The Great Depression was a title which originally belonged to an economic crisis that hit the Western world around 1860. It was a severe depression, but by the time 1929 rolled around, rather than think up a juicer title, historians simply transferred the name to what seemed in the midst of the storm like a much worse crash and renamed the previous one, the Long Depression, since in some form it lasted until the 1890’s.
Before the Great Depression (the 1929 version), governments had usually stepped back and let the proverbial hit the fan, allowing the free market sort the matter out. This often caused great pain at the time, but governments felt it was either not their prerogative to sort the market out or they didn’t have the ability or resources to be able to sway the market one way or another.
But when the New York Stock Market crashed in October 1929, things got progressively worse and by 1932 the market and the economy had reached their nadir. The U.S. President Herbert Hoover had instigated some reform and infrastructure programs to try to halt the downward spiral, but it seemed nothing could stop it. The more charismatic president, Franklin D. Roosevelt, was elected in a landslide in that year and he set about writing a New Deal for the beleaguered United States population, which, while maintaining many of Hoover’s initiatives, seemed to incorporate a new swing towards the policies of the up and coming British economist John Maynard Keynes.
Keynes had repeatedly advised that government should stimulate the economy by lowering interest rates and raising spending on infrastructure and other programs, as business stopped spending because of some crisis or downturn, to tide the economy over a trough, and then to pull that money back out of the economy with taxes as business regained its confidence and started expanding again.
Until the Great Depression there had been no unemployment pensions. The United Kingdom was the first country to initiate an unemployment relief system in 1912, followed by several European countries after the Second World War. The U.S. began paying unemployment relief in 1932, in the depths of the depression, and Australia joined other European countries in 1945.
Before this, retirement pensions had been introduced by many countries around the turn of the century, Australia chiming in in 1900.
But what I want to bring to reader’s attention at this point is that a whole range of social security systems and institutions started around the time of the Great Depression and Second World War, such that in the West we now have a huge system supporting all sorts of arguably worthy causes, including, in no particular order, student loans, single mothers pensions, disability pensions, disabled pensions (and in Australia we now have the NDIS), subsidised or free childcare for working parents, Medicare (or some other universal medical insurance system), the pharmaceutical benefits scheme (Australia), and the list goes on. I am not saying that any of these groups are undeserving, I am simply pointing out that layer upon layer has been added to the social security system in most Western countries, which may or may not be sustainable.
On top of the country-specific schemes, many international institutions were created around the time of the depression, such as the World Bank, the International Monetary Fund, the World Health Organisation, the United Nations among others. Western countries contribute to the funding of most of these institutions to some extent.
Western democracies, all with a Christian heritage, decided that prosperous as they were, they could afford to look after their own citizens, and even help bring struggling third-world countries up to speed.
Over time populations often seem to have taken all this for granted and rather than see it as one of the great blessings of living in an affluent, Christian based country, they have become so accustomed to it as to see it as their God given right. Or to look at it another way, rather than seeing these social programs as the largess of a democratic and comfortable economy, some see that the government owes all of these support systems to them.
Following the Global Financial Crisis (GFC), and now this COVID 19 pandemic, it looks quite likely that the whole notion of the political and economic social contract will be re-written, in a higher key. As Scott Phillips of Motley Fool explains,
It was encouraged [the stimulus] (even enabled) by the recognition that government balance sheets could run extended deficits during tough times, to be paid off when things improved.
If it wasn’t already clear, it became crystal: Keynesian economics -- spend in tough times, and recover it in the good times -- was not only a more humane approach, but it was smart economics.[1]
I agree that it was smart economics, as well as humane, for the time, but is it possible we have overdone it? The whole expectation of what a government should do has changed.
The problem came to a tipping point at the end of the Global Financial Crisis when a mentality set in that seemed to suggest that we (governments only do our bidding) could pull money out of thin air (some call it printing money, some counterfeiting it), and simply not bother to pay it back. This line of thinking goes by the fancy economic title of Modern Monetary Theory. Actually, there is nothing fancy about the procedure, and I am sure it will remain (a soon to be debunked) theory.
Inoculated by the hither-to huge stimulus during the GFC, which went by another beguiling term, Quantitative Easing, government decided they could up the ante this time around, and stimulus Bills which once added up to Billions have now graduated one step higher to Trillions.
Some economists even suggest we can go on printing and spending on stimulus programs ad infinitum, without repaying the money borrowed from future taxation. The suggestion is there will be no problem, since interest rates are so low or even kept negative.
Actually, we don’t have to guess what the outcome of so much spending by government will be, because we have a clear example in the Japanese economic stimulus for the last thirty years. When big private and corporate Japanese spenders ran into difficulty in the early eighties, government stepped in to support banks (eventually owning many of them), and eventually buying large percentages of some of the largest Japanese corporations listed on the stock market. This massive stimulus effort by Japanese authorities did not stimulate the economy but has resulted in a thirty-year recession instead, yet many Western economists suggest we should do precisely the same thing! It’s mind boggling! And it seems no one is contemplating what will happen when interest rates spike upwards, which is inevitable.
