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The world of tomorrow, according to Stephen Poloz
There will be no shortage of risks facing households and businesses in the coming years, as indebted governments are weakened by the pandemic. Consequence: it will be necessary to prepare for hard blows, because the State will not be able to come and save everyone.
This is the thesis proposed by former Bank of Canada Governor Stephen Poloz in his most recent book, The next era of uncertainty – How the world can adapt to a riskier future, published by Penguin Random House. Rest assured, the book reads much better than a report on monetary policy.
The title echoes John Kenneth Galbraith’s book published in 1977, The age of uncertaintywritten in a period of turbulence to which we often compare ourselves these days.
The five tectonic plates to which Mr Poloz refers are the aging of the population, technological progress, growing inequalities, indebtedness and climate change.
Of the five, only technological progress, driven by applications of artificial intelligence, the digitization of the economy, and advances in the life sciences, has a positive effect on economic growth.
The world of tomorrow, according to Poloz? The interaction between these forces will inevitably cause shocks. It invites households and businesses to prepare accordingly, without relying too much on the support of fiscal and monetary authorities.
“The possibility that even a modest increase in interest rates could lead to a series of unusual business bankruptcies and job losses may seriously limit the ability of central banks to meet their inflation targets,” writes as an example who led the central bank of Canada from June 2013 to June 2020.
In this dangerous world, people should expect to lose their jobs more often, he warns.
Despite its positives, technology will make jobs obsolete: driver, farm equipment operator, financial advisor, call center agent, and store clerk. The author does not rule out an increase in the rate of unionization as a result.
housing under pressure
Mr. Poloz also expects sharp swings in interest rates. The speed of the current rate hike undertaken by the Bank of Canada seems to prove the former governor right.
This explosive combination of rising unemployment, bold anticipation given the shrinking workforce, and sharp swings in interest rates will put pressure on housing.
“Expectations of a steady rise in property prices will be dashed,” says the author. The periods of falling prices will be more noticeable and memorable. There will be consequences for people’s attitudes towards housing,” he says in his chapter on the future of housing.
Advocates for more innovations in housing finance. In particular, he advocates a system of co-investment in housing between the borrower and the lender, a way of promoting home ownership among the youngest, according to him.
Despite its limited options due to its indebtedness, the state, according to Poloz, must adapt to the situation by offering automatic membership in social programs. He favorably views the conversion of employment insurance into a guaranteed minimum income program, whose rules should minimize its negative impact on the rate of participation in the labor market.
In passing, he applauds Quebec’s nurseries for their benefits in women’s participation in the labor market.
stephen poloz intimate
Each of the 13 chapters begins with two or three pages of more personal content where we learn in small slices of the life of the great Mandarin. Raised in a modest veterans’ home on Quebec Street in Oshawa, where three generations lived together, Mr. Poloz was not born with a golden spoon in his mouth. With a father of Polish and Ukrainian origin, the renowned economist is an example of the “Canadian miracle”.
His efforts in school banking were rewarded with diplomas from Queen’s and then Western, opening the doors for him to federal institutions such as the Bank of Canada, Export Development Canada, then again the Bank of Canada, this time as a note signer. .
In this sense, he broke with tradition by signing the tickets with his full name instead of just his initials. The reason ? Stephen is also his mother’s maiden name. By signing with his name and surname, the governor honored the memory of his parents with all discretion.
The author devotes a chapter to the hectic days in February and March 2020 when the spread of COVID-19 paralyzed the economies of OECD member countries and prompted a coordinated response from central banks.
The book is not yet available in French.
The next age of uncertainty: how the world can adapt to a riskier future
Penguin Random House
Three quotes from the book.
About climate change
“About 80% of the world’s energy needs are met by fossil fuels today. It is simply not possible to suddenly stop producing and using fossil fuels, as some idealists argue, without traumatic consequences for living standards. »
On the Bank of Canada’s quantitative easing during the pandemic
“It’s basically about creating money out of thin air. The underlying reason is that borrowers need more liquidity to ensure that they can meet their daily obligations without risking default. This is not the same as creating money out of thin air and forcing it into the economy so that there is too much money for too few goods. When the demand for cash increases in times of stress, the risk is that there is too little money for too many goods. »
On the future of housing
“Net house price growth will continue even though the aging population means it will be slower. Immigration is expected to increase. Inflation-adjusted interest rates are expected to remain very low for the foreseeable future, providing a solid foundation for housing in general. »
Questions to a renowned economist
In mid-July, Press joined the special counsel of the law firm Osler, Hoskin & Harcourt, at his farmhouse in Lake Louisa, north of Lachute. Among the topics discussed – in French – with Stephen Poloz, was the question of the behavior of households, the methods of financing housing, the control of prices and wages.
What can households do to deal with this riskier environment that you describe in your book?
For households, the change is to adopt a more prudent, more conservative financial plan, with room for maneuver, because unemployment will be more frequent, probably shorter, but not necessarily. The turnover rate in the labor market will be higher.
The impact of unemployment on the ability of households to repay mortgage debt is the most important factor of uncertainty. I think households are not going to buy the biggest house possible like in the past. They will have a greater security cushion and level of savings to guarantee greater financial flexibility.
Perhaps we will also see a higher labor market participation rate than today, because it is another way of managing the risk of having two incomes in the same household, even if one of them only works part time.
According to his chapter on the future of housing, he seems to find merit in extended mortgage amortization beyond 25 years. Why ?
Our attitudes toward debt have never really changed. By convention, the mortgage must be paid off over 25 years. This is the conventional plan. Today, mortgage lenders offer home equity lines of credit even to retirees. It is considered a good financial flexibility. However, it is perfectly equivalent to a mortgage balance at the withdrawal of a loan amortized over 50 years.
I don’t necessarily recommend taking out a 50-year mortgage. What is needed is a more flexible financial system to manage a level of risk that will be higher in the future with, for example, co-investment models, which remain rare at the moment. Eventually, I think it will happen.
How would your co-investment model work?
When it comes time to buy a house, it is expensive. First time buyers may want to consider buying a half house (a townhouse), it is less expensive. With joint venture you buy a house, but you only buy half with an investor [comme un prêteur hypothécaire], who will own the other half. It would have the merit of reducing the cost of living for everyone.
In your book, why are you concerned about the dispersion of the mandates of the monetary authorities?
The central bank mandates are correct mandates, but for the current inflationary situation, there are no good policies. It is about minimizing the problems and finding the trajectory that takes us back to the 2% inflation target. In general, a central bank has only one tool, so there should be only one mandate. When we add targets, it opens the door to debate and disagreement within the institution itself, as well as providing an opportunity to politicize monetary policy.
What do you think of the freezing of prices and wages as a measure to combat inflation?
This is a tough question. Currently, we are witnessing changes in the prices of oil and raw materials that will affect the rate of inflation temporarily. If you believe that the increase in the price of oil is temporary, it may make sense to consciously reverse this increase, and once the price of oil begins to fall, we could restore taxes, for example.
About two-thirds of the inflation we see comes from external sources, such as rising commodity prices. It is a temporary increase in a price level, not permanent inflation. It looks like 12- to 18-month inflation, but the price increases will taper off on their own over the next six months because of the base effect. The question for central banks is to manage the permanent part of inflation, the internal part.
The preferred path seems to be stagflation, that is, an economic slowdown combined with high inflation, but which is steadily declining. It is not possible to avoid stagflation, but we want it to last as little as possible. But we don’t know. It’s risky.
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