second-highest values of both, followed by the United Kingdom and at much lower levels, Switzerland, and Japan.

The positive relationship between money supply growth and inflation supports the view that inflation in Canada can be expected to continue and will likely accelerate if future fiscal deficits continue to be financed by additions to M2.

Does the graph provide any insight into the monetary conditions vs. temporary bottlenecks debate? If supply chain disruptions are the problem, then Switzerland and Japan should be affected in the same way as the other countries. But that’s clearly not the case. Inflation is essentially non-existent in Switzerland and Japan.

A danger in Canada’s current situation is that although supply chain bottlenecks and labour shortages may be temporary, some businesses have dealt with them by raising output prices to cover higher input costs. At the same time, many businesses have had to raise wages to attract workers in scarce supply. If people build these price and wage increases into their inflation expectations, inflation may persist even after the shortages of supplies and labour have been cleared.

The cost of supplies may or may not return to pre-crisis levels, but at least some of the higher output prices may remain. And workers will strongly resist any attempt by employers to reduce wages back to pre-pandemic levels. Unions are likely to demand wage parity for their members and set a new standard for workers in the non-unionized sector of the labour market. The wage-price spiral that dominated the 1970s may return.

Its clear relation to the money supply suggests inflation will become an increasingly serious problem for the economy and that the Bank of Canada and federal government will soon have to make some difficult decisions. Eventually there will have to be a reckoning as to whether the excessive government spending that fuelled the inflation was caused by an ideologically driven expansion of the role of government in society or by the problems brought on by the COVID pandemic.

If policy allows, the market will fill all those job vacancies

 Canadian employers recently reported that they are increasingly unable to find  workers who fill their needs. This condition is reflected in the official statistics, which show that between the first and second quarter of this year, the average number of job vacancies rose from 553,480 to 731,905. As of July, the number had grown to a record 815,800. Employers most affected by problems hiring workers are restaurants, retailers, trucking companies (as in the U.K.), and health-care providers.

Some employers have responded to the shortage by abandoning expansion plans or going out of business. Others report having raised wages. These and other responses to the high rate of job vacancies have serious implications for inflation, the rate of recovery from the recession and monetary, fiscal, social, and immigration policy, so it is important to understand why job vacancies are so high.  

One possible reason is that Canada suffers from an overall shortage of labor because more workers have retired than have entered the work force, while immigrants have added to it in smaller than usual numbers.

The facts do not support this view. In August, 1.521 million Canadians were unemployed, which was about 400,000 above the 1.176 million in August 2019, when the economy was at full employment and no labour shortages existed. Canada is not suffering from a shortage of workers available for employment.

Another possible reason is a mismatch of workers’ qualifications and wage expectations with employers’ requirements and ability to pay. This problem exists at all times and is caused by changes in technology, consumer tastes and overall growth in the labor force and output. It is routinely dealt with by workers acquiring new skills, moving to different locations, and modifying their pay demands, while at the same time employers train workers, adjust pay and working conditions and install labor-saving capital.

It is unlikely that the degree of mismatch has recently increased by enough to explain the current record number of job vacancies. No substantial changes in the mix of output or production technology have taken place. Employers are making the usual efforts to find workers. For example, salaries increased 2.6 per cent in 2021 and employers report planned increases in 2022 that are greater than in the preceding five years. 

A third explanation for high job vacancies is that workers fear COVID infections in the workplace and have therefore changed their occupational preferences. This seems to be a key problem for restaurants, healthcare and related service industries where close contact with potentially infected customers is high, workers consider pay to be too low, and work times are inconvenient, variable, and stressful.

But workers can afford to remain unemployed only if they have income to pay for their living expenses while they try to find the jobs they want. Since the start of the pandemic such income has reached them through substantial increases in the generosity of Employment Insurance (EI) benefits and the Canadian Recovery Benefits (CERB) program.

Ottawa recently reduced the level of these transfers and changed the conditions for receiving them so as to bring them more in line with pre-pandemic practice. Workers now must: have been employed an increased number of hours to receive EI benefits; wait one week before receiving approved benefits; submit a medical certificate to receive EI sickness benefits; face a minimum of weekly EI benefits of  $300, down from the pandemic level of $500; see their benefits again determined by regional unemployment rates (which lowers benefits for workers in regions with low rates); and face reductions in EI benefits if they receive CERB payments.

