By Rashmi Narayan
If you’re wondering how the federal government is finding hundreds of billions of dollars for its economic response to the COVID crisis, it is indeed coming out of thin air.
For the first time since the early 1970s, Canada is responding to an economic crisis by implementing a policy called quantitative easing (QE), or large-scale buying of assets. The federal government is issuing government bonds, which are in turn purchased by the Bank of Canada, the governments’ Crown Corporation, to create billions of dollars. The Bank of Canada is buying at least $5-billion a week of Government of Canada securities, starting April 1, until the economic recovery is well under way. Economists assume the bonds could amount to $250-billion.
In an April 8th article ‘Canada joins the QE club’, Canadian Centre of Policy Alternatives economist Jim Stanford explained why Canada was using this policy when it hadn’t during the 2008 global financial crisis. “The central bank is simply doing what private banks do every day: creating new money by advancing credit (by buying a bond or other asset) and/or taking over loans (and associated assets such as mortgages) from other lenders.” The idea is to put more money into the hands of those that issue or own assets and they, in turn, would spend that extra cash, or loan it out, thus sparking more economic activity.
These strategies provide money to the federal government for its COVID-19 response and also create cash flow to financial institutions to ensure that households and businesses continue to have access to credit, and that lower interest rates find their way to borrowers.
Senior Economist at the Canadian Centre for Policy Alternatives Marc Lee feels that Canada is doing quite well and following best practises in its response to the crisis.
But there can be a downfall to quantitative easing or creating money. A huge increase in money supply could lead to inflation. When there is a large supply of anything, its value goes down. In the case of money, when its value goes down, you need more money to purchase the same item. However, since spending has dropped significantly due to containment that it should not be an issue, according to Lee.
The economic impact and subsequent recovery are not a challenge limited to Canada. Both the 1930s depression, which lasted 10 years, and the 2008 financial crisis slowed the economy because of market conditions. In the case of the COVID-19 pandemic, Chair and Professor of Economics at Thompson Rivers University Dr. Ehsan Latif says, “We artificially shut down doors during the lockdown.” In that sense, he feels that controlling the economy is in our hands and things could get back to normal once public health is not threatened and / or a vaccine is found, 12 to 18 months down the road.
Lee said that March saw a 9% drop in the Gross Domestic Product, which is unprecedented in history. “There’s a big hole to fill despite CERB (Canada Emergency Response Benefit) and the wage subsidy. No matter how they slice it, the economic numbers will be terrible.”
Lee recognizes that the move to contain people indoors is a trade-off between additional health risk and freedom. He surmises that while many like himself have the luxury to work from home, retail stores and restaurants are being forced to ride out the pandemic. He would like to see people use masks in grocery stores and in public transit, so we can open up the economy.
Some industries might never recover. Lee says fear of travel could mean foreign tourists might be replaced by local tourists, though they would not spend in the same way.