Literary Insights

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Economic uncertainty and volatility have been rising in recent years, making it harder for individuals and companies to plan for the future. We can expect even more volatility ahead.
Greater economic volatility means outcomes could be worse or better than expected, with a wider range of possible outcomes. This increases the risks associated with major economic decisions.
We base decisions on past average experiences, expecting the future to be similar. But with more uncertainty, the future may diverge significantly from the past.
Experts make forecasts using economics, data, and models. But experts aren’t always right and there are things they can’t know. Honesty about uncertainty is important.
The global financial crisis and the COVID-19 pandemic were significant economic disturbances that models failed to predict. This revealed the limits of economic expertise.
Tectonic forces like demographics, technology, inequality, debt levels, and climate change are interacting in complex ways, creating more economic volatility.
Individuals and companies must learn to adapt to a future with greater uncertainty and risk. Scenario planning, flexibility, and risk management will become increasingly vital.

Here are the key points:

The book was written in the aftermath of the COVID-19 pandemic, which exposed the extreme uncertainty in making economic forecasts. Past forecasts made during times of upheaval (e.g. 9/11, the 1970s crises) often turned out to be wrong.
The author argues that several key foundations of the economy are changing, making the future more uncertain. He calls this the “next age of uncertainty”.
Long-term forces like demographics, technology, globalization etc are all evolving and interacting in complex ways, making the future hard to predict. Economists’ models rely on constants, but many foundations are now in motion.
The book aims to help readers understand the economic forces shaping the future and make better decisions despite increasing uncertainty. It builds on the author’s insights from a 2018 lecture on long-term forces destabilizing the economy.
The title echoes John Kenneth Galbraith’s 1977 book “The Age of Uncertainty” which examined economic upheaval in the 1970s. The author argues we are entering a new era of uncertainty that will not be the last.
The world is in constant motion due to powerful tectonic forces that cause the Earth’s crustal plates to move over millions of years. Similarly, the global economy is shaped by powerful long-term economic forces that build up over decades.
These economic forces, like population aging, technological progress, rising inequality, growing debt, and climate change, interact in complex and unpredictable ways, sometimes amplifying each other and sometimes partially counteracting.
Persistent imbalances between economic forces can lead to crises when the pressures finally exceed the friction holding them back, just as tectonic stresses cause earthquakes when plates suddenly slip past each other.
Economic forecasts should be expressed as probabilities, not definite predictions, due to the uncertainty arising from complex economic forces.
We are entering an era of slower labor force growth due to population aging, so economic growth will likely converge to a lower long-term average compared to the rapid growth of the past 50 years.
Expectations anchored in recent decades need to be adjusted for the powerful economic forces that will shape the next 50 years. Understanding these forces is important because they affect employment, savings, and asset values.
Population aging due to the baby boom generation is reducing workforce growth and economic growth. This is also putting downward pressure on interest rates.
Technological progress leads to industrial revolutions that boost productivity and growth but also cause economic disruption and hardship for many workers. We are currently in the early stages of the Fourth Industrial Revolution based on digitalization, AI, and biotech.
Rising income inequality is driven by technological change and globalization. The gains tend to go to a few inventors and shareholders first before spreading through the economy. This causes political backlash.
Debt levels have risen for households, firms, and governments. Lower interest rates and financial innovation have facilitated this. Government debt has surged due to stimulus spending during recessions and the pandemic.
Climate change will be an increasing source of volatility through weather events. The transition to a net-zero emissions economy will also be disruptive.

Here are the key points:

The five major forces acting on the economy (technology, demographics, globalization, the environment, and debt) are creating instability as they interact and collide. This makes the economy behave erratically and increases uncertainty.
Individual forces are understandable, but their interactions are complex and hard to model. This limits economists’ ability to make accurate predictions, especially long-term ones.
Multiple uncertainties compound and expand the range of possible economic outcomes. The real world is even more complex than models suggest.
The economy may experience chaotic, crisis-like events that seem random but actually stem from ordinary forces interacting in unusual ways. These are hard to foresee even if the forces are understood.
After a crisis, events seem more explainable, but not necessarily more predictable. However, understanding the forces can still help guide risk management.
The economy is like tectonic plates - gradual forces lead to inevitable but unpredictable seismic events. Forecasting a range of possibilities helps prepare, even if timing is uncertain.
“Black swan” events may not be as random as they seem if underlying instabilities are considered. Risk management is still worthwhile even if timing is uncertain.
The author reflects on growing up in Oshawa, Ontario in 1959. His parents were part of the baby boom generation and struggled during the Great Depression. Their frugal attitudes were passed on to the author.
Demographics have major impacts on the economy that are often overlooked. The baby boom cohort boosted labor supply from the 1960s to 1980s. Now that generation is retiring, causing a massive exodus from the workforce.
Changing demographics affect consumer spending, saving, interest rates, and economic growth. Economic models often ignore demographics by treating them as a constant. But they are critical for long-term investments and forecasting growth trends.
The aging population in developed countries will be a key demographic shift in the coming decades. This will reduce labor force growth, providing a headwind for economic growth. It will also put pressure on government budgets for healthcare and pensions.
Immigration and participation of women in the labor force can offset some of the effects of aging. But most projections still point to slower growth ahead for advanced economies. Adapting policies and expectations will be critical.

Economic growth comes from increasing the size of the workforce and improving productivity. Global population growth is slowing due to declining birth rates and aging populations. This will put downward pressure on global economic growth in the coming decades. However, policies like increased immigration and labor force participation can help offset slowing workforce growth in individual countries. Ultimately, demographic forces shape long-term growth trends, but their impact can be mitigated through structural reforms that maximize workforce participation and productivity.

