Last time I wrote I declined to say what should be the response of Australia if faced by a depression.
The madness of the debt-laden economy we have created in the last 10 years, and the mentality which caused it, which has been building for the best part of the last 50 years, is the main problem.
When the Great Depression hit the western world in 1929 the response by the United States under Roosevelt looked at first sight like a classical Keynesian approach. Roosevelt, as I mentioned before, instigated unemployment benefits, a great initiative, contracted the working week to 40 hours, raised the minimum wage massively and made overtime rates prohibitive (to encourage employers to put on unemployed people instead of paying current employees for longer working times), and instigated massive public infrastructure projects. This all helped a great deal, which is why he ended up calling it the "New Deal"!
Actually, Roosevelt's policy was not really Keynesian at heart (profligate government spending to keep the economy afloat as private business closes their collective wallet), because he kept chopping and changing direction, which only confused business. Increasing wages dramatically was probably not a great idea either. Australia's approach was a classic conservative and British approach, paying off debt and balancing the budget, and it seemed to work as well as the American model.
Western governments went on to not only accept a Keynesian approach for the longer run, but to build on it massively. We not only pay unemployment benefits, but have added free medical insurance, pensions for everything imaginable, student loans that sometimes never get paid back, and I am not going to mention the aged pension at a time when a huge wave of Baby-boomers are retiring together. Note, again, the aged pension is a great idea, I am simply noting the demographics of the Western world at the moment.
The demographic situation is a hidden mine-field. Retirees do not need to spend much money. they don't travel to work, hopefully many of them own their homes (it's only the unfortunate like myself who move from park bench to park bench each night), and they can curtail international travel on a whim. In a word, they can sit at home, eat baked beans and watch tele for as long as it takes. And once they slip into that stream of thinking, they possibly will make it a way of life and float along without expending much energy or money for the duration.
This could cripple the economy in itself, without Coronavirus or the public debt that threatens to sink the boat.
As I said last time, all political leaders are duty-bound to spend to stave off this virus for as long as possible, to save as many souls as possible, at least in the West. Time is our saviour at the moment and we must 'flatten the curve' as they claim, to slow it down so the system is better able to cope.
But I fear we will spend ourselves into oblivion trying to stop a recession (or depression), and it will be a futile endeavour, in the end. The precursors of this economic situation we have made for ourselves over at least the last decade, and a good case can be made to say they have been building for multiple decades. I understand that keeping people employed is extremely important in such a time, but I don't believe it is in the power of leaders to circumvent a depression. Economics 101 will over-rule them.
Unfortunately, since the GFC eleven years ago, leaders around the world have become infected with a spending virus and they had already flagged months ago that this would be their response in the next episode. We already have a debt bigger than we can repay and all governments have been busy cutting taxes in the meantime, which means we have no way to pay off that debt. Printing money again, which we are busily doing right at the moment, will only add massively to that debt.
What is bound to happen at some point in this episode is that governments will default, as has happened many times in the past. America defaulted during the depression by halving the value of their currency, when they almost doubled the price of gold in 1934, taking it from $20.67 to $35 an ounce in one proclamation. Similar shenanigans will happen this time, but we know not what at this point.
One possibility is that the U.S. will abandon the US $ in favour of a cryptocurrency and play havoc with the value of the currency at the same time.
There are rumours that China will create its own gold-backed cryptocurrency in an attempt to trump the USD, but I doubt it will work. This is because the USD is backed by trust, whereas China is not.
Certainly a gold baked currency would not be a bad idea, in order to bake a bit of reality and discipline into currency again. I feel certain that this was the purpose of the original cryptocurrency, Bitcoin. It was an attempt to mimic gold, as it is a finite currency, like gold. What has happened since though has taken all the power out of Bitcoin, as there are now around 500 cryptocurrencies floating around, all finite, but no limit to who can create another one.
Probably the final solution will involve a lot of pain at some point, followed by conservative economic principles coming back into fashion. It may even involve totally novel ideas like paying off debt and balancing budgets, whether households, companies, or countries.
Most of what I have said so far involves economics, whereas I fear the real issue is more in the realm of psychology. Each time we have a depression, and there have been many in the past, we seem to need to go through the same psychological reset before things can climb back onto an even footing again. In 1873 what is now termed the Long Depression started, and it continued until 1896. It was at the time called the Great Depression, but lost this name to the 1929 version when it appeared. It just illustrates how short term our collective memories are.
I want to use the example of my father’s experience to illustrate the psychological pattern that progresses through and after such episodes. Those who actually go through a depression learn its lessons very well – they are burned into their habits and minds. These people see around them grinding poverty and privation and they determine to be frugal in their own spheres, and they fear ever getting into such a quagmire again.
They are very careful not to borrow more than they can repay quickly, and only for a house, farm or business where they are reasonably certain they can pay it back quickly. Some people who had been hardest hit by the crisis are fearful to ever borrow again. For example, in 1893 when the Long Depression hit Australian shores, the price of houses in Melbourne fell dramatically and didn’t recover their pre-depression prices for 70 years. That is, prices didn’t recover their original levels until 1963! If you went through such a set-back you may be shit scared to invest again.
Being of the depression generation, my grandfather was very cautious in his borrowing and business practices for evermore. The next generation, my father’s, who was only 12 when the depression hit, heard the stories of privation from their parents, and are similarly cautious in all their business and private dealings. The next generation loosen the purse strings a little more and borrow more. The following generation have heard the stories third hand and become less fearful in their financial habits. The following generation finally throw most caution to the wind, and don’t even realise they are borrowing when they take a car on hire-purchase or a phone on a two year ‘plan’, and decide to build their dream house right off the bat, instead of starting off with a modest shack. Some of their friends think that life owes them a living and start asking for a “living wage” from government, for sitting at home doing nothing.
It’s this psychological progression that often causes the angst eventually, and inevitably has to have a reset at some point. If I can make a modification to a previous Australian Prime Minister’s (Paul Keating’s) famous statement, “it’s the depression we had to have.” It seems society has to go through a ‘time of trouble’ every few generations, so that we emerge on the other side a bit more financially and psychologically balanced. This is as true for Prime Ministers as it is for ordinary wage earners. The politicians have thrown all caution to the wind in their attempt to please the masses... until it doesn’t work anymore. Then the reset comes.
In other words, there is no way anyone can stop a depression, because it is baked into the modern mentality to create debt and behave stupidly, and we now have to take our medicine. We have to take our dose of castor oil and allow it to clean us out.
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