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Report: Impending Economic Chaos
Report|Jul 13, 2021

Report: Impending Economic Chaos

The World's Economy Isn't Adding Up, Writes Gideon Rozner.
Gideon Rozner

Recently, I had cause to visit a cemetery. Wandering around with my girlfriend, we read the tombstones and started talking about the epitaphs. I told her what I wanted on mine: ‘I tried to warn you’.

Many people have admitted that the bizarre coronavirus saga of the past year or so has changed their politics. It’s certainly changed mine. I’ve gone from being a libertarian to being a paranoid libertarian. Because I have become absolutely certain that we are on the edge of a horrible economic abyss. 

We are dancing on the lip of the volcano. We are shareholders toasting to our portfolios in 1928. We are investment bankers hoovering up sub-prime mortgages in 2006. We’re Dutchmen hoarding tulips in the 1600s. We’re rank-and-file linesmen in 2002, safe in the knowledge our retirement savings are invested in good old reliable Enron stock.

Collectively, we’re every other chump in world history who thought the good times would last forever… until they didn’t.

But yeah, like I said, I tried to warn you.

Of all the grotesque spectacles that Australian politics is capable of producing, one of the most obnoxious would have to be budget night. It’s Canberra’s answer to the Oscars, a blast of glitz and pageantry as the federal treasurer reveals how the Commonwealth intends to spend our money for the next 12 months.

DIVVYING IT ALL UP

I saw a couple of budget nights up close when I worked in Parliament House, back in the day. The building swells so much it seems like it will burst, as every rent-seeker, carpet-bagger and two-bit spiv descends on Capital Hill. For some, it’s a piss-on with the corporate credit card. For others, it’s serious business, an eyewitness look at how their particular racket fares in the great national divvying up of the spoils.

And boy, would they have been happy this year. Few ‘stakeholders’ (as they say in Canberra-speak) went home empty-handed. The monstrously overregulated and extortionately expensive childcare industry got a big slice, as did the ‘vocational skills and training’ racket. Developers and construction unions would have been thrilled with yet another round of housing subsidies and half-baked ‘infrastructure’ projects. Then there were smaller amounts handed over to the perennially uncommercial recycling industry, elite sport, whatever passes for ‘the arts’ these days, and on and on.

All washed down with pronouncements that ‘Australia is coming back’, that the economy is ‘roaring back to life’. And that’s technically true, if you trust the economic indicators.

But I don’t.

Falling unemployment figures are great, until you realise that the definition of ‘employment’ is working for just one hour per week. GDP growth is impressive, except that it appears to be largely driven by government spending, not genuine economic growth. Consumer sentiment is high, but how could it not be when the government has been sending people money for the express purpose of having them go out and spend it?

Something isn’t right. No country can chuck thousands of its own citizens out of work and close businesses for months on end and have its economy ‘roar ahead’. Unless, of course, you keep things chugging along with borrowed cash. Which we are. 

WORLD DEBT

And it’s not just Australia that’s plunging itself into debt – it’s just about every country in the developed world. How much longer can we keep paying the mortgage off with the credit card? And what happens when the critical piece of that rickety Jenga tower gets removed?

Money. It’s a funny thing, when you think about it. Almost everyone on earth wants it, yet extremely few people understand it.

Until a couple of thousand years ago, there was no currency, only bartering. Exchange was direct. When societies evolved and bartering became more complicated, early civilisations minted coins as mediums of exchange. Eventually, people got tired of carrying around all that metal, so banks issued paper banknotes, which could be redeemed for gold, then governments took over with their own central banks.

And then sometime in the 20th century, everyone decided that tethering paper currency to precious metals was old hat, and in 1971 Richard Nixon decoupled the US dollar from gold completely. Since then, American currency has no intrinsic value, other than the ‘full faith and credit’ of the  US government. Every national currency on planet earth now functions in the same way.

But how far does that ‘full faith and credit’ go when a government can bring money into existence simply by printing it? Remarkably far, it seems, in the 50 years that the experiment has been running. But history is replete with examples of when it hasn’t gone so well.

Cryptocurrency may be to government-backed money what uber was for the taxi industry

The Chinese were the first to introduce paper currency around the 10th century, but eventually so much of the government-backed cash was in circulation that its value plummeted. Inflation soared to the point that paper money was abolished by the Ming dynasty in 1455 and not introduced again for several hundred years.

Weimar Germany was plunged into its own inflationary crisis, printing deutschmarks to pay striking workers but in so doing sent the cost of a loaf of bread from 250 marks in January 1923 to 200 billion by November. Zimbabwe’s money printers were kicked into gear to pay off government debt until inflation peaked at 79.6 million per cent per month. One of Argentina’s routine inflationary crises was so bad that in 1989, the mint didn’t have paper to print any more cash, making the land of silver the only country in world history to literally run out of money.

The bottom line is that you can’t just create new money without any underlying economic production backing it up. A thriving economy creates money, not the other way around.