China’s economic growth was fueled by reforms that shifted small-scale rural farming to large commercial enterprises. This displaced rural families who moved to cities, expanding the workforce and manufacturing capacity.
No country can sustain 10% growth forever. China’s growth has declined but income levels are still much higher than before reforms. Eventually China’s growth will converge with other major economies.
Economic growth depends on population growth and productivity growth. With slowing population growth due to aging, productivity growth will need to be the main driver.
Interest rates consist of inflation plus a “real” component. The real rate tends to a “natural rate” that balances saving and borrowing.
Population aging increases savings, lowering the natural rate. Slower growth means less incentive for firms to invest, also lowering the natural rate.
Much of the decline in rates in recent decades is due to demographics and inflation, not central banks. Low rates are historically more normal.
Financial innovation has also reduced borrowing costs, satisfying people’s impatience to spend.
The author developed an interest in science fiction and an optimistic view of technological progress as a child watching Star Trek in the 1960s. However, he also experienced the negative impacts of automation and job loss when his father’s company went on strike and ultimately shut down due to automation threatening workers’ jobs.
The author sees economic specialization and trade as key developments in human history that allowed for surplus production, savings, and ultimately the creation of culture, government, military etc. International trade builds on this by allowing people across borders to specialize and trade.
Technological progress has enabled major leaps in productivity through industrial revolutions, but these also caused periods of pain as many lost their jobs to automation and new technologies.
The author remains an optimist about technology’s potential, but also recognizes the disruptions caused by automation and job losses, having experienced this in his own family during the 1960s. Managing these transitions well is key.
The First Industrial Revolution in the late 18th century brought mechanization and factory production, displacing many traditional workers. This led to the Victorian depression from 1873-1896 as the economy adjusted.
The Second Industrial Revolution beginning in the early 1900s brought electrification and mass production. The Roaring 20s boom was fueled by optimism about new technologies, ending with the 1929 stock market crash and Great Depression.
The Third Industrial Revolution beginning in the 1970s was driven by electronics, IT, and automation. Unlike previous revolutions, it did not lead to a depression, partly due to smarter monetary policy that prevented deflation. However, it brought jobless recoveries and inequality.
We are now in the Fourth Industrial Revolution of digitalization and AI. The pace of change is increasing, bringing great opportunities but also risks of economic disruption. Understanding past revolutions provides perspective on managing change. The key is enabling the benefits while supporting those adversely affected during the transition period.
Technological advancements like artificial intelligence and automation are disrupting many traditional jobs and industries. This can lead to job losses and economic hardship for some.
However, history shows that over time, displaced workers are able to transition to new types of work enabled by technological progress. Economies adjust, though sometimes with significant lags and difficulties.
The adjustment period can be very difficult for impacted individuals. Technological change tends to drive inequality by benefiting highly skilled workers over lesser skilled ones.
Rising inequality has economic and political consequences. It leads to diverging experiences and perceptions between those succeeding in the new economy and those struggling with job losses or stagnant wages.
Inequality and economic dislocation breed political dissatisfaction. This helps explain the rise of populism and anti-globalization sentiment in recent years.
Policymakers face the challenge of helping economies transition smoothly to new technological realities, through worker retraining programs, education, basic income policies, and other measures to alleviate short-term hardships.
If policymakers fail to manage the transition well, backlash against technological change and global economic integration may intensify. But history suggests economies can and do adjust to technological revolutions over time.
Technological progress has been the primary driver of rising income inequality globally, by enabling job displacement and economic restructuring. It leads to uneven gains, with benefits accruing disproportionately to capitalists and highly skilled workers.
Globalization facilitates and amplifies the effects of technological change, but is often wrongly blamed as the root cause of job losses and wage stagnation.
International trade allows countries to specialize based on comparative advantage. While some domestic industries shrink and workers lose jobs, others expand, benefiting workers there. Consumers gain from access to cheaper goods.
Trade liberalization has complex effects on income distribution. Some workers lose out from import competition, raising inequality. But the overall income gains spread widely, creating new jobs economy-wide. The net impact depends on specifics.
Resisting trade on inequality grounds is misguided. The higher purchasing power it provides raises living standards. Self-sufficiency would leave less time for specialization and value creation. The level of prosperity worldwide depends heavily on the gains from trade.
