The great economic rethink?

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On the website of the decidedly creepy World Economic Forum, there is a call for a ‘Great Reset’ in the wake of the COVID-19 catastrophe. Along with the expression ‘the new normal’, this phrase is perhaps the most common cliché being used by the business and economic community.

Main image: wall reading 'until debt tear us apart' (Ehud Neuhaus/Unsplash)

The prescriptions for the WEF’s reset are nothing if not utopian. It talks about laying the 'foundations of our economic and social system for a more fair, sustainable and resilient future'; creating a 'new social contract centred on human dignity, social justice', and devising 'decent, meaningful jobs'.

Such blandishments, coming as they do from the global corporate elites and their acolytes, are about as convincing as a 55 line sonnet. Especially concerning is the WEF pointing to the 'inconsistencies, inadequacies and contradictions of multiple systems', which, at least on the face of it, seems to be an admonition to create even more intense global monocultures, the very ones that have been responsible for a great deal of the aforesaid inequality, injustice, loss of dignity and lack of resilience.

The WEF is right, though, that there will be Great Reset in finance and economics. It is inevitable because the shock has been so great. The first problem is what to do with global debt, which was already at unsustainable levels before the COVID-19 hit: over 320 per cent of global GDP. The only way to prevent system-wide failure has been to lower interest rates to near zero levels.

In response to the COVID-19 crisis governments, including the Australian government, have borrowed heavily (albeit at low interest rates) to keep their economies from collapsing. That means the debt will increase even further. China also has a huge debt problem, with the country’s domestic money supply now running at two and a half times the size of the economy: a money printing exercise, or rather Ponzi scheme, designed to keep the nation’s banks from collapsing. To say the least, it is a short term solution only.

There are typically only two ways out of a debt build up: inflation, which erodes the real value of the debt, or debt forgiveness. It is hard to see how the former will happen. There has already been ridiculous inflation in assets such as shares and property, bubbles that would seem to have mostly run its course. Inflation in the prices of goods seems unlikely because of global oversupply in most sectors. And inflation in services, which account for about 60 per cent of developed economies, also seems unlikely given the collapsing of demand. The simple analyses of inflation used by many economists — whereby economies are seen as closed systems in which, if there is too much money sloshing around, prices will automatically rise — no longer apply. Western economies, especially America’s, are very open systems, with money not just circulating domestically but across borders in huge amounts (over $US4 trillion a day).

 

'What is happening is increasing the uncertainty about what the monetary system is.'

 

It is hard to see how debt forgiveness will work, either. China can do it because its banks and financial institutions are centrally controlled and its system is sealed off from the rest of the world. But how can Western banks, which lend out about 20 times what they take in as deposits, forgive debt on any significant scale? Forgiving more than 5 per cent of their debt will wipe them out. The only option would be to nationalise them, which I am sure the good people at the WEF would consider abhorrent. Japan, which fell into such a debt trap in 1990 has never found a way out – its economy has been moribund for 30 years – so it is hard to see how any other developed economy will achieve it.

It is not just government debt that is increasing; it is the size of central bank balance sheets. This is another type of money printing, although it does not have an interest rate attached to it. Rather, it is a magic trick with money itself: ‘now you see it, now you don’t’. The US Federal Reserve is expected to double the size of its balance sheet this year to 38 per cent of GDP (much of that money has been used to reduce debt for American companies listed on the stock exchange). The European Central Bank’s balance sheet will increase this year from 39 per cent to 64 per cent of GDP; the UK central bank’s assets will double from 25 per cent to 50 per cent; and Japan’s central banks assets will rise from 103 per cent to 134 per cent. The Reserve Bank of Australia looks decidedly modest, with a rise from 9 per cent to only 16 per cent.

As with reducing interest rates to zero, this is a short term measure only, another way of kicking the can down the street.  Like the mathematical sorcery that produced as much a quadrillion dollars of derivatives, an insanity that led to the Great Recession of 2008, it undermines the very idea of a means of exchange.

And that, in the end, may be what the Great Reset turns into. What is happening is increasing the uncertainty about what the monetary system is. It was uncertainty between the banks (played out in the interbank lending rate) that drove the 2008 crisis. Eventually, it may lead to, first, the destruction of money, then a Great Rethink.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: (Ehud Neuhaus/Unsplash)

 

Topic tags: David James, COVID-19, economics, Australia, China, debt, great reset

 

 

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Existing comments

David, I only completed Economics 101 at Uni although I taught Commerce at High School.I am a bit confused by your essay. I always thought that money was a means of exchange.Of course with people gambling on the value of currencies going up or down, that principle seems to have fallen by the wayside. One assumes this Virus is going to be around for quite a while so the impact on society will be great. No doubt the marginalized will be badly hurt as usual. I do fear for the welfare of my children and grandchildren in this "new world".
Gavin O'Brien | 21 August 2020


Ah! David, stimulating but stretching. Please keep going and show us some more, in ways that non-economists can grasp and understand.
Ginger Meggs | 21 August 2020


...lazy money... what to do? Those wealthy enough to invest are usually faced with the quandary of high return/high risk investment or lower return on traditional "blue chip" stock or bricks and mortar...but the "new normal" financial landscape has turned most of that on its head. Frantic rushes to safe haven commodities like precious metals are seeing record prices which are only as sustainable as buyer sentiment. The "have nots" (me included) can't get close to the ultra-low interest rates to enjoy the holiday from capitalism; the financial institutions are squeezing the last few drops out of the buy/lend interest rates and its unlikely that consumers can spend while home incomes are reduced and the bank's precious debt remains unadjusted. Debt is the gift that keeps on taking (Mad as Hell); its a pity our superannuation isn't as carefully protected from negative impact of fiscal meandering through the crisis. Australians were permitted to draw 2×$10k from their super under a pretext of "hardship" but really it was just the government propping up a failing economic model; the hardship was and remains protected debt, the motivation is fear of financial loss. All that lazy money...
ray | 21 August 2020


Of course, one solution to the crisis of liberal capitalism that David outlines would be for us to experiment with various forms of command economics. If matters got considerably worse in terms of the deleterious affects of the virus in driving inequality and visiting exponential destitution upon the 'have nots', what's to prevent that from rearing its illiberal head as a solution? After all, no one in China starves, which is not the proud boast we can make about Western polities and their traditional ways of dealing with ever-increasing inequality. My guess is that, in such an event, those without work and wealth to sustain them, would quite easily trade in their civil liberties in order to 'put bread on the table'. And I do not think matters would have to get a lot worse for that to happen. It would simply be a case of someone yelling: 'Sleepers Awake!' and a quiet but seething revolutionary way of doing economics would be ushered in without the fuss and bother of armed uprisings, which our somewhat effete and increasingly incapable Western democracies would be incapable of resisting. And whose to say that democracies incapable of confronting the real world should survive?
Michael FURTADO | 22 August 2020


Best source on this topic are almost daily pod casts on the Keiser Report. https://www.rt.com/shows/keiser-report/ Truly brilliant stuff.
John | 22 August 2020


Mr James writes cogently of the problems associated with private debt, but seems to shy away from monetary solutions other than debt forgiveness. A debt jubilee would be a positive thing, but without structural change to the way we create money and spend it onto circulation, debt forgiveness will simply enable the debt accumulation process to start anew. In ‘Creating New Money’, Huber and Robertson talk about a new way of creating money - and spending it into circulation. Along with the abolition of fractional reserve banking (gasp, there - I said it) the Huber and Robertson proposal offers a healthy alternative to our current, sick financial system. http://www.jamesrobertson.com/book/creatingnewmoney.pdf
Democratoz | 14 September 2020


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