Democratic Socialist states already faced existential challenges, not least an emerging global slump. They might have papered over the cracks, without the corona virus lock-downs. Now infinite money printing is on the cards.
Democratic Socialist states already faced existential challenges, not least an emerging global slump. They might have papered over the cracks, without the corona virus lock-downs. Now infinite money printing is on the cards. The outcome will be a reset levelling unviable state and financial structures. Will it be preceded by hyperinflation? Probably.
The recent lock-down fiascos in most western countries and most American states is a classic, and huge example of public policy failure. Liberty enables decentralized decision making with no political axe to grind. Relying on individual, responsible action would have enabled us to cope with this latest bad winter cold season with minimum loss, as we have done so many times in the past. Instead we saw an irresponsible experiment with a health and safety police state. We have been put through medically, economically and psychologically crippling lockdowns.
At no point did most Democratic Socialist regimes even consider the hidden but perfectly predictable suffering and loss which lockdowns would inevitably bring. Much of this is covered in two recent posts on the net loss of life caused by lock-downs (June 9th ‘Killer Lockdowns of the Hysteria Pandemic’) and the difficulty many people, not least politicians, have in grasping unintended consequences (June 11th ‘HS2 and the Broken Window Fallacy’).
The idea today is to look beyond the lock-down’s immediate medical and economic costs, which are hidden (to politicians and officials at least) second order consequences. There are further very serious consequences to consider. Confidence in the rule of law has been undermined, perhaps for a long time, making a return to prosperity that much slower and harder. Less tax will be collected from an impoverished and angry populace. This in turn makes worse the impossible fiscal position most western governments had already reached. Then came the virus hysteria, wished upon us by irresponsible MSM media, blinkered officials and self-interested recipients of Bill Gates largesse at the WHO and Imperial College.
To use an aviation term, most western governments were already in ‘Coffin Corner’ before the corona virus mess. That term means a (literal) crash in a light plane has become unavoidable, but disaster can be delayed a little by making more of the same mistakes. The underlying mistake made by Democratic Socialist regimes has been a steady vote buying (and Marxist) influenced attack on Liberty, and indeed common sense. The state has undermined productive values, families and people, the soundness of currencies, private property and wealth, traditional beliefs and common cultures, and the willingness and ability to save and invest.
Short termist politicians have underwritten irresponsible, destructive behaviour and unviable value systems. The looming fiscal bankruptcy of their regimes reflects their moral and economic failure.
If the constant reinforcement of the unproductive at the expense of the productive is the underlying Democratic Socialist error, the obvious problem is reliance on continuous exponentially growing money printing. The money flood buys government debt at ever lower interest rates. This makes up the shortfall between taxes levied on failing productive activities and the growing costs of endless intervention in people’s lives – for a time.
Relying on accelerating money printing to paper over the cracks (rather than reform the state) is the original ‘pilot error’ which has made a crash inevitable. Pumping even more new money into economies at every difficulty is the equivalent of pushing the accelerator to the floor to delay the inevitable stall. The crash is, well, the crash when gravity, physical or economic, inevitably prevails.
In monetary terms it will probably be the destruction of modern currencies. These are confidence based but intrinsically worthless. Without them the whole debt and money printing pile of liabilities that is the Democratic Socialist experiment will come down to earth. Movement towards this predictable end has been speeded up by the lockdowns.
Last year another world wide slump began to develop. Austrian school economists alone recognise that such a slump becomes inevitable as soon as banking systems begin to create additional money or money substitutes out of thin air (see May 3rd post ‘How a Free Society will avoid Economic Slumps’). The apparently prosperous money printing boom is identified by them as a period of steady malinvestment due to mispricing of capital and risk via falsified low interest rates. Prosperity and stability are undermined as resources are constantly misdirected.
For the illness of malinvestment, for example in over expanded financial sectors, empty or overpriced property assets, over expanded state services, and assorted investment manias, the slump is the necessary and therefore the inevitable cure. If allowed to proceed to its conclusion, the slump will return all real and financial assets to their correct levels. It enforces default and bankruptcy on unaffordable activities in the state sector and in commerce. It encourages new saving via higher interest rates to fund rapid conversion or adaptation of some incorrectly conceived projects into viable enterprises.
Back to the history. Money creation took off again in the later 1980s and has continued ever since, driving interest rates down from well over 10% during the Volker crunch in the early eighties to basically zero now, or less in the EU and Japan.
Which means we should have had a really big slump by now. But we have not. So far, each time a slump began to develop, more money printing by the US federal Reserve and its franchisee central banks in Frankfurt, Tokyo and London, could and did arrest the process.