Putting tariffs or other trade restrictions in place may seem to help domestic industries, but actually reduces overall prosperity through lost incomes. For example, tariffs on appliances may create some jobs but will raise prices for consumers, reducing purchasing power and jobs in other sectors.
Globalization allows for more specialization and lower costs through global supply chains. Components are produced where specialists are and connected via trade. Forcing companies to use less efficient domestic production decreases productivity.
Supply chains involve matching components to the optimal locations based on skills, wages, etc. This makes them complex and fragile. As countries develop, supply chains shift.
Offshoring of simpler components may reduce lower-skilled domestic jobs. But it allows companies to sell products cheaper, creating more jobs overall. High-skill jobs in design, engineering, etc. remain.
Income inequality has risen in the US more than in other countries. Government policies like progressive taxes can prevent this inequality despite globalization. Canada has contained inequality better through very progressive taxes.
Income inequality has been rising due to technological advances and globalization. This has fueled political polarization between “globalists” and “localists/somewheres”.
Countries with weak redistribution policies saw early populism and anti-immigrant sentiment. The US elected Trump and European countries saw a rise in populism.
A shift toward nationalist policies risks reversing globalization gains like trade and supply chains, hurting growth. Deglobalization is like “throwing sand in the economic machine”.
Trade restrictions directly hurt consumers through higher prices. Anti-trade politicians rarely mention this.
Inequality has swung dramatically throughout history, often peaking before economic depressions which then reduce inequality. We may be near another such inflection point.
Consensus on addressing inequality is difficult and policies risk reducing overall income. Even so, technology-driven inequality will likely resume worsening.
Rising inequality goes hand in hand with growing indebtedness, the next key trend.
The author started out planning to study medicine but switched to economics after taking an intro economics course and falling in love with the subject.
He envisioned working at the Bank of Canada and eventually running it, an unusual vision for someone so young.
He married his high school sweetheart Valerie while still an undergrad. They financed his education through her job, his DJ gigs, and scholarships.
In his final year, his professor exaggerated his undergraduate thesis findings to Bank of Canada officials, leading to a summer job and eventual post-grad position there.
At the time, the Bank was focused on reducing high inflation. This policy helped stabilize inflation but had an unintended consequence of increased debt levels.
Household debt levels have risen steadily in many countries, often tied to rising housing costs. Debt persists later into life now compared to 10 years ago.
Auto loan terms have lengthened, increasing vehicle debt. Corporate debt has also risen in many countries, though less sharply than household debt.
Economic policies have successfully reduced instability and severity of recessions. However, reduced downturns also limit the “cleansing” effects of recessions, where overleveraged firms fail and debt falls. This unintended consequence has allowed higher debt levels to persist through cycles.
Effective economic stabilization policies, such as lowering interest rates during recessions, reduce unemployment but lead to rising debt levels over time. This debt accumulation makes the economy more fragile.
The global financial cycle has lengthened and increased in amplitude because stabilization policies prolong economic expansions, leading to complacency and higher risk-taking.
High government debt levels are often associated with wars and economic crises. Government debt has risen steadily in recent decades due to stabilization policies and philosophies around deficits.
High debt levels can be managed if interest rates stay below economic growth rates. Aging populations will likely keep interest rates low, making debt more sustainable.
Reducing debt faster than the natural decline may be preferable to restore fiscal room for future crises. But some debt facilitates economic progress, so completely restricting it would be counterproductive.
Greenhouse gas (GHG) emissions are increasing, leading to climate change. This is causing more volatile weather, flooding, destruction of communities, and water shortages. Even if emissions are reduced now, it will take time to slow climate change due to built-up GHGs.
Reducing emissions requires changing the behaviour of billions of people. Hydrocarbons are the main source of energy and economic development. Rising living standards increase energy demand, mostly met by hydrocarbons which produce GHG emissions.
Alternatives like solar, wind and nuclear exist but are currently more expensive than hydrocarbons. Costs are falling but transitioning will be economically disruptive.
Hydrocarbons are cheap because GHG emissions are an externality - there is environmental damage but no cost to emitters. This is a market failure.
GHG emissions are like a neighbour opening a snack bar, attracting cars and smells, reducing surrounding property values. The snack bar owner gains, neighbors lose.
Externalities like smells and traffic are not priced into the snack bar’s costs. If they were, the prices would be too high and no one would come. This controls the externality.
Similarly, GHG emitters don’t pay for using and polluting the atmosphere, which harms global citizens. Pricing emissions would control them.

