Читать книгу TOO MUCH MONEY - Gregory J. McKenzie - Страница 3

“Money has never yet made anyone rich" Seneca

One of the reasons people go blank, when listening to an economic explanation of a recession, is because they do not know economic jargon. To most people the word “demand” can have many meanings. Exposed to other ways of speaking loosely, the word “supply” is used in news items to denote drug trading. No wonder then that non-economist can get confused with technical uses of that word. For economists its like knowing a secret language. They know the technical usages of these twin words “supply and demand”. But they often fail to communicate this in their public messages.

Demand can be defined as “insistently requested”. Supply can be defined as “insistently offered”. These definitions go some way to understanding why demand is more important than supply during a recession. There may be a lot of supply available in any market but if it is not “requested” by buyers then it just gathers dust. In Germany, for example, shoe sellers were caught out with unsold winter stock due to their March 2020 shutdown. They had put in their orders for Spring, but by April there were simply no customers. This may also happen for the Christmas season of 2020-21, with parts of Germany again shutdown. For some retailers that would be the last straw.

The other qualifier in these definitions is that both words must have the qualifier “effective”. Demand that is merely wishful thinking has no impact on current private final consumption expenditure levels. Supply chains that do not function cannot add to the availability of goods and services. So, when international flights were largely frozen during the second quarter of 2020, shortages of certain essential medical items became chronic. The demand for protective gear in Europe and the USA was urgent but there was simply not the supply to offer up to hospitals, schools and public transport workers.

Effective demand can restart an economy. This is because it stimulates business investment. Businesses will only invest if they expect demand for their products or services to translate into higher sales revenue. at the same time, Effective supply can keep businesses from losing sales. Out of stock situations can mean losing customers. There is little consumer loyalty these days. People go to larger retail outlets because they expect them to have stock ready for sale. Failure to deliver may see these consumers switch to microbusinesses on line. This seemed to be happening in 2020 due to supply chains problems caused by the pandemic.

Then there were instances of panic buying. When people were sent into lock downs in early 2020, they rushed to retail stores. In Australia, we have seen buyer behavior that defied logic. During March 2020 effective demand for items like toilet paper exceeded effective supply. Why? Because of panic buying. Supply chains could not keep up with this excessive demand. No matter how much money a consumer had to offer they simply could not buy enough toilet paper. Toilet paper for some time in Australia was “insistently requested” by consumers, but was not “insistently offered” by retailers who just could not get stock on shelves fast enough.

The same happened when people were locked out of their annual overseas trips. Turning to old fashioned road trips, desperate “grey nomads” bought up every road map they could find. This created a shortage of road maps because they were no longer mass produced in Australia. The supply chain failed to provide effective supply for this unexpectedly “insistent” demand.

Now economic theory does not even try to explain panic buying or panic selling. It concentrates on normal market behavior. Still such behavior can affect economies in strange ways. When Australia experienced its first “toilet paper shortage” since the Second World War, substitutes began to emerge. People bought toilet wipes, tissues and even bidets. None of these substitutes were as good or as cheap as toilet paper. So, when the panic subsided in certain cities of Australia, consumers went back to buying toilet paper rolls. Suppliers still could not import toilet paper so shortages persisted on retail shelves. Local manufactures came on board eventually to take advantage of this rare opportunity for quick profits.

All this matters because governments are throwing money at problems they do not seem to understand. Once again they are falling back on what they did during the last recession. For instances, in the last recession in the USA, after 2008, private final consumption expenditure rose only after the federal government provided financial incentives. So, back then the US Government had a “cash for clunkers” scheme that saw more new cars purchased but only whilst those government incentives were there. This led to a misallocation of resources because of artificially expansion of the effective supply of new cars. A well intentioned move merely led to an inefficient recovery in the USA.

Other governments in Europe gave first home buyers money incentives to buy homes. But once those incentives were gone, private final consumption expenditure fell back to recession levels. Again this led to misallocation of resources. It also propped up an overheated real estate market by artificially expanding effective demand for housing. Many governments operated on that overly optimistic assumption that by merely lowering consumer prices, markets can have uninterrupted periods of higher domestic consumption expenditure.