The response to past changes in EI benefits suggests that these reductions will lower the number of unemployed workers and unfilled jobs. It remains to be seen how quickly this happens, especially since the cash payment of $500 available to all Canadians through the CERB program earlier this year will continue to enable some workers to search longer for better jobs. But experience shows that reducing the income available to those who are unemployed invariably increases the number of people in work. The pandemic hasn’t changed that basic economic rule.

The article has been published in the Financial Post on October 5

https://financialpost.com/opinion/herbert-grubel-if-policy-lets-it-the-market-will-fill-all-those-job-vacancies

Immigration should be an election issue

 

The Trudeau government is on record that it will increase the number of immigrants from 300,000 in 2018 to 411,000 in 2022. This increase will have serious implications for the three hottest-button issues of the 2021 election: the high cost of housing, the inadequate capacity of medical and other public facilities, and climate change. Yet in their campaign documents, none of the three major parties discusses the effects of immigration on these issues or promises to change existing immigration levels or policies. Canadians deserve better.

The effects of immigrants on the cost of housing are obvious. After arriving in Canada, people must live somewhere. They thus add to the demand for housing and, other things being equal, the excess of demand over supply. In recent years that excess demand has significantly raised the already high inflation-adjusted prices of single-family homes, condominiums, and apartments.

These high prices have motivated the major parties to promise policies to increase supply through the financial encouragement of construction or outright government ownership of rental facilities. Though such policies have been promised in the past the record shows that they have proved inadequate. Because the need for new construction is currently much larger than the ability of governments to finance it, current promises are likely to face the same fate.

Another set of policies promised by the three leading parties involves reductions in the demand for housing. The cheapest and most risk-free proposal sees the imposition of restrictions on the purchases of dwellings by foreigners. Many Canadians applaud this idea and foreigners have no political clout to oppose it. But even if the policy did stop foreign purchases, the effect on prices would be minimal because demand from foreigners makes up only a small proportion of the total. Moreover, to realize speculative or investment profits foreigners have to sell dwellings so that in effect they raise prices when they buy and lower them when they sell. And, of course, Liberal proposals to provide subsidies to new home-buyers will increase demand, possibly by more than restrictions on foreign ownership will reduce it.

The reality is that almost all demand for housing is caused by population growth, of which in recent years immigration has accounted for about 80 per cent. It is hardly rocket science that reducing the number of future immigrants would reduce demand and help bring it in line with supply.

Immigrants also add to the excess demand for medical services, whose existing supply cannot prevent both long waiting lists and sometimes acute shortages of both hospital beds and family physicians. Newcomers also cause excess demand for roads, public transit and recreation facilities, which results in traffic congestion, as well as overcrowding on buses and in public parks.

Those currently running for office promise to alleviate these problems with increased spending on health care and infrastructure. But such promises are likely to produce the same results as similar ones made in past elections. Some new facilities will be created but at best they will enable supply to keep up only with the natural increase in population, the rise in income, and the overall aging of the population — but not with the demand created by the much larger number of immigrants.

Immigrants also have an important influence on Canada’s efforts to prevent global warming through reductions of CO2 emissions. In 2016 our per capita output of such emissions was 15.09 metric tons. The 323,190 immigrants that year thus added 4.88 million metric tons to the country’s emissions and correspondingly raised the cost of measures needed to reach the emission targets Ottawa has announced. But two-thirds of these emissions would not have taken place if recent immigrants had remained in their (on average) low-emission home countries.

The negative effects immigrants have on the affordability of housing, the availability of public services, and the cost of climate change policies could be reduced by lowering immigration to 100,000 a year, a number I believe would allow ample numbers of skilled workers and refugees alike to meet both our labour market needs and our international humanitarian responsibilities. The proposed number can readily be raised or lowered if evidence suggests that demand or cyclical economic conditions warrant it or supplies of housing and public facilities have caught up with demand.

Published in the Financial Post on September 10, 2021

https://nationalpost.com/opinion/herbert-grubel-immigration-should-be-an-election-issue

Why I will vote for the Liberals

 

All my life I have supported conservative causes and parties financially, in my writings, and lectures. I even spent four years in the federal parliament as the member of the right-wing Reform Party. Yet, in this election I will vote for the Liberals and hope that Justin Trudeau will head the next government.