Here are the key points:

Climate change poses a tragedy of the horizon - costs borne by future generations, reducing incentives for action now.
Carbon taxes raise the cost of emissions, encouraging consumers and firms to reduce them. But they are politically contentious.
Emissions regulations directly limit emissions by sector. They also raise costs but leave revenues intact.
Investor activism can also raise financing costs for high emissions firms, creating incentives to reduce emissions through a market mechanism.
For investor activism to work smoothly, companies need transparency on emissions and reduction plans.
No approach is perfect. A combination of carbon pricing, regulation, and investor action may be needed for an orderly transition to a lower emissions global economy. But gaps across countries remain a key challenge.
The transition to renewable energy will take time. Fossil fuels currently supply about 80% of global energy needs, the same as 30 years ago. It is not feasible to suddenly stop using fossil fuels without major economic disruption.
The goal is to reach net zero emissions by 2050 through a combination of reducing fossil fuel use, increasing renewable energy, carbon capture, and reforestation. This requires coordinated international action to prevent countries from free riding.
Corporations are increasingly committing to emissions reductions targets and linking executive pay to sustainability metrics due to pressure from investors. However, commitments need to translate into measurable year-over-year progress.
Financial markets will differentiate between high and low carbon emitters in the fossil fuel industry rather than paint all as stranded assets. The highest emitters will face the most pressure.
Oil companies can adapt by increasing efficiency, offsetting with renewable investments, using green refining energy, and shifting more production to petrochemicals and other non-fuel uses where demand will persist.
Perspective is needed - oil companies are facilitating the transition and have much lower emissions than things like tobacco, which still have hundreds of billions in market cap. Markets will eventually recognize oil companies’ efforts.
The world is facing major tectonic shifts - climate change, demographics, globalization, and technology - that are interacting in complex ways. This creates heightened uncertainty and risk.
Climate change is a huge challenge that will require political solutions, which are inherently divisive. Even with policy action, there will be volatility in the transition to net zero emissions. Developing carbon capture technology should be part of the solution.
Other forces like technology and globalization are also transforming the world rapidly. When forces like climate change interact with these, it leads to even more volatility and uncertainty.
Past financial crises demonstrate how vulnerabilities can build up during periods of euphoria and rapid change. Contagion then spreads quickly when cracks appear.
Today’s world of hyperconnectivity means risks are more systemic. Forces reinforce each other. Small events can cascade in unpredictable ways.
We face a future with more extreme outcomes, both positive and negative. Navigating mounting complexity and uncertainty will require new approaches. Being adaptive and avoiding complacency are essential.
The Victorian depression in the late 19th century illustrated how technological progress, rising inequality, and high debt can interact to produce economic volatility and crisis. New technology disrupted old industries, causing job losses and deflation.
Uncertainty is a constant in economics. The normal distribution or “bell curve” is commonly used to measure risk, but has flaws because it discounts tail risks - rare but impactful events.
Economic models rely on correlations in data to make predictions. But correlations can break down when new variables become dominant drivers. Modeling requires imagining counterfactuals, which is cognitively difficult.
The economy is a complex, adaptive system with innumerable variables. Extreme uncertainty arises when unforeseeable structural change occurs, invalidating historical correlations.
High uncertainty prevails when traditional economic relationships seem to break down. Policymakers should be humble about what they can know in these circumstances. Systems thinking is required, not mechanical modeling.
Economic models try to capture complex relationships between many variables, but can lose predictive power as they become more complex. This creates “model uncertainty”.
Measurement issues around key economic concepts like capacity and equilibrium interest rates also create uncertainty. Economists may produce multiple forecasts to reflect this.
Weather forecasting faces similar challenges with many interacting variables and measurement imprecision. This can lead to chaotic, unpredictable outcomes (“butterfly effect”).
Likewise, the interactions of shifting forces in the economy (demographics, technology, inequality, debt, climate change) can theoretically generate chaotic, inexplicable outcomes.
Major unforeseen events (“black swans”) can redefine risk perceptions. But with growing complexity, inexplicable events may simply reflect underlying chaos rather than true black swans.
Increasing global interdependence raises vulnerability to cascading shocks, making economies more synchronous. This was illustrated by the rapid global spread of COVID-19.
The takeaway is that the major forces acting on the economy are likely to create more volatility and heighten uncertainty around economic decisions. Statistical averages will become less reliable guides.
The author returned to the Bank of Canada as governor after an 18-year absence, during which time he gained valuable corporate experience that proved extremely useful during the pandemic.
His appointment was announced in May 2013. On his first day, he had the original 1930s desk of the first Bank of Canada governor brought to his office.
He met with the Prime Minister and Finance Minister, and then signed his full name on Canadian banknotes, breaking tradition to honor his family heritage.
He made it a personal mission to get an iconic Canadian woman on a banknote during his term, succeeding with Agnes Macphail on the 2017 150th anniversary note.
His corporate experience gave him valuable insight into how the economy worked from a business perspective, which proved critical in the early days of the pandemic response.
In 2013, the appointment of Viola Desmond to appear on the $10 bill seemed impossible, yet it happened. Similarly, a global pandemic shutting down the world economy also seemed impossible back then. These events illustrate how unpredictable and interconnected forces can interact to produce chaotic outcomes.
The COVID-19 crisis was not a true “black swan” event since epidemiologists had warned of such a pandemic. However, its economic impacts were still immense and volatile due to global integration.
The crisis tested lifetime economic learnings. Starting conditions matter - Canada entered the crisis in a relatively strong economic position compared to the aftermath of the 2008 financial crisis, providing more resilience.
In early 2020, oil prices had already dropped which impacted Canada’s oil sector. The Bank of Canada cut interest rates in March, but it was clear more unconventional monetary policies would be needed.
COVID-19 did not affect all countries equally given different starting points. Canada was operating near full capacity in late 2019, putting it in a better position to weather the storm than in 2008.
A key role for central banks in crises is ensuring financial markets function properly. Early coordination between the Bank of Canada and banks was important preparation.
In early March 2020, the author was in frequent contact with government officials, financial regulators, and bank CEOs to monitor the emerging economic impact of the COVID-19 pandemic.
There were signs of stress in financial markets, such as rising borrowing costs in the commercial paper market. The author discussed potential policy responses like mortgage payment deferrals with the banks.
The author participated in press conferences with the Finance Minister to announce fiscal support measures and coordinated interest rate cuts to boost confidence and support the economy.
As the situation deteriorated, the Bank of Canada shifted focus from monetary policy to ensuring financial market functioning, announcing programs to purchase provincial bonds, commercial paper, and corporate bonds.
The author tried to balance responding decisively to the crisis with maintaining central bank independence and waiting for more economic data before further rate cuts.
There was close coordination domestically and internationally between central banks and governments to share information and policy responses. The pace of events was extremely rapid.
The underlying reason for central bank actions was to provide more liquidity to the financial system so borrowers could meet obligations and avoid defaulting, not to print money. The goal was to ensure enough money was available to support economic activity, not create an excess.
The Bank of Canada proceeded cautiously with new programs, wanting private markets to function if possible, recognizing these tools were unprecedented, needing time to develop processes, and wary of taking on too much credit risk.
Companies were drawing heavily on credit lines to ensure liquidity, putting pressure on banks, who in turn relied on the central bank for funding. The central bank adjusted collateral rules to ensure ample liquidity.
Interest rates were cut to the effective lower bound of 0.25% on March 27 to provide stimulus and address distortions in money markets.
The Bank committed to unlimited purchases of Government of Canada bonds to provide system-wide liquidity and bridge from crisis response to recovery.
Coordination with the government on fiscal policy was deemed important for policy alignment, though independence of monetary policy was still valued.
Rapid, large-scale deployment of tools helped quickly contain the crisis, setting the stage for focus to shift to fostering economic recovery.