Well, Zimbabwe and Weimar Germany are one thing, but a currency crisis couldn’t happen in an advanced country like the Unites States. Could it?

Of all the dangerous, crackpot ideas that the political left are unleashing on the world, it’s so-called ‘modern monetary theory’ that will do us in. It’s basically a fusion of bastardised Keynesianism and technocratic socialism that insists that large-scale money printing really is a good idea.

BEST-CASE SCENARIO

The theory is that government spending is more or less unlimited, because the government can just print more money to finance its spending. But what about inflation? Well, that’s easily fixed too – if there’s too much money sloshing around the economy, the government can pull some out simply by raising taxes. So best-case scenario, the government spends as much money as it wants while taking more and more of yours. And worst case, this pea-brained exercise in monetary vandalism will work about as well as it has every other time it has been attempted: catastrophically.

And it’s not a fringe theory, either. Plenty of ‘credible’ economists have signed up, along with the usual vested interests that see a big slice of that new money coming their way. But worst of all, governments have basically adopted modern monetary theory, even if they aren’t calling it that.

That’s why any and all economic woes these days are met with one solution: ‘Stimulus’. Unemployment rising? Business confidence flatlining? Consumer spending in the toilet?

Just chuck in some more money to get the economy whirring again, no worries.

And on that measure, the Biden administration has been a runaway success. 

It’s genuinely hard to work out exactly how much he’s spent in the four or five months he’s been in office, but his ‘COVID relief bill’ alone dumped US$1.9 trillion on the global economy. In fact, of all the US dollars currently in circulation, one fifth have been created in the past 12 months alone.

And of course, the US is not alone, with politicians patting themselves on the back the world over as they kick their own money printers into gear. In Australia, the Commonwealth is financing its own heroic spend-a-thon by issuing government bonds. Those bonds are being purchased by the Reserve Bank, ostensibly to keep the cost of government borrowing low. And of course the RBA is perfectly capable of buying those bonds because – you guessed it – it can print money. And it is.

So why aren’t we seeing inflation, then? Well, give it time. Consumer prices in the US have already jumped 4.2 per cent in the past year, the fastest rise since 2008. Inflation in Australia is technically low right now, but like I said, I’m sceptical about economic indicators, and that includes the consumer price index. It’s the standard measure of inflation, calculated by measuring the price rises among a ‘basket’ of common household spending items.

For now at least, a pint of milk costs about as much as it did a year ago. But go to a house auction on a Saturday afternoon and tell me inflation isn’t a problem. Or ask yourself why, after a year in the political class set fire to the Australian economy over a respiratory illness, is the share market basically at record highs? 

The intrinsic value of a Telstra share or three-bedroom townhouse is the same, but the price is getting higher and higher. And the more the government floods the economy with cheap cash, the higher prices will go. 

But they’ll tell you it’s all fine, because interest rates are so low that it would be stupid not to borrow unfathomable sums of money to spend on God-knows-what. But what happens when inflation does become a problem? What happens when the Reserve Bank responds by jacking up interest rates? What happens when mortgage payments become so expensive people start defaulting en masse, leaving the banks with millions in bad debt on their books? What happens when global interest rates get too high one or more major economies to service their debt and no amount of ‘stimulus’ can save them?

Well, I guess we’ll see.

When the government very kindly gave me access to my own superannuation money last year, I pulled out as much as I could and put it straight into Bitcoin. In part, it was a kind of silent protest against the loathsome racket that is compulsory superannuation. But the reason I chose Bitcoin is because as a currency it is decentralised, largely unregulated and, most importantly, finite. While Central Banks can create new currency as fast as the printing presses will let them, Bitcoin is designed so that no more than  21 million of them can ever be produced.

SAVED BY CRYPTO?

So in terms of my personal finances, I have become a doomsday prepper. And I’m not alone – cryptocurrency adoption is highest in countries with unstable currencies, with long-suffering people in places like Nigeria and Venezuela feverishly buying it up, often on the black market to circumvent cryptocurrency bans in their country. Even the investment banks and major corporations that a few years ago had written cryptocurrency off as a colossal ponzi scheme are adding it to their balance sheets, citing the risk of inflation.

And that, my friends, is where we may find redemption amid the impending economic apocalypse. Cryptocurrency may be to government-backed money what Uber was for the taxi industry. And if we can break governments’ monopoly over currency – if we can nobble the ability of the state to constantly dilute the value of money to pursue its own idiotic vanity projects – then anything is possible.

Until then, I’m hiding in Galt’s Gulch, waiting for Atlas to shrug. You should do the same. Look after your assets, be wary of low-interest loans, and take a good, hard look at the government-backed money sitting in your bank account. And then, I suppose, enjoy the fireworks. The economic chaos on the edge of which the world is teetering will not be pretty, but it won’t be boring either.

And remember, I tried to warn you. 

 

Illustration by Alashi.