Here is a chart[2] of what is happening in terms of money creation and spending on government bonds right now in the U.S. economy:
In fact, the Fed accumulated more Treasuries since the beginning of Q4 2019 than the entire foreign sector accumulated over the past eight years since 2012.
So, we’re eating our own cooking; the U.S. Federal Reserve is the biggest buyer of U.S. federal government debt, and they print new dollars to do so.
That is historically how long-term sovereign debt supercycles are paid down when they are denominated in one’s own currency and hit 100% of GDP or more: currency devaluation, and a soft default through purchasing power of that sovereign debt, rather than a nominal default.[3]
What Lyn Alden is suggesting here is that we are in the beginning of a stealthy default by Western governments who are printing their currencies into oblivion, which will result in the devaluation of those currencies. That is, your money will buy less in future – and you will be the poorer for it. Surely Scott Phillips is right when he says,
...the size of the response has been mindblowing.
We’ve seen right-wing governments in the USA, the UK and here in Australia, who are otherwise fiscal conservatives, throw money at the problem like there was no tomorrow.
Indeed, the various programs -- from the forgiveness of airline landing fees to the $100-plus billion being spent on JobKeeper and JobSeeker -- are larger than even the most strident social democrat might have dared hope, only 12 months ago.
And the line between what we expect of government, and what it deigns its role to be, has all but vanished.[4]
There are several possible outcomes from this situation:
1. We may enter a depression, where there is economic stagnation and where prices continually fall over a long period of time.
2. All the currency that has been conjured into existence (printed, or counterfeited into existence by central banks), will at some point cause hyper-inflation, where prices spiral ever upward and your money loses its value rapidly.
3. We could enter a 1970’s style stagflation, where the economy stagnates at the same time as prices hyper-inflate.
In the first scenario, unemployment will rise, perhaps dramatically, and this is the reason prices of almost everything will fall, including property. We already see this happening in terms of commercial property, but I fear it will spread to residential and eventually to agricultural property. Depression is something that governments will do their utmost to prevent, as they managed to do during the Global Financial Crisis (GFC). This time, despite the massive stimulus measures now in action, I feel they will not succeed.
All the currency that has been, and will continue to be conjured into existence, some say is the very definition of inflation, the second scenario. However, if this money does not circulate (is saved rather than being spent), it will not cause inflation. Inflation is what governments and central bankers were hoping for with the Quantitative Easing stimulus during the GFC, but inflation did not eventuate for various reasons. Some predict that hyper-inflation will come with a sudden vengeance at some point in the near future. I remain agnostic about this.
The third alternative is a distinct possibility as well. At this point it is not possible to say with any certainty which alternative will eventuate. We will simply have to wait and see. It largely depends on which direction leaders take us from here.
It is no small thing to see a conservative government run up a multi-generational debt in a matter of months. We’re all Keynesians now.[5]
What most have always wanted is responsible government that supplies the basics in roads, water, electricity and law & order.
Now we want an NBN, low unemployment, industry assistance, JobKeeper, a higher rate of unemployment benefit, healthcare, turbo-charged bushfire protection, a disability insurance scheme and plenty more. Not only that, but governments are also throwing billions and billions of dollars at a cure for COVID-19.[6]
My position is that we need to stop this madness and return to the principles that set the Protestant Western world up for the massive success that has been its legacy. The Western Protestant world burst from the Medieval dark ages when Martin Luther and others set the principles in place for its success.
If it is a surprise to you that I would propose Protestantism as the reason for the greatness of the capitalist West, then you only have to read Max Weber’s The Protestant Ethic and the “Spirit” of Capitalism, and its modern sequel, Niall Ferguson’s Civilisation: The West and the Rest.
The West probably can afford, and it is arguably smart economics to tide the unemployed (and others) over a tough economic spell. Since we have a Christian heritage we need to offer compassion to those poorer and in need. If we had not a Christian heritage then there is no historic precedent to offer any form of compassion in society.
But the madness of Modern Monetary Theory must be acknowledged as such. Artificially holding interest rates negative must be seen as robbery against those who have, over a disciplined lifetime, saved for retirement or to build a home base.
In short, our governments need to see it as their role to set the economic basis for an orderly and stable existence and protect their citizens against charlatans in the world of finance.
It is imperative that we have as a foundation a just social and economic order, a decent and legitimate state behind us in order to build a successful life for ourselves and our families? None of us live in a vacuum. Humans are indomitably social creatures. It is extremely difficult to fight the whole system to gain success in life.[7]
[1] Scott Phillips 12 August, 2020 https://us3.campaign-archive.com/?u=0d1d0582254b8399936e6130e&id=1b7fd151ab&e=706935065b [2] From Lyn Alden: https://www.lynalden.com/august-2020-newsletter/ [3] Ibid. [4] Scott Phillips 12 August, 2020 https://us3.campaign-archive.com/?u=0d1d0582254b8399936e6130e&id=1b7fd151ab&e=706935065b [5] Ibid. [6] Scott Phillips, 12 August, 2020 https://us3.campaign-archive.com/?u=0d1d0582254b8399936e6130e&id=1b7fd151ab&e=706935065b [7] Shane F. Smith, All cultures Are Not equal: What constitutes a Good dignified Life? A Decent, Legitimate State.
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