Despite brief recessions the accumulated errors of decades of malinvestment have never been cleaned out. Economic progress has however ground to a halt under the weight of misallocated resources and state intervention. Savers and workers have suffered constant losses in purchasing power from money printing. Only the few who owned inflated financial assets seemed to benefit.
Central Bank intervention to ‘stimulate the economy’ happened repeatedly from 1987 onwards. It is the Austrian explanation for the brief 2001 Dot.com and the 2008-2009 downturns. When the most recent slump began to develop, the central banks had reduced interest rates to basically zero and expanded their balance sheets.
Nevertheless, one could forgive central bankers for feeling that there could be a few more years of apparent stability in western economies, bought by another splurge with the monetary printing presses. Now there may well not be any more scope for kicking the can down the road at all.
The culprit is a few weeks in March of more than usual foolishness manifested by most of the Western political class. The lockdowns have probably critically undermined both the credibility of the Democratic Socialist state and its tottering viability.
The story is extraordinary. Compulsory house arrest and ‘social distancing’ was imposed on working populations known to have next to no vulnerability to the coronavirus, and on school systems whose charges actually had no vulnerability at all (less than 1 in a million, literally). The actual first order effect of saving lives from corona virus was in fact not achieved. Studies show that the severe lock-down measures have had almost no effect on reported corona-virus mortality.
And overall mortality ‘with’ corona virus is proving to be a fraction of alarmist estimates so far. Very few indeed actually died ‘of’ the virus – in Britain 95% of deaths have reportedly involved people with other medical conditions. The somewhat disgraced Neil Ferguson at Imperial College avers that two thirds of the dead would have died this calendar year. The first order effect of the lock downs was therefore wholly useless in terms of corona virus deaths.
What about second order effects? Did anyone in power even think about what these might be? Apparently not since the political classes are by definition IYIs almost to a man (and, increasingly, woman). They are, in Nicolas Taleb’s phrase, ‘intellectuals yet idiots’. They don’t bear the costs of their ill-informed and selfish mistakes. They have no skin in the game. The skin in their games is ours, not theirs. They probably still think there will be no consequences for them, no matter how much they screw up. Somehow, I doubt that they are right.
In any case the net medical effect is a big negative. Lock-downs are going to have caused more lost years of useful life, and probably more lives altogether, than the corona virus supposedly took. Medical care for people with actual treatable conditions who depended on timely or continuing care was stopped, needlessly. The result will have been an increase in deaths from other untreated illnesses. Added to this will be many thousands of ‘deaths of despair’ caused by joblessness and bankruptcy. Murders, suicides, drink and drug overdoses, strokes and heart attacks all go up measurably and predictably by over 50% among the unemployed and the bankrupt.
And that is before one considers the likely deaths among marginal third world populations caused by the world wide slump. There will be impoverishment for millions in the first world and death, according to UNICEF and others, for millions – especially children – in vulnerable third world economies.
Is this expectation of a deep slump alarmist? I hope so. But I doubt it. Firstly, there remains the continuing underlying slump and the associated trade war disruption. That slump is still intensifying. Then there is the additional damage wrought by the lock-downs. There have been collapses in activity and employment in western countries - for example, 40 million unemployed and over a $1 trillion of lost production in the USA. It would take time to recover in ordinary times, which these are not.
Economic harm in the EU is being particularly concentrated in the so-called hospitality sector; travel, tourism, hotels, bars and restaurants. Lock-down regimes are being needlessly prolonged for such businesses, though the virus itself is probably heading towards extinction.
The likely introduction of police state style contact tracing and quarantine arrangements, on top of lock-downs and pointless ‘social distancing’ capacity reductions, look set to finish off the vast European tourist industries. Millions of smaller and not so small businesses will go bust. Large, politically connected, crony corporates will get most of the recently printed government money, until it runs out or becomes worthless. The little guys? Not so much. Since these labour intensive hospitality sectors may account for between 10% – 20% of the EU economy, the consequences in terms of permanent unemployment and loss will be tragic and long lasting.
There will of course also be unintended third order psychological or institutional effects of the lock-downs which remain hidden, at least from policy makers. We have discovered, for basically the first time in peacetime, that we are living in societies where, even if you pay your taxes and otherwise operate within the law, the state is happy to destroy your livelihood on the flimsiest of pretexts.
The powers that be are perhaps incredibly selfish, or inept. Or they may be in thrall to vested interests - globalist bureaucracies, ‘Big Pharma’ vaccine peddlers, and/or deep state police state enthusiasts. In any case, they are no longer credible as providers of reliable, predictable business environments. That must mean less confidence, less investment and less employment. The deal on which the last few centuries of progress was based is, at least provisionally, off.
