Actual fantasy
OUR URGENT NEED FOR RATIONAL ECONOMICS
Everyone knows the quotation, of course, which says that “when it gets serious, you have to lie”.
Actually, when it gets even more serious, we have to face the facts.
I’m indebted to Dutch rock music genius Arjen Lucassen for the observation that the counterpart to “virtual reality” is actual fantasy – and that’s where the world economy seems to be right now.
You may think it’s imminent, or you might believe that it still lies some distance in the future, but I’m pretty sure you know that we’re heading, inescapably, for “GFC II”, the much larger (and very different) sequel to the 2008 global financial crisis (GFC).
SEEDS 20 – the latest iteration of the Surplus Energy Economics Data System – has a new module which calculates the scale of exposure to “value destruction”. This exposure now stands at $320 trillion, compared with $67tn (at 2018 values) on the eve of GFC I at the end of 2007.
How this number is reached, and what it means, can be discussed later. Additionally, potential for value destruction needn’t mean that this is the quantity of value which actually will be destroyed when a crash happens. Rather, it gives us a starting order-of-magnitude.
For now, though, we can simply note that risk exposure seems now to be at least four times what it was back in 2008. Moreover, interest rates, now at or close to zero, cannot be slashed again, as they were in 2008-09. Neither can governments again put their now-stretched balance sheets behind their banking systems, even if global interconnectedness didn’t render such actions by individual countries largely ineffective.
Finally – in this litany of risk – two further points need to be borne in mind. First, global prosperity is weakening, and has been falling in most Western economies for at least a decade, so any new crash will test an already-weakened economic resilience.
Second, and relatedly, any attempt to repeat the rescues of 2008 would be unlikely to be accepted by a general public which now – and, in general, correctly – characterises those rescues as ‘bail-outs for the wealthy, and austerity for everyone else’.
The high price of ignorance
It’s tempting – looking at a world divided between struggling, often angry majorities, and tiny minorities rich beyond the dreams of avarice – to think the surreal state of the world’s financial system reflects some grand scheme, driven by greed. Alternatively, you might feel that far too many countries are run by people who simply aren’t up to the job.
Ultimately, though – and whilst greed, arrogance, incompetence and ambition have all been present in abundance – the factor driving most of what has gone wrong in recent years has been simple ignorance. For the most part, disastrous decisions have been made in good faith, because thinking has been conditioned by the false paradigm which states that ‘economics is the study of money’, and which adds, to compound folly still further, that energy is ‘just another input’.
I don’t want to labour a point familiar to most regular readers, so let’s wrap up recent history very briefly.
From the late 1990s, as “secular stagnation” kicked in (for reasons which very few actually understood, then or now), the siren voices of conventional economics argued that this could be ‘fixed’ by making it easier for people to borrow than it had ever been before. This created, not just debt escalation, but a lethal proliferation and dispersal of risk, which led directly to 2008.
In response, the same wise people, those whose insights caused the crisis in the first place, now counselled yet more bizarre gimmicks, the worst of which was that we should pay people to borrow, whilst simultaneously destroying the ability to earn returns on capital. Nobody seems to have wondered (still less explained) how we were supposed to operate a capitalist economy without returns on capital – and that, by the way, is why what we have now isn’t remotely a capitalist system based on properly-functioning markets.
When GFC II turns up, it’s as predictable as night following day that the zealots of the ‘economics is money’ fraternity will come up with yet more hare-brained follies. We already know what some of these are likely to be. There are certain to be strident calls for yet more money creation (but this time with a label saying that “it’s not QE – honest”). Some will advocate ‘helicopter money’, perhaps calling it ‘peoples’ QE’. There will be calls for negative nominal interest rates, with the necessary concomitant of the banning of cash. Ideas even more barking mad than these are likely to turn up, too.
Ultimately, what’s likely to happen is that the authorities will respond to GFC II by pouring into the system more additional money than the credibility of fiat currencies can withstand.
We know, of course, that any new gimmicks, just like the old ones, won’t ‘fix’ anything, and can be expected to make a bad situation even worse.
So the question facing everyone now – but especially decision-makers in government, business and finance, and those who influence their decisions – is whether we abandon conventional economics before, or after, the next mad turn of the roulette wheel.
Put another way, should the creators of “deregulation”, QE and ZIRP – and the facilitators of sub-prime and “cash-back” mortgages, collateralised debt obligations and the alphabet soup of “financial weapons of mass destruction” – be allowed to introduce yet more insanity into the system?
Before making this decision, there’s one further point that everyone needs to bear in mind. In 2008, financial gimmickry nearly, but not quite, destroyed the banking system. The only reason why this didn’t happen was that fiat money retained its credibility. But, whilst the follies which preceded the GFC imperilled only the credit (banking) system, those which have followed have put the credibility of money itself at risk.
This is perhaps the most powerful reason of all for not letting the practitioners of ‘conventional’ economics have another swing at the wrecking-ball.
I hope that, reflecting on this, you’ll agree with me that we can no longer afford the folly of financial economics.
Moreover, we need to say so, making fundamental points forcefully, and resisting any temptation to wander off into esoteric by-ways.
A scientific alternative?
If there can be no doubt at all that money-based interpretation of the economy has ended in abject failure, there can be very little doubt that a workable alternative is ready and waiting. That alternative is the recognition that the economy is an energy system.