Here are the key points:

LSAPs (large-scale asset purchases) are operationally identical to QE (quantitative easing), but differ in their objectives.
LSAPs were used during the pandemic to ensure proper market functioning, not to influence interest rates like QE.
Once markets stabilized, the term QE was adopted to reflect the shift back to monetary policy.
QE aims to lower longer-term interest rates to provide additional monetary stimulus. LSAPs are flexible based on market needs.
The pandemic economic downturn was unique - a deliberate shutdown unlike typical recessions. Fiscal support prevented negative spirals.
Comparisons to past downturns like the Great Depression are not valid given the different causes.
The recovery has been faster than expected, but some permanent changes have occurred in sectors impacted. Overall the economy has shown resilience.
Going forward, high debt levels and accelerated technology adoption present challenges. Supporting workers through transitions will be key.

Here are the key points about the future of inflation:

I did not think much about inflation until the 1970s when it became a major issue. I studied it extensively as an economics student and researcher.
Direct inflation targeting by central banks has worked remarkably well since it was introduced in the 1990s. It has helped keep inflation low and stable.
However, real interest rates are expected to stay low due to demographic factors. This will reduce the room central banks have to cut rates during downturns. So it may be harder for them to keep inflation on target in the future.
Moreover, the tectonic forces will create more economic volatility. This will make forecasting and monetary policy more challenging. So we can expect more variable inflation rates ahead.
It’s important that any rise in average inflation remains contained. If it gets too high, people will lose trust in the value of money. Anchoring inflation expectations will be a key goal for central banks.
Overall, the future of inflation looks more uncertain. Central banks will need to be vigilant, transparent and accountable to keep inflation under control in the coming age of uncertainty.
There is a gap between public perception of inflation and the actual measured inflation rate of around 2% per year. People tend to focus on prices that have risen a lot, like food and gas, and forget about things like cars and electronics that have fallen in price due to globalization and quality improvements.
Official inflation statistics try to account for quality improvements, so the true price decline of some items is masked. This contributes to the perception gap.
Inflation expectations have become anchored at around 2% due to decades of the Bank of Canada successfully keeping inflation near its target. This gives the central bank latitude to pursue aggressive policies without worrying inflation expectations will spike.
In the 1970s, attempts to stimulate growth often failed because inflation would accelerate right away as expectations were not anchored.
The close relationship between government and central bank raises concerns about inflation when debt rises unsustainably. The government relies on the central bank to monetize deficits.
Governments have an incentive to boost the economy leading up to elections, even if it risks inflation. Voters may not feel the inflation until after the election.
The debt-inflation dynamic is a perpetual risk requiring vigilance, transparency, and oversight. An independent central bank is key to controlling politicians’ incentives.
There is an inherent tension between governments wanting to stimulate the economy before elections and independent central banks focused on keeping inflation low. This is why central banks are typically given operational independence.
Advocates of “modern monetary theory” argue governments that control their currency can print money to cover obligations, so deficits don’t matter. However, they acknowledge inflation limits this.
Modern monetary theory is not actually modern or monetary. It was anticipated by Keynes in 1936 as a response to liquidity traps when monetary policy is exhausted.
In practice, modern monetary theory and conventional central banking wisdom have similar implications - create just enough money to meet inflation targets.
Historical attempts at excessive money creation to finance deficits led to high inflation, like in the U.S. in the late 1960s during Vietnam. Bringing inflation back under control required high interest rates and recession over more than a decade.
High inflation acts like a tax, reducing economic growth. Keeping inflation low and stable is crucial for efficient economies.
Inflation targeting by central banks since the 1990s has provided lower and more stable unemployment rates. However, high inflation in the 1970s benefited indebted households through rising real estate values and reduced mortgage debt burdens. Governments also benefited as inflation eroded the real value of their debt.
Technological progress and slowing workforce growth due to aging populations present risks of rising inequality and worker displacement. This could increase political pressure for inflationary policies like trade restrictions or relaxed central bank mandates to reduce debt burdens.
Central bank independence can mitigate inflation risks but is not absolute. Central banks face political pressure to support growth and employment, blurring their inflation-fighting mandates. This raises risks of policy mistakes leading to higher inflation, as in the late 1960s.
Investors should take the risk of higher future inflation seriously given the challenging policy environment. While central banks and the public have learned lessons from 1970s inflation, unpredictable politics and economic forces create risks of inflation returning.
Parents worry a lot about their children’s future employment and what jobs will be available. Kids often seem indifferent to this concern.
The author was granted honorary degrees from Trent University and the University of Western Ontario. This prompted reflection on convocation ceremonies and the hopes parents have for their graduating children.
The author fondly recalls first seeing the campuses of Queen’s and Western and how special those undergraduate years can be.
Technological change is transforming the job market, eliminating some occupations but creating new ones. Predicting the jobs of the future is difficult.
Skills like creativity, emotional intelligence, and adaptability will be more important than specific occupational training. The pace of change means continuous reskilling will be needed.
Governments should emphasize lifelong learning and portable benefits not tied to a single employer. Businesses should enable mid-career sabbaticals and provide training.
Job polarization between high and low skill roles seems likely to continue. Maintaining inclusive growth will require progressive policies.
Overall the future of work seems bright, with technology allowing more people to do fulfilling work. But society must help those displaced transition to new opportunities.
The five major forces (technology, demographics, globalization, climate change, and politics/policy) will interact to generate greater volatility and disruption in labor markets. This will impact jobs through two channels - short-term cyclical volatility and long-term structural disruption.
Cyclical volatility means more frequent ups and downs in the economy and job market. This will lead to more periods of layoffs and hiring scrambles for firms, and unemployment spells for workers. It will increase frictions and the natural rate of unemployment.
Workers will bear much of the burden of increased volatility through more unstable incomes and employment. This will exacerbate inequality and economic insecurity. Workers may respond by delaying retirement or pushing for better compensation and job security from employers.
Structural disruption means certain jobs will be permanently destroyed by technological change while new jobs are created. This will require workers to continually adapt through retraining and mobility. Education systems will need to teach general skills like critical thinking and adaptability.
Policymakers will need to reform social safety nets and programs for lifelong learning to help workers manage volatility and disruption. Firms and governments should cooperate to smooth labor market adjustments.
Union membership has been declining for decades across advanced economies, driven by factors like the decline of manufacturing and a perception that unions are less necessary amid rising prosperity. This has contributed to the declining share of income that goes to workers.
Technological change and automation from the Fourth Industrial Revolution will cause significant job disruption going forward. By 2025, around 15% of jobs globally are at risk of being displaced by technology. However, new tech-related jobs are also expected to be created.
When new technologies emerge, they initially destroy some existing jobs but also create new types of jobs. Most importantly, they generate new income streams and reduce costs, increasing purchasing power across the whole economy. This increased demand creates jobs across all sectors and skill levels.
An example is the jobless recovery in the 1990s after the adoption of computer technologies. While some jobs were destroyed, the new tech also enabled productivity gains, lower inflation, and increased consumer purchasing power. This allowed the economy to continue expanding without inflation, creating new jobs across the board.
In sum, the tectonic forces of technology and automation will cause ongoing structural change in the economy and disruption for many workers. But they will also create new types of jobs and boost purchasing power. Managing this disruption will require policy responses to help workers make transitions.
Greenspan’s decision to not raise interest rates in the mid-1990s, despite low unemployment and inflation, proved fortuitous. It allowed the economy to smoothly transition to new technologies and increased capacity.
The deployment of new technologies in the 1990s and 2000s increased U.S. economic capacity by over 10 percentage points relative to earlier forecasts. This lowered costs/prices and increased incomes.
The jobless recovery after the 1990-92 recession was due to technology deployment. New jobs lagged the destruction of old jobs.
The full benefits of the technology revolution were realized when low inflation allowed the Fed to keep interest rates low, fueling investment and growth. This created a virtuous cycle.
The transition was “K-shaped” - some gained while others struggled. But the macro benefits were large - over $2 trillion in extra spending power per year.
Past experience shows technological disruption is painful but manageable if policymakers respond properly. The Fourth Industrial Revolution could displace jobs like trucking, but will also create many new jobs and income to spur broader growth.
Demographic trends will increase demand for elderly care workers, a sector with little productivity growth. This will require more caregivers and possibly institutional living, requiring public investment. But medical advances could alleviate this issue.

