The study of economics is a rich and rewarding experience, and whilst some regard it as the dismal science I can only assume that they are referring to the dismal performance of our political masters over recent decades, in terms of their truly awful economic policy track-record.
There is barely a developed country in the world today that is not mired in debt the like of which we have never seen in peacetime history. There are, of course, many reasons and arguments that can be made to justify these debts, but the simple fact of the matter is that it is politics, not economic science, that has brought us to the precipice of a new global economic catastrophe.
Our most recent experience of government induced meltdown came in 2008, and whilst the years of hardship that followed were both deep and prolonged, there is a real danger that what comes next will make those years seem like our glory days.
For the first time in 50 years there is the real prospect of stagflation ahead of us - a period of both high unemployment and high inflation.
That might seem unlikely, but with the already heavily indebted governments responding to the Covid-19 pandemic by pumping out vast amounts of money for furloughed employees and mothballed businesses, inflation might easily and rapidly rise once people are again free to venture out of their homes and into the shopping malls.
Furthermore, rising consumer spending could easily occur at a time when business inventories are running low, and productive capacity in the economy is significantly reduced due to a huge spike in permanent business closures due to bankruptcy.
If you are unfamiliar with the study of economics, and unaware of the ravages of inflation and why it must be controlled as one of our first economic priorities, have a look at:
With associated national-debt levels set to reach unprecedented peacetime levels, and interest rates already at historically low levels, governments may find themselves with very few levers left to effectively stimulate their economies out of trouble in these dire circumstances.
With ongoing pandemic disruption, and large numbers of job-losses due to business
bankruptcies, it's not hard to predict a significant supply-side contraction in
the economy, with rising prices and long-term unemployment as a result.
Add to these difficulties the backlash against decades of 'globalization', and a resurgent nationalism in many countries, and you might conclude that economic supply-chains across national boundaries might look quite different in the years ahead.
Furthermore, the literal obsession with maximizing consumption of goods and services today, at the expense of higher saving/investment rates, has long been hailed as the backbone of a strong economy. It's as if saving and investing for tomorrow would doom us all to poverty and misery when the opposite is true. This is clearly macroeconomic illiteracy at its worst, and I've explained a simple model of income flows in my article about:
For many years the trend towards increased flows of global trade across national boundaries has allowed businesses to harness the low cost means of production that are available in less developed countries. However, a lot of that trade has been with China, and current relations between China and the West have taken a nosedive in the wake of the global pandemic.
A move away from globalization, which may or may not be desirable depending on your own point of view, would unfortunately mean that some of the supply-side gains from international trade over previous decades are lost in the coming years.
There is a chance that a reduction in trade with China might be counter-balanced by growth in trade with alternative low-cost countries (India being the main candidate), but it seems that shortages in some key supplies during the pandemic, due to reliance on imports, is leading to louder calls for a rebuilding of national industrial bases for strategic reasons.
This would have the advantage of improving national security because it would more or less guarantee access to essential goods and services, but the supply-side costs to a national economy will be more severe the further that it moves away from the comparative advantages of international trade.
On this website I will have little to offer with regard to the merits of alternative geopolitical points of view, but arguments in favor of my preferred brand of economics is something that I do intend to offer.
As an early heads up, I generally prefer free-markets combined with building a tax base that leads to a greater redistribution of income. I also prefer the 'automatic stabilizers' of the business cycle rather than active 'demand-management' policies with all their time-lag problems and inefficiencies.
As you may have gathered, a central building block of my preferred brand of macroeconomics is the so called 'supply-side' school of thought. This brand of economics came to prominence as a response to the troubles of the 1970s, and 'Reaganomics' leaned heavily on its principles. For more information, see:
I'm aware that this will immediately cause some resentment among political opponents of Reaganites and the right-wing of the political spectrum, but I ask that you bear with me.
I regard many of the criticisms of Reaganomics to be perfectly legitimate, in particular the 'trickle-down economics' which were expounded by his administration, but those are not my preferred supply-side economic policies. I have no truck with arguments that favor tax cuts for the rich, quite the reverse in fact.
Unfortunately for us all, it appears that the lessons of the 2008 financial crisis have not been learned by those who have the power to influence economic policy. According to their simple economic models the crisis shouldn't have happened, but there was a major flaw in those models.
It was assumed that our economies were growing at a stable low inflation rate in the years prior to the crisis, but the problem was in the measurement of that inflation. Governments use a supposedly 'representative basket' of goods which they track over time for price changes, this they use as a proxy for overall inflation. If the headline inflation rate gathered from the tracking is low, then the economy should be growing at a sustainable rate.
Here's the problem.
The items in the basket specifically excluded, and continue to exclude, mortgage costs and real estate prices. Now ask yourself this, did mortgages and real estate prices rise in the years before the 2008 financial crisis or not... the answer is that they rose very rapidly!
Just as bad as this was the fact that many of the items that did make it into the so called representative basket were goods that were at least partially produced in China and other parts of the developing world i.e. in countries that had massive spare capacity to satisfy increasing demand for goods without the need for rising prices.
Moreover, many of those imported goods are electronic goods whose prices tend to fall as technology advances, so falling import prices masked rising domestic prices.
So, in effect, our governments totally failed to record an accurate estimate of real inflation. The calculation method they chose may have made sense at one time, but the method is hopelessly out of date now that so much of our domestic consumption is sourced from overseas.
We need our 'representative basket' to start tracking the prices of domestically produced goods and services, with a focus on those products that we consume more when our incomes increase, if we want to know whether or not our domestic economies are overheating or not.