Which brings us to the last, doubtlessly deeply unintended, consequence of the lock-downs. The Democratic Socialist states have damaged, probably permanently, their own already declining tax bases. They have shot themselves in the foot.
Western states need to print money at an accelerating rate to patch up the mess they have made because of the unnecessary lock-downs. To get some idea of this consider the balance sheet of the Federal reserve. That measures new base money creation in dollars. Starting at $400 billion or so in 2007, it rose to around $4,500 billion a few years later. Since late last year, it has gone up to $7,000 billion, mostly created out of thin air during the lock-down months. The US federal government has nearly doubled its spending (which from a much lower base is also what President Hoover did in 1930-1932).
When you consider the prospect facing the Federal Reserve, and its weaker brethren such as the European Central Bank (ECB), the size of the problem becomes clear. Only newly created trillions of dollars have kept the peace during lockdowns. (And the equivalent in Europe, if you can call it peace in either place.) You can’t take the money back and nor can you cut the spending, especially in election years.
Absent an implausible global recovery, the Federal Reserve, and the ECB must be looking at the same again money creation to buy deficit covering government bonds nobody else wants at these low interest rates – or any remotely likely interest rate, given the risk. So that is another two or three trillion dollars meeting Uncle Sam’s deficits for a year or two more. We will be at £10 trillion on the Fed’s balance sheet soon. Then the sky’s the limit.
But there is more. Americans have been on rent and mortgage holidays. American states and cities, especially big old Democrat, often Black, run cities, are broke and their pension funds are broker. Both will ‘need’ (in political terms at least) to be bailed out.
A large bank failure, probably in Europe, is also practically baked in the cake. It will threaten to take down many others, including in New York and London. They have after all been stuffed with low or negative yield government bonds from the West’s expansively spendthrift states. All of these messes are likely to demand further money creation, leading to further economic disruption and more impoverishment.
But wait. You have guessed it. There is still more trouble. Here is the thing. The central banks have driven interest rates down to zero and below. They are still lower when adjusted for inflation, which is highly likely to surge – food prices are already up considerably. Governments and all their dependents, including the entire global banking system and many of its big corporate customers cannot bear interest rates that are even a relatively little higher than they are now.
The Federal Reserve’s swollen balance sheet is tiny in relation to the sum of all government, financial sector and corporate debt in the world. And there is plenty more still rougher stuff in debt denominated in other currencies. To keep interest rates down at these levels throughout the entire universe of mispriced un-repayable debt will require infinite money printing once inflation rises and confidence is lost. That could happen over the next year.
What then? Well the dollar will have to be printed to destruction to buy all new state and corporate bonds. So will the dollar’s more brightly coloured but rather less respectable colonial currencies – like Sterling. People would try to dump them all. They would buy any and all goods and real assets until the fake money vanished entirely like the ignominious American revolutionary Continental Dollar (as in ‘not worth a Continental’). The end of the fiat currencies would represent a near general political and financial default. The Federal Reserve would be history, or toast, whatever. Only the right stocks among financial assets would retain some value.
At that point, the true Austrian School slump will finally get to work cleaning up the mess. Asset prices and incomes will return to the realms of common sense. The outcome would be dramatically discredited and shrunken or dismantled central state sectors, and restructured banking and corporate sectors based on some form of sound money. Any group that had been able to become a free society would be able to restart genuine progress anew. If, that is, we have avoided major wars ...
You may be wondering what would happen if the federal reserve refused to create any more fraudulent money. Well interest rates would go back into the 5% - 10% range. Most of the world’s governments and banking sectors would just blow up. They are too fragile to stand that level of shock. It would lead to a near general political and financial default. Only the right stocks among financial assets would retain some value.
At that point, the true Austrian School slump will finally get to work cleaning up the mess. Asset prices and incomes will return to the realms of common sense. The outcome would be dramatically discredited and shrunken or dismantled central state sectors, and restructured banking and corporate sectors based on a hastily (gold backed?) rehabilitated dollar or some form of sound money. Any group that had been able to become a free society would be able to restart genuine progress anew. If, that is, we have avoided major wars.
Hm? The two outcomes look kind of similar eh? They are. Because whatever happens, the end result of a money printing boom is always the same. A deflationary reset eventually occurs in real, inflation adjusted terms. Doesn’t make any difference which way the Fed goes? Well, yes it does. Hyper-inflationary currency collapse followed by a deflationary reset (our most likely course) would be longer and more painful than just the deflationary reset.
As the great Austrian school economist Ludwig Mises explained long ago, once large-scale money creation has begun there is no way to avoid the eventual corrective slump. But you can make it a lot worse by kicking the can down the road, as out ‘IYIs’ have been doing for years.