Here is a summary of the key points about the future of housing:

Economic and financial volatility will spill over into housing markets, leading to bigger and more frequent fluctuations in housing activity and prices. Expectations of ever-rising prices will be upended as declining prices become more common. This will affect attitudes toward housing.
It’s complex to conclude housing prices are in a bubble due to a lack of reliable models. The goal should be preparing to manage higher housing risks rather than forecasting.
Home ownership is culturally important in most countries, with rates typically 60-70%. People have a natural desire to own and “feather their nest.”
Government policies often tap into and encourage this desire for home ownership. But the preference is not created by governments.
An aging population, job disruption, and rising home costs may bring back “live-in help” arrangements resembling Downton Abbey, with loyalty but also income inequality.
The future of housing will see bigger, more frequent price swings. Rather than predicting, the focus should be on managing the new risks. Home ownership will remain important, but traditional expectations will be challenged.
Canada has a long history of supporting home ownership through policies like the creation of the Canada Mortgage and Housing Corporation (CMHC) after WWII to help veterans and stimulate the economy. Over time, required down payments were reduced and mortgage insurance expanded, further encouraging home ownership.
Low interest rates have increased housing demand and prices through the ‘interest capitalization effect’, making mortgages more affordable but also increasing home values. This can lead to unsustainable price increases.
Geographical constraints like scarce land and long commutes also drive up housing prices, especially in city centers, through the ‘rent curve’ effect.
Interest rates and geographical factors can combine to produce significant housing price volatility. The pandemic provided an example as remote work flattened urban rent curves.
Going forward, the five tectonic forces are expected to bring more volatility to the housing market, with prices likely to rise and fall more often. This may shift preferences toward renting over owning to avoid housing risk.

Here are the key points:

Population aging and lower real interest rates are increasing demand for housing, pushing up home ownership rates, housing construction, and house prices. However, other forces like income inequality and automation may increase volatility in the housing market. The net effect is uncertain.
High household debt levels, with debt-to-income ratios over 200% in some countries, are concerning to some based on experiences from the Great Depression. However, this may reflect outdated thinking, as debt should be evaluated relative to assets not just income.
High home prices make home ownership impossible for some. These people may need to rent rather than buy, and save independently for retirement.
Mortgage conventions like 25-30 year amortization prevent home ownership for many. Longer mortgages or even no amortization would facilitate ownership. This transforms rent paid to landlords into interest paid to banks.
Tax policy often favors home ownership over renting. Analyzed properly, home ownership with debt may not be riskier than renting if equity accumulation is equal. Debt and housing should be separated in analysis.
Mortgages are agreements between borrowers and lenders. Government policy should not impose outdated thinking on modern arrangements. Banks assess ability to service debt.
Debt should be compared to assets not just income. High debt may simply reflect high asset values.

Here are the key points:

There are three ways to pay for a car’s depreciation: pay upfront, finance over time with interest, or lease without ownership. Ultimately there is no real difference - it is just using the financial system efficiently.
Anti-debt attitudes are misguided. With low interest rates, households can service more debt than in the past. Borrowing should only be restricted if it risks the whole financial system, not based on moral judgements.
Home leases/co-ownership should be just as available as car leases. Sharing mortgage risk and rewards between banks and households would lead to a more stable system.
Debt should be judged relative to assets (debt-equity ratio), not just absolute debt. Household debt-equity ratios are actually quite low due to large asset bases.
Young households take on debt aware of potential future inheritances. Legacy effect impacts behavior but is ignored in debt criticism.
Shared-risk mortgages would stabilize the economy by sharing housing risk between banks and households. Banks would have less incentive to fuel bubbles and households less vulnerable to price declines.
Poloz reflects on his passion for economic policymaking and the possibility of improving lives through sound policies. He treasured his collaborative experiences with other central bank governors, especially the intimate dinners at the Bank for International Settlements (BIS).
Poloz describes building close relationships with governors like Ben Bernanke, Janet Yellen, Jay Powell, Christine Lagarde, and Mark Carney. The BIS dinners fostered productive brainstorming and policy coordination among equals.
Poloz hoped to keep central banking behind the scenes during his tenure, achieving near anonymity. But the public recognized the dramatic role of central banks during the financial crisis. Poloz aims for steady policies that allow central banks to fade into the background of a more tranquil world.
Rising risks from major tectonic forces will challenge policymakers in the future. Interest rates are likely to remain low, limiting central banks’ stimulus options. Fiscal policy and reforms must play larger roles to foster inclusive growth.
Poloz argues policymakers should encourage financial innovations like shared-risk mortgages to strengthen the system. They must also address climate change despite political difficulties. Rising populism threatens international cooperation.
The five tectonic forces (debt and demographics, productivity growth, political fragmentation, climate change, and the Fourth Industrial Revolution) will place growing structural demands on government finances and programs.
An aging population will greatly increase costs for healthcare and pensions, while slower economic growth from aging will constrain government revenue growth.
Income inequality and worker displacement from automation will increase demands for government support programs.
Most governments have already used up fiscal capacity responding to the pandemic.
This means governments face a growing gap between rising structural demands and constrained revenue growth at current tax rates.
Closing this gap will require some combination of:

Raising taxes directly, though this may hurt growth
Boosting economic growth to raise revenues indirectly at current tax rates
The political climate makes raising taxes difficult, so policies to spur productivity and growth will be crucial
Fiscal and monetary policies will also need capacity to respond frequently to economic and financial volatility caused by the tectonic forces interacting.

In summary, the tectonic forces will create large structural fiscal gaps and greater volatility that will strain government finances. Boosting growth through productivity-enhancing policies will be essential to close fiscal gaps in a sustainable way.

Developing fiscal plans has become very difficult due to polarized politics and lack of consensus. A more balanced, nuanced approach is needed.
Global tax reforms may raise some revenue but not enough to significantly impact government budgets. More emphasis is needed on fostering economic growth to raise revenues.
Taxing income and payroll discourages work and economic growth. Taxing consumption instead would encourage work and investment while raising the same revenue. This would boost growth.
Replacing income/payroll taxes with higher consumption taxes could be politically feasible if framed as revenue neutral and pro-growth. This would provide fiscal flexibility.
Government debt incurred during the pandemic may not need to be fully paid back if spending is controlled and growth/inflation reduce the debt burden over time.
Fiscal sustainability depends on stabilizing or reducing the debt-to-income ratio through economic growth. Technological innovation will be the key driver of growth.
Technological innovation tends to increase inequality, which must be addressed to maintain political stability. The optimal income distribution for growth is debatable but some inequality is needed to incentivize innovation.
Income inequality is contributing to political polarization. Perception that the rich are getting richer while others are losing out breeds discontent.
Tax systems often confuse rather than clarify income distribution issues. More progressive taxation could improve buy-in for other policies.
Universal basic income (UBI) is a bold idea to redistribute income. It provides a disincentive to work but could replace complex bureaucratic programs and free up resources for growth investments.
Boosting labor force participation, especially for women through childcare support, is key for growth. Quebec’s daycare program increased women’s participation significantly.
Structural policies like childcare can be self-financing through higher growth and tax revenues. Fiscal benefits could compensate those negatively affected.
Public infrastructure investment is important but should prioritize opportunities for growth, like urban areas attracting immigrants and jobs.

