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Graham Macdonald
MBMG International Ltd.
Nominated for the Lorenzo Natali Prize
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Are we in Depression?
For its neighbours, the main problem with a unified Germany
is the giant shadow cast across Europe by its increased economic might and
strategic importance, relatively diminishing the status and economic
competitiveness of all other European countries.
From a German perspective, a unified Germany has enormous, unleashed, latent
potential; the gap between what the rest of Europe sees and what Germany sees as
its rightful place. In Imperial times, this was expressed in terms of
territorial ambitions, nationalistic fervour and military strength. More
recently, it led to World Wars I and II.
The historian, A. J. P. Taylor, explained this better than anyone to my
generation, which quickly learned the diplomatic lessons. Other than local
conflicts (notwithstanding that some of these have caused appalling loss of
life), peace in Europe has mostly prevailed since 1945. Less clear is whether we
have taken to heart the lessons of inter-war economic policies which did so much
to exacerbate the casus belli inherent in the Versailles Treaty.
The post-1918 global landscape abounded with economic imbalances. The ‘war to
end all wars’ concluded with a Soviet regime presiding over what had been the
Russian Empire, Germany coming perilously close to a similar outcome following,
the Austro-Hungarian and Ottoman Empires being sliced and diced into volatile
nascent nations, while both France and Britain were, like Germany, heavily
indebted to America. The US was the global provider of capital, whose main
achievement until the latter part of the war had been accumulation of enormous
quantities of global gold reserves, allowing the US Dollar to become the global
reserve currency - something that has not changed for nearly a hundred years.
While more serious students should absorb Rogoff and Reinhart’s, This Time is
Different : Eight Centuries of Financial Folly, a McKinsey study concludes there
are only four ways of dealing with enormous build-ups of debt:
Inflation - The current US strategy, based on the monetarist shibboleth that
increasing money supply ultimately creates inflation, has demonstrably failed
universally in practice (other than possibly one questionable instance in
Chile). Chief apologist Milton Friedman and his dangerous devotees, headed by
Fed Chairman Ben Bernanke, have excused monetarist policy failures saying that
all previous attempts failed because they did not do enough of it (!). In other
words, when something is not working you need to do it more.
In fact, markets have previously imposed limits to the pursuit of monetarist
solutions. America’s close to these limits now - every injection of stimulus has
a smaller and shorter-lived effect than its predecessor. Some estimates now
indicate that each $1.00 stimulatory input results in only 12 cents of
additional output. The current monetarist ideologues are not yet ready to
abandon their strategy (the only one they have) but will ultimately find
themselves with no choice.
This is similar to President Hoover, in 1932, who even considered having to pass
legislation preventing ‘money hoarding’. Hoover’s successor, Roosevelt, even
tried adding the firepower of unlimited leverage by abandoning the gold
standard. This appeared to work for half a decade but the term ‘double-dip’ was
coined to describe the situation where recession/depression recurs because the
law of diminishing returns inhibits the inability of central banks to maintain
effective stimulatory output.
In the inter-war period, in Germany, the Weimar Republic famously experimented
with pursuing currency expansion to the ultimate extreme so as to try to repay
its war debts and the Versailles reparations. This led to hyperinflation where
wheelbarrows full of Marks became worth less than the actual cost of printing
them. Mr. Bernanke’s complacent claims to be able to easily create inflation by
harnessing the twin technologies of printing presses and helicopters could well
become his epitaph.
Austerity - This is the UK coalition’s self-prescribed foul-tasting medicine and
the current German/ECB/EZ Core prescription for Greece and its fellow GIPSIs.
There are huge scars on the German psyche following the Weimar period but, like
the monetarist inflationary theories, the tail chasing the dog on an ever
downward spiral of debt reduction and GDP destruction has rarely, if ever,
proven successful in major debt episodes.
Inevitably, it too cannot be pursued to its logical conclusion; people prove
unwilling or unable to put up with it to that point. The Financial Times
reminded us last year that while hyper-inflation destroyed Germany’s last shreds
of self-esteem, it was the austerity Germany’s creditors imposed through the
mechanisms of the BIS that led to Hitler’s election.
Social tensions are everywhere - from Jasmine Riots to Arab Springs, from
Tottenham Court Road to the EZ elections, which at least provide the glimmers of
hope that some pressures can be released before austerity inevitably results in
more self-appointed extreme dictatorships or military regimes.
War event/subsequent peace dividend - Ultimately WW II did lead to the
resolution of the 1929-1949 debt crises. In that sense, austerity did lead to
the solution of the problem. Not only is Angela Merkel reminiscent of Alaric,
the Goth leader who overthrew both Athens and Rome by siege and starvation, but
globally, tensions between nations are on the rise again. The Middle East
remains tense, the Filipino and Chinese navies stand-off over a tiny Pacific
outcrop of islands, Iran has raised stakes in the Straits of Hormuz over nuclear
aspirations, Vladimir Putin’s rhetoric and actions tend to be inflammatory,
roguish nations continue to develop nuclear programmes and the US has increased
its military presence in Asia Pacific. Global nuclear conflagration ought to be
totally unthinkable, but sadly it is not.
Default - Nations default when they cannot pay. This happened in the 1930s and
has started happening again today. Default, whether outright (through debt
repudiation) or de facto (currency/debt debasement) is rarely orderly although
Greece has managed to live in default for over 50% of the last 2 centuries! It
tends to happen when all other choices have been exhausted. Whatever form it
takes, if the conditions which led to the situation that caused it are changed,
then it can be a base from which to achieve sustainable growth, cure
dysfunctional banking and liquidate malinvestment, restoring social order at the
same time. This is what happened in South East Asia following the crises of 1997
and in Iceland after 2007.
What can we learn from our parents and grandparents? Answer given below in an
economic formula:
Santayana’s comments [“those who cannot remember the past are condemned to
repeat it”] + Mark Twain’s [“history doesn’t repeat, it rhymes”} + Einstein’s
definition of madness [“doing the same thing over and over again and expecting
different results”] + Hyman Minsky’s observations that trying to cure debt
bubbles with more debt only ends in eventual catastrophe) = [I’ve said many
times before that Liaquat Ali’s “Lords of Finance” should be compulsory in
schools everywhere] If we do not learn the lessons from the 1930s parallels,
there is a very good chance that the outcomes of this decade may not be
something to look forward to.
So, are we in a Depression? I am now!
The above data and research was
compiled from sources believed to be reliable. However, neither MBMG
International Ltd nor its officers can accept any liability for any
errors or omissions in the above article nor bear any responsibility for
any losses achieved as a result of any actions taken or not taken as a
consequence of reading the above article. For more information please
contact Graham Macdonald on [email protected] |
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