The Great Recession of 2008-12, showed this is not always the case. Once consumers and businesses get used to government handouts, they are reluctant to risk their savings. When governments began to wind back fiscal stimulus, they found that economic stagnation was the unintended outcome. Sometimes governments should just let effective demand and effective supply find their own equilibrium. This may turn out to be a more permanent solution and is certainly more efficient.

Yet many economists in 2020 still felt compelled to give advice on the impact of fiscal stimulus policies. Not all of it is positive. One economist went so far as to use welfare economic theory to argue against general assistance to all those in need. The point that was being pushed was that not every business, not every worker and not ever industry deserves help. There was no mention of “picking out the winners” but it seemed implied by some caustic remarks concerning overgenerous government “bail outs”.

Now this is all well and good but economist need to offer hope not doom. Letting people know that opportunities that arise from business failures include freed up capital and new opportunities, would be a nice touch. Iceland let their banks fail in 2009. Today their banking system is stronger for that pruning of their bad banks. Yet Japan chose to bail out banks, stock markets and even real estate investment funds. This has been going on in Japan for decades. Their response in 2020 was to launch fresh fiscal stimulus amounting to about $US 3 trillion. Japan's public debt burden is twice the size of its gross domestic product.

Financial economists fell over themselves in praising central banks for helping economies avoid another financial crisis in 2020. Yet some of these economists had failed to predict the GFC back in 2008. By 2020 they were back predicting gains on financial markets because of what is now known as Modern Monetary Theory. I have no intention of expounding on this theory. Anyone who is interested can go to many academic sources that will do a far better job of it than I could ever hope to deliver. But be critical of their claims. Money supply once increased is very difficult to contain in terms of price stability in all markets.

Academic economists were as divided in 2020 about how to reboot economies, as they were back in 2008. Keynesian fiscal policy stimulus was accepted as inevitable. Even those economists who did not agree with the whole Keynesian (or Neo Keynesian) approach, remained silent when first the USA, then the EU, then Japan and then China launched trillion dollar rescue packages. Once these Group of Eight rich countries had adopted Keynesian solutions, it seemed pointless to oppose budgetary bail outs.

But the timing of the removal of fiscal stimulus measures became the new theoretical battleground. When fiscal consolidation was adopted by many countries back in 2012, severe austerity programs were enacted. Often they were forced on a country (like Greece) as a condition of getting billions of dollars in emergency funding. This must not happen in 2021.

Many economists today warn against a repetition of fiscal consolidation for the foreseeable future. But other academics argue that public debt must not be allowed to dominate the futures of troubled economies. The term “mortgaging future generations” was used as a sort of debate battering ram. Whilst it is true that future generations are been saddled with heavy sovereign debt burdens, this is better than living in a destroyed economy. As GDP rises the amount of money flowing to governments also rises. With fiscal discipline this can be used later to pay down historic debt levels. But not for the next five years.

Public sector economists point out that governments are not like households. They can retire public debt over a thirty to fifty year period. Some governments even sell one hundred year bonds. They could print money to buy back their own debt. And the negative real interest rate on some public debt actually meant that surplus units were paying governments to take their money.

This is all well and good. There is no doubt that official interest rates will remain low for many years. But not for thirty years. At some point debt must be repaid with a positive interest rate attached. But this is unlikely to happen for at least five years. Not even Communist China plans ahead longer than the next five years.

To be relevant, Economics must stay in touch with the real world. When consumers desperately need jobs, the real world is more concerned with unemployment and domestic production than it is with theoretical purity. To continue to push for tax cuts, paying off public debt and the early resumption of free trade seems misguided. As some young people begin to give up on finding a job, economists are failing to come up with new answers. Discouraged job seekers can hold back any economic recovery. Wage subsidies may keep people in the workforce in the short run, but the creation of jobs is necessary to fight off the scaring caused by any protracted unemployment. The scaring of long term unemployment can be devastating. It reduces lifetime productivity and destroys job skills.