Governments face major structural fiscal challenges in the years ahead due to aging populations and rising health care costs. At the same time, they will need to invest heavily in infrastructure, innovation, and research to boost economic growth. This will require difficult policy choices.

Governments also face rising financial risks that will require intervention, as economic volatility is likely to increase. Key lessons from recent crises are that fiscal policy is more effective when automatic stabilizers kick in quickly, and that central banks can use unconventional tools like negative interest rates to support growth when rates are near zero.

Overall, governments have less room to maneuver financially than in the past. They need clear fiscal frameworks to maintain credibility even in emergencies. Boosting growth is imperative both to ease future fiscal burdens and rebuild capacity to handle crises. The policy challenges ahead are substantial.

Interest rates are a key monetary policy tool for central banks, but their effectiveness declines as rates fall towards zero. This asymmetry means central banks may struggle to respond sufficiently to economic shocks when rates are low.
High household debt levels exacerbate economic volatility and constrain central banks’ ability to raise rates. Macroprudential tools like mortgage stress tests may be needed to address financial stability risks.
Climate change will cause more extreme weather, posing risks for individuals, companies, banks and insurers. Governments may need to backstop insurance for catastrophic events.
Water scarcity due to climate change could become a major geopolitical issue. Canada’s fresh water resources could provide leverage, but sharing water sustainably will require international cooperation.
Overall, coming fiscal and monetary stresses may exceed governments’ capacity to stabilize economies using existing tools. More automatic fiscal stabilizers like universal basic income may be needed, along with international cooperation on issues like climate change and water scarcity. The future policy environment looks challenging.
The world is experiencing major tectonic forces - aging populations, slower growth, higher debt, growing technology, and deglobalization - that will lead to greater economic and financial volatility even with policymakers’ best efforts. This will make it harder for households and firms to plan for the future as they take on more risk.
Policymakers will struggle to absorb the increase in risks. Companies may need to lead in helping individuals adapt to the increased volatility when governments cannot.
Business leaders should build scenarios into their planning to account for a wider range of economic outcomes, like slower growth or higher inflation. This will help them adapt their plans as conditions change.
Values-based leadership, like that shown in fiction by Picard and Bartlet, will be important. Leaders should focus on people and values over numbers, consult their teams, and demonstrate humility. Shared values help teams perform in volatile times.
The post-pandemic rebound may tempt leaders to extrapolate high growth, but slower trend growth is more likely. Flexibility to adjust plans will be key.
Overall, the tectonic forces mean companies face more complexity and risk. Scenario planning and values-based leadership can help them adapt.
Forecasting uncertainty grows the further into the future we look. Economists account for this by calculating expanding “zones of ignorance” and dynamic forecast errors.
Companies should build multiple planning scenarios to account for uncertainty. Relying solely on a baseline scenario is increasingly risky given rising economic volatility.
Declining real interest rates imply companies should lower their “hurdle rates” for new investments. Using historical rates may cause firms to miss opportunities.
With rising volatility, effective risk management will become a key source of value creation and competitive advantage for firms.
Firms that understand the likelihood of sustained low real interest rates will make better investment decisions than those expecting a reversion to historical rates.
Companies that implement superior risk management will be better positioned to survive volatility, maintain employment, and deliver returns.

In summary, firms need to embrace uncertainty in planning, lower hurdle rates, and prioritize risk management to thrive in a more volatile economic environment driven by long-run demographic and technological forces.

Firms are increasingly making “intangible investments” like research and development, employee training, and risk management that pay off over the long term. These should be viewed as investments even though they are usually accounted for as expenses.
Intangible investments are growing in importance and now exceed traditional capital investments in things like machinery and equipment. This benefits large firms disproportionately since intangibles can be leveraged across the entire company.
The growing importance of intangible investment is leading to larger firms and more concentration in industries, which historically has led to monopolies or oligopolies.
Policy responses have included forced breakups or increased regulation. However, there are arguments on both sides - more competition can benefit consumers but consolidated industries can also provide stability.
Overall, modern economies are evolving towards more inequality as growth shifts to intangible investments that favor large firms. This raises questions about how to adapt policies to this new reality.
Income inequality is a major issue that governments have the capability to address through more progressive taxation and policies like universal basic income. However, political polarization often prevents effective solutions.
As a result, companies are embracing “stakeholder capitalism” and ESG (environmental, social, governance) goals as a way to fill the void left by government inaction. This helps manage risks and pressures that could otherwise threaten their business models.
Profitability remains important, but investors are now enforcing ESG standards through managed portfolios and pricing mechanisms. Companies need to balance profits and ESG responsibilities.
Employees are a key stakeholder group vulnerable to economic volatility. Companies that invest in their workforce through human capital and by absorbing risks like unemployment and unaffordable housing can gain competitive advantages.
Transparency around ESG investments and performance metrics is important so investors recognize these efforts. Integrating ESG into corporate DNA, with incentives, is superior to just charitable giving.
Overall, a balanced, values-based approach to ESG will benefit shareholders through higher stock prices while also fulfilling broader social responsibilities that governments are failing to address.
The author had a life-changing heart attack in 2004 that gave him a more positive outlook on life. He sees optimism in the face of uncertainty.
The global economy is entering a new era of higher uncertainty due to five tectonic forces interacting: population aging, technological progress, growing inequality, rising debt, and climate change.
These forces will cause greater economic and financial volatility. Life will improve on average but there will be more frequent ups and downs that impact individuals.
The increase in risk is driven by natural forces that can’t be erased. Understanding these forces helps explain past crises better than blaming proximate causes.
With greater uncertainty ahead, companies will need to improve their risk management and governments should aim to insure society against risk. There is still room for optimism if policymaking responds well.
The author remains hopeful about the future, believing progress will continue albeit with more volatility. His 2004 heart attack gave him a more positive mindset to confront uncertainty.
It is unlikely that we can prevent future economic crises by just fixing the issues that contributed to past ones. Other forces will still create volatility. However, we can hopefully get better at crisis management over time.
Low interest rates and high government debt will limit the ability of central banks and governments to manage fluctuations.
Expect more economic volatility, especially in the labor market with higher unemployment but also worker shortages.
Household debt and house prices will likely stay high. Mortgage innovation is needed as people have longer careers.
Governments should aim to insure society against rising economic risks, but their capacity is limited. Fiscal policy has limits.
Companies are embracing ESG (environmental, social, governance) goals, partly due to investor and societal pressure. This can help address risks for workers.
Companies should dedicate resources to risk management and keep capital on hand to pivot when needed. Volatility creates risks but also opportunities.

