When I was studying economic theory in college, one phrase kept leaping out at me: “Economics is the dismal science.” This was partly due to the fact that I could never really be convinced that the discipline of economics was anything but a science. Instead, I preferred to think of the reality of economics being continuously influenced by political policies and institutional structures, including those in the international sphere. Control over the world’s economies is much more institutionalized than ever before. The current economic situation in North America really highlights this perspective, especially given the reaction of bodies such as the U.S. Federal Reserve Board and the Bank of Canada in dealing with the post-pandemic world.
In Canada, one is coping with the highest levels of inflation since 1995. The U.S. is seeing the highest levels of inflation since the early 1980s. On top of which, we’re getting economic data that is fluctuating quite rapidly, so it’s very hard to get a precise read on where the economy is at any point in time. The additional fear now is that both these monetary bodies are increasing the prime rates in order to tackle this hyperinflation at a time when the economy is attempting to get back on its feet after the disastrous pandemic period — thus the concerns about a potential recession in both countries and around the world.
Now, you don’t have to be an economist to know that something’s wrong. Filling up your gas tank, buying a home and purchasing groceries just got incredibly more expensive! Governments blame much of the distress on post-pandemic supply chain problems and global fuel-food shortages due to the Russia-Ukraine war. On top of which, there are suddenly skilled labour shortages in most countries, leading to increasing wage levels and low unemployment rates. The current situation has particularly been led by Boomers, many of whom have chosen to retire. An April paper by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.” Due to the lack of and high cost of child care for example, many women are financially unable to return to the labour market. In order to fill many jobs, countries are having again to look to immigration policies as a possible solution.
Recent blow-out jobs reports may have quieted claims that the U.S. is in a recession, but it did not end the mystery about the state of the economy or resolve questions about where it is headed. Should a recession evolve in the U.S., past experience would suggest that Canada is not far behind. Similarly, both federal governments are under the gun to do something about inflation — a major political issue. However, as most analysts state, the current economic situation is something completely new and unprecedented in light of post-pandemic elements and the current global situation with respect to supply chains, especially in Europe.
Higher interest rates as a result of Federal Reserve Board and the Bank of Canada benchmark interest rate increases to control the hyperinflation will have an immediate impact on lowering economic growth. Consumers feeling the hit will most likely have to cut back on expenditures, including the purchases of homes due to the subsequent rise in mortgage rates. Whether or not we are on the brink of a major recession is still up in the air. There is no sector of the economy that hasn’t been affected during this so-called recovery period.
However, how about longer-term predictions? As the famous British economist, John Maynard Keynes, once said: “In the long-run, we are all dead.” He further noted that aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors —sometimes behaving erratically — affecting production, employment and inflation. As of today, this definitely appears to be the case. All any of us can do is hope to survive during the foreseen continuing turmoil within the markets and the economy in general. In the spirit of economics as a ‘dismal science’, most economists for are not overly optimistic about improved short-term growth.
FROLITICKS 
Leave a comment