Back in 2008 some economists argued for lower real wages and increased productivity. The fact that the real economy bounced quickly out of a recessionary cycle seemed to have justify this opinion. Working poor were given job contracts but only to fill casual jobs. Thus came the rise of the so-called “gig economy”. The hidden social cost of this structural change to labour markets was in terms of the loss of full time jobs as a result of this trend. Wage rates generally between 2012 and 2020 began to stagnate. In 2020 many wage freezes were implemented by governments. As inflation begins to rise in 2021, real wages will fall. But there will be no increase in productivity as long as half the workforce is weighed down by domestic duties. Women cannot be expected to work at home, look after children and increase their productivity. Older workers have been forced to use digital technologies that were not around when they did their job training. To expect them to lift their productivity without retraining is expecting too much too soon.

The third decade of the Twenty-First Century will have “new normal” economic problems that require “new normal” policy solutions. Economists need to look to the future and stop looking back at any “golden age”. They run the risk of being compared with military generals who fight today’s wars with yesterday’s battle plans and tactics. Already in Europe there are signs of a double dip recession. There are a lot of “what ifs” in this analysis but basically it warns that any new lock downs that extend beyond one quarter will drive down GDP. More milder lock downs may cause economic stagnation.

A “new normal” outcome could be defined as one where declines in working from a central office location have minimal effect on consumer demand. It may, in fact, increase consumer demand for certain goods. Some examples might included home office equipment, digital software, baking flour, sanitation products and even toilet paper. Tourists trapped inside their country may begin to travel more domestically. Old road systems may be put under increasing strain as “grey nomads” are forced into long periods of unemployment. In 2021 there may be a end to the long commute for many service providers as consumer demand more locally based cafes and restaurants.

Even the definition of “markets” needs updating. The old fashioned definition was ‘a place where buyers and sellers meet’. But in a pandemic "normal', market places are shut and often people do not physically meet. The world has entered a digital age. People will no longer wait for long periods of time. Access to the internet has changed consumer habits.

The age of “road rage”, mobile phones, social networking and fast foods, is not ready to wait for the “long run” promises of some economists. Consumer preferences insist on multiple uses for new products. Private consumers have ended their long love affair with the old traditional products. Electronic trading has changed the free marketplace for all time. Buyers and sellers now “meet” more often on the internet. Some private consumers buy services using digital “money”. Blockchains are increasingly popular ways of making payments. Physical bank locations are now not necessary.

At the same time, the information revolution has given private consumers more options. The way they research their purchases is changing. In a pandemic, consumers may only use cash to pay for small priced items. Even taxes are now paid online. Phone banking can allow private consumers to do all their financial transactions from their tablet computers. So many purchases can also be sourced online. Economists need to catch up to this “new normal” before the future leaves them behind.

A lot of this will have to be done by a new breed of economists. Most of the present group are either, too attached to their mathematical models, or, too prejudiced to accept any new ideas. Unemployment may be solved by abandoning the Twentieth Century idea of a factory or an office. Young workers are so digitally skilled they can easily set up some sort of internet workplace. Private consumers can now work from home and can be paid by the hours they put in via some sort of digital workplace.

This has largely done away with the rush hour in 2020, saving all that downtime moving to a workplace. The hours loss to a long commute can be redirected to increasing labor productivity. But it has also destroyed the rental office block market. Offices lie idle in cities like New York, London, Paris and Tokyo. The multiple office place model has been broken. From 2021 there may be a shift away from traditional CBD office megacities. But that vacant space must be redeployed to some economic use.

Economics can be the study of chaos! Some economists see chaos as an opportunity and not a disaster. Welfare Economics is sometimes seen as the study of the chaos of greed. Alternatively, it is the study of the chaos of individualism. Whichever view that currently suits the continual boom and bust periods of economic life, that one view tends to dominate welfare economic debate. In a boom, the chaos of greed dominates. People get greedy for higher incomes or bonuses, higher wealth and the ‘get rich quick’ path to happiness. They move from job to job with little thought for job security. Life savings are risked on the stock exchange and in investment schemes.

Yet in a recession, the chaos of individualism dominates. People get scared and begin to look after “number one”. Theoretical economists argue that households are the source of all wealth generation. This means that for economic growth to occur, job security is now paramount! Private individuals seek to protect their income, their wealth and do anything to avoid sliding into poverty. In late 2020, this may mean seeing airline pilots working in restaurants; hotel chefs working in coffee shops and takeaway bars; and taxi drivers working on construction sites. Some economists insist that this is a paradox, but it is also reality. Labour mobility has always been a problem in past recessions.