In summary, the future will likely be more economically volatile. Policymakers are constrained, so companies need to help workers manage risks. Being prepared to adapt to both bad and good luck will be key.

The advantage of a positive outcome will come with very high risk. Companies will need chief risk officers as well as chief opportunity officers to manage the increasing uncertainty.
The five tectonic forces (aging population, deglobalization, climate change, rising inequality, and technological transformation) are shifting economic foundations and will challenge economic modeling and forecasting.
Just as people in Bali have adapted to the risk of earthquakes, we can adapt to a riskier world through stakeholder capitalism, green investing, and other innovations. We have reason to be optimistic about overcoming challenges with hard work and ingenuity.

The book discusses the rising uncertainty and risks in the global economy caused by major demographic, political, environmental, and technological shifts. While these forces create challenges for policymakers and forecasting, we can adapt through new economic models and approaches. The message is one of cautious optimism about humanity’s ability to navigate the next age of uncertainty.

Here is a summary of the key points about rates, debt, and the response to the pandemic:

Interest rates were cut to very low levels in response to the pandemic, with the Bank of Canada lowering its policy rate to 0.25% in March 2020. This was part of the effort by central banks to support the economy during the crisis.
Both government and private sector debt increased substantially due to the pandemic. Fiscal stimulus and support programs led to a rise in government debt, while individuals and businesses took on more debt as well.
The Bank of Canada deployed a range of tools to support market functioning and provide stimulus, including large-scale asset purchases (quantitative easing) and forward guidance promising to keep rates low.
The pandemic led to a rethinking of debt sustainability, as massive spending was required for the crisis response. Fiscal policy took on a larger role compared to monetary policy in providing economic support.
The Bank of Canada has pledged to maintain highly stimulative monetary policy even as the economy recovers, to help support the recovery and return inflation to target. This indicates rates are expected to stay low for an extended period.

Here are the key points summarizing the section on economic growth:

Economic growth is affected by demographics and population growth. As populations age, growth tends to slow down (14-15, 188).
Growth was fueled by baby boomers entering the workforce, but is slowing as they retire (15-16, 40-41).
Interest rates affect growth. Lower rates typically lead to higher growth (15-16, 41, 86).
Innovation and technological progress are drivers of growth (53-54, 16).
Growth is tied to productivity increases (32, 33).
Globalization and trade have boosted growth (233).
Government policies around infrastructure, regulation, immigration, and taxes impact growth (37, 231, 232-33).
Growth forecasts have underestimated actual growth, especially recently (184).
Post-pandemic, growth is rebounding but faces demographic and debt challenges (226, 247, 272).

Here is a summary of the key points about housing markets:

Desire for home ownership is strong due to factors like the “feathering instinct” and desire for ownership. Home ownership rates are high in countries like the U.S.
Housing markets are volatile and susceptible to fluctuations. Prices fluctuate based on factors like interest rates, population growth, and supply/demand.
Interest rates greatly impact housing markets, with low rates driving increased prices and ownership. Rising rates can dampen prices and ownership rates.
Mortgages and financing are critical for home ownership. Innovations like shared responsibility mortgages can help improve affordability.
Taxes and policies often favor home ownership through deductions and incentives. Owning is not always financially superior to renting though.
Housing markets contracted during the pandemic but remain strong overall. Future trends around remote work and urbanization will impact housing demand.
Overall, housing represents a major segment of most economies and is tied closely to demographic, policy, and financial factors. It has undergone major fluctuations historically and remains a critical economic force.

Here is a summary of the key points about Stephen Poloz from the text:

Early years and education: Grew up in Oshawa, Ontario. Earned a bachelor’s degree in economics from Queen’s University and a master’s degree from the University of Western Ontario.
Career: Worked at the Bank of Canada for over 30 years, eventually becoming governor in 2013. Prioritized managing economic risks. Focused on issues like aging population, income inequality, climate change, and technological disruption.
Views: Concerned about slowing productivity and globalization. Interested in the future of work and inequality. Advocated fiscal policy options like education, job retraining, income support. Favored stakeholder capitalism to address inequality.
Personal: Married his wife Valerie in 1977. Survived a heart attack in 2018. Avid Star Trek fan. Admired leaders like Nelson Mandela and Margaret Thatcher. Parents were real estate developers.
Trudeau, Justin - Current Prime Minister of Canada, elected in 2015. Known for progressive policies and bold spending initiatives.
Trudeau, Pierre - Former Prime Minister of Canada, father of Justin Trudeau. Served as PM from 1968-1979 and 1980-1984. Known for his charisma and nationalist policies.
Trump, Donald - 45th President of the United States from 2017-2021. Known for populist rhetoric, confrontational style, tax cuts, and opposition to immigration and free trade. Presided over strong economy but left office after losing reelection bid.
Key economic issues - income inequality, debt levels, financial volatility, aging population, climate change, impact of technology.
Tectonic economic shifts - major forces reshaping economy like globalization, technology, climate change. Create volatility and uncertainty.
Role of central banks - independence, focus on inflation, tools like quantitative easing. Debate over mandate.
Canada - stable banking system, high household debt, regional divides, aging workforce.
COVID-19 - unprecedented government spending in response. Accelerated adoption of technology. Long-term impact uncertain.

#book-summary

The Next Age of Uncertainty How the World Can Adapt to a Riskier Future - Stephen Poloz