The real estate boom in the lead up to 2008 was a core component of the financial crisis, because the banking sector had loaned heavily using overinflated house prices as security against those loans. When the bubble burst, much of the banking sector became immediately insolvent, and governments chose to bail them out with huge amounts of the public's cash that they labelled 'quantitative easing'.
Here's the second problem.
Because the headline inflation rate did not rise significantly in the years after the huge injection of cash, it appears that our governments may have come to the mistaken conclusion that printing huge sums of money is not inflationary! But it is - and very much so.
They don't see it because they're looking in the wrong place.
The inflation, caused by a huge credit boom, had already occurred prior to 2008, not afterwards. The quantitative easing from 2008 onward merely went to the banking sector to purchase their bad assets (i.e. bad loans secured against overpriced properties) - that money didn't enter the wider economy. It was retained within the banking and financial sector in order to maintain solvency. The effect of this was to create a new bubble, this time in equities and other financial assets.
The economic consequences of these terrible policies have left us with debt levels at all-time highs, and the future is starting to look bleak.
A key argument that has been used to dismiss proponents of supply-side economics is the lack of any clear monetary policy prescription, which does leave the doctrine somewhat incomplete.
Happily, this vacuum is filled by another of my preferred schools of thought - the Austrian school of economics. I believe that a hands-off approach to demand-management is advisable with regard to cyclical patterns in the economy, but if we want to avoid financial crises and credit booms in the future then we need to replace the existing fractional reserve banking system with something that is much more stable.
The Federal Reserve, the Bank of England, and the other big central banks were so incompetent in their management of our currencies in the years preceding the 2008 financial meltdown that by the time it arrived it was almost completely unforeseen and unprepared for.
It's almost regrettable that the money printing in 2008 onward didn't come with a sharp rise in inflation at that time, because I feel that the absence of an inflation penalty after 2008 was entirely untypical of most money-printing operations. In times past these operations have always led to rapid inflation rises because the money entered the real economy rather than being held within the banking and finance sector.
I fear that our governments have been lulled into a false sense of security and that they don't understand the dangers of debasing our currencies in the form of excessive spending on furlough payments etc during our current pandemic crisis. I doubt that our economies will escape the ravages of inflation a second time, because this time the money really is entering the real economy.
For a fuller explanation, see:
Happily, with regard to the Banking and finance sector, there are some much better alternative structures to that which we currently have, and one in particular that I subscribe to is called full reserve banking. It is a system that has been championed by many of our greatest economists on either side of the political divide at one time or another.
It's also a somewhat idiot-proof system, which should pay huge dividends in the hands of our political and economic masters...
The economic damage of the 1970s caused far more inter-generational harm than most economists are aware of. The sheer numbers of people thrown onto the unemployment scrapheap was huge, peaking in the 1980s with double-digit unemployment rates that stayed high throughout the 80s.
The UK was hit particularly hard in the 1970s because the oil price rises that kicked it all off led to a huge inflow of international funds. The UK was a major net oil producer at this time so, as oil prices rose, funds flowed in as investors sought a safe haven for their money.
This caused a massive spike in the UK real exchange rate of over 20%, and that made UK exports very expensive and imports from the rest of the world very cheap. At the resulting exchange rates those UK businesses that competed most in international markets, i.e. manufacturing, came under huge pressure. Ultimately it caused large scale deindustrialization and millions of job losses. More details on these ravages are available via the link.
Long-term unemployment works like a cancer on society, and it eats away at everything it touches. The worst hit communities in the northern regions of England still suffer today with levels of economic deprivation that would not look out of place in a Soviet Socialist Republic.
For more information on the levels of inequality and income-gap problems in the UK and elsewhere, and how things have changed in recent decades, have a read of:
I have witnessed many of these societal failings personally, and I can tell you that for all the fancy words in the world nothing is going to make a real impact on these communities without real change, and even then it will still take many more years to reverse the damage that stems back to the economics of the 1970s.
From the words that I've written above about long-term unemployment effects, I think that you can probably guess that there is no quick fix for severe macroeconomic decline once it takes hold. What matters most is to avoid it in the first place.
The only real obstacle to stable economic growth is inappropriate policies and regulations. The public sector has proven time and time again that it simply is not fit for managing the economy. If the 2008 financial crisis taught us anything then it taught us that.
You could go down the line and assess one economic recession after another. The culprit is almost always the public sector, either directly because of some foolish commitment to a bad macroeconomic policy, or indirectly because the policy response to some external factor was all wrong.
We need to recognize the nature of each economic threat rather than automatically adopt some Neo-Keynesian demand-side policy aimed at boosting spending. At the current time it should be immediately obvious to most readers that trying to spend our way out of a debt problem is not the correct way to proceed, yet that is the approach we are following.
As indicated above, a big part of the problem is the fractional reserve banking system, which has been analyzed extensively, with most experts concluding that it is a system which requires constant growth of spending to keep functioning.
Any sign of a recession can cause asset values to fall, and any banks that have 'secured' their loans on those assets can quickly become insolvent. When that happens governments have already proven to us that it won't be the bankers who have to pay the price, it will be regular citizens who foot the bill, and this is completely unacceptable in my opinion.
We need to get the public finances in order so that debt accumulation does not become overly burdensome. We need to improve supply-side incentives and the automatic stabilizers of the economy. We also need to implement a negative income tax, i.e. a universal basic income, to get rid of the welfare-trap.
If some of these economic policies are unknown to you, or the arguments for or against them are unclear, have a browse around my site for explanations. If you can't find what you are looking for, or you can but I haven't done a good enough job of explaining, then don't hesitate to send me a message via the 'contact' link at the bottom of the page.