No, I am not out of my mind and lost faith in conservative principles. Instead, I believe that it is in the longer run interest of the conservative movement in Canada if the Liberals and Trudeau will be in office during the next four years when they will face the need for highly unpopular policies needed to deal with the inevitable consequences of their past, irresponsible economic and social policies. They will lose voter support for many years, which would befall the Conservatives if they were in power when these policies must be adopted.   

The past irresponsible Liberal economic policies will lead to inflation and higher interest rates needed to deal with it. Inflation has already begun and led to significant increases in the prices of gasoline, food, lumber, automobiles, and housing. Expecting inflation, investors have bought inflation-proof assets such as bitcoins, gold, works of art and collectibles, driving up their prices to unprecedented heights. All the necessary conditions for the continuation of this inflation are in place.

Inflation inevitably leads to higher interest rates. If the Bank of Canada does not raise rates soon, it will have to raise them later when the experience of the 1970-80s is repeated. On that occasion, price increases were considered to be due to temporary, reversible events and therefore not requiring higher interest rates. As it turned out, the increase in the price of energy caused by OPEC output restrictions led to price increases in other commodities, which ultimately spread to the rest of the economy, led to higher wages, and made the Bank of Canada use record levels of interest rates to stop the price increases.

If the Bank of Canada accepts the view that current price increases are not temporary and reversible, it will raise interest rates soon to reduce excess demand, which is the ultimate cause of all inflations. Continued federal deficits and spending by consumers of the excess holdings of money created by poorly targeted transfers during the pandemic will not help but make the Bank’s job more difficult.   

Whether soon or later, interest rates will almost certainly increase during the mandate of the next government. The higher rates will increase mortgage defaults, higher unemployment, personal and business bankruptcies, and government deficits. Canada’s economy will be in a classic recession bringing great hardships to many.

But this is not the only serious problem caused by higher interest rates. The cost of servicing the record federal debt of $1.3 trillion will increase and add to the already programmed large deficits. The country’s credit rating will be lowered by international credit rating agencies and further increase the government’s borrowing costs.

The bottom line is that, within the term of the next government, the Liberals will have no choice but to adopt politically very costly cuts in program spending and increases in all taxes. They will try to blame the Conservatives, the pandemic and climate change for the need to adopt the highly unpopular policies. These efforts will not be credible.

The large debt is due mostly to Liberal-inspired woke policies designed to increase the welfare state and pandemic-fighting policies that cost much more than they would have if timing and targeting had been better. The cost of climate change policies will hit consumers hard who will see no clear benefits, especially as China and other big polluting countries fail to reduce their levels of pollution.

If the Liberals win the next election, they will face another serious political problem, which is the result of their strong moral support of interest groups whose members have in common certain personal characteristics that are united under the LGBTQ+ banner and include natives and racial minorities. The Liberal have until now supported these minorities mostly by encouraging them in their view that are suffering from personal and systemic discrimination, which is the cause of their low incomes and social status.

Many ordinary Canadians preoccupied with work and other personal concerns have been unaware of this Liberal support of minorities. Others have accepted them because they have not been affected materially or find them consistent with their sense of moral responsibilities for the underdogs in society. However, in the coming years, these interest groups will demand that the Liberals adopt the “Reset” policies they promised to eliminate discrimination and create greater equality of income and social standings.

The equalization of incomes will require higher transfer payments to these groups and increased taxes on high-income Canadians. The elimination of discrimination will require the mandated use of quotas in employment and educational institutions.  Meeting the demands of natives will require large spending increases. Immigrant communities will be satisfied only if they can welcome increasing numbers of their relatives and friends who upon arrival will increase shortages in the housing market, and public health and recreation facilities.

These policies will materially affect the vast majority of Canadians who are not members of the LGBTQ+ community, natives, and immigrants. They will also feel unjustly accused of personal and systemic discrimination and oppose resets in Canada’s culture and economic system that have served them extremely well in the past and evolved successfully through time.

It will be good to see the Liberals lose much voter support if they will the next election as they deal with the cost of inflation, higher interest, a recession, and the consequences of having created the high expectations of minorities. The Conservatives will benefit from the Liberals conundrum and will have strong voter support for a long time in the future. That is why I will vote Liberal and urge others to do the same.