During deep recessions, as “vulture capitalists” snap up cheap assets, commercial banks continue to pay bonuses. When householders see friends lose their job, they save even more of their income and make things worse for economic recovery. Also businesses begins to hoard rather than to invest. Then unemployment gets entrenched. Redundant job seekers crowd out retraining facilities. Overall the velocity of circulation of money slows alarmingly. There is nothing boring in any of those situations. If not challenged by government actions, this downward spiral can continue all the way to an economic depression. But governments can act to reboot their economies and redirect workers to new opportunities.

The Twenty-First Century has begun with a major change in global positioning. The first noticeable change in positions involves China. By 2010, China had become the second largest economy in the world. China is also the largest net saving country in the world by volume of money saved. Along with Germany, Japan, Switzerland and Singapore; China is the global source of loanable funds. A "new normal' has begun for China's role on global markets. The Chinese Yuan is now also a reserve currency. This has benefited Asian countries and countries that trade heavily with Asia.

At the other end of the scale is the USA. By 2010, the USA was the largest net debtor in the world. As it is no longer the only originator of excessive capital funds, the US financial market has become a terminus for global money. This money flows in from Saudi Arabia, Germany, Japan, Switzerland, Singapore and China into US commercial banks and into US Treasury bonds. Without this money flow, the US economy would be bankrupt. But as a reserve currency, the US dollar can dominate the official reserves of many foreign central banks.

There will be a period of economic chaos as individual countries try to reassert their economic dominance. The COVID-19 pandemic will require continual government stimulus spending to maintain stagnant growth. For example, Germany is trying to reassert its industrial dominance. Yet without its exports to the rest of the world, Germany may fail to reach economies of scale. This was one reason why Germany insisted on an EU rescue plan. The trillion dollar stimulus deal will see grants going to weakened member states. This will require higher EU budget deficits for the next seven years and increased rebates to frugal members.

The USA has an even harder task. Its dominance of the global goods market is being seriously threatened by China. From being the dominant economy of the world, the US economy is at now struggling to stimulate its own economic growth. Political unrest is not helping end this struggle. By the end of November 2020 the Congress of the United States of America had still not agreed on its second stimulus package. Meanwhile the unemployed, destitute and working poor of that great country are hanging by their fingertips. Social costs of this pandemic are going to be enormous. And any economic and social scarring will take decades to heal.

The Professor of Economics at Columbia University and Nobel Prize winning economist, Joseph Stiglitz has criticized the incorrect use of the term “free market fundamentalists”. He also questioned the accuracy of growth measure like gross domestic product. For example, he says that spending to repair infrastructure after some catastrophe like COVID-19 is often counted as a positive contribution to growth. That means that all that spending to restore production in the USA will eventually make US growth statistics look better. At one and the same time, the social costs of this coronavirus pandemic are not counted and do nothing to adjust down final GDP statistics. Professor Stiglitz also pointed to incorrect profit data and poor investment in real estate figures for the US housing market after 2006. Yet some economists expect the 2020 asset disinflation will dwarf what happened to the the asset bubbles caused by the GFC.

The new wealthy of 2020 are the social networking entrepreneurs. They have created wealth from various web engines and from cloud computing. Their net wealth is built up on assets like copyright, patents and goodwill. Free trade deals now protect these assets. Soon this will stop being the exception and become the rule. Wealth dynasties will be created on the internet or whatever eventually replaces it. And a new economic growth phase will arise. But the job creation that accompanies this growth may surprise many governments today. It will not be blue collar workers who find they are being reemployed in the new “roaring twenties” of the Twenty-First Century.

END NOTES:

1 Anthony Hughes from New York (page 12 The Australian Financial Review 20 January 2011). Hughes wrote that the home building industry in the USA showed signs of stagnation in December 2010. He went on to point out that ever since the home buyer tax credit ended (in May 2010) the US housing sector was “depressed”.

2 Liam Walsh “After toilet paper, a new shortage strikes”The Australian Financial ReviewOctober 26, 2020 (page 21)

3 Warren Hogan "Why the price of cheap money will always be too high"The Australian Financial ReviewOctober 29, 2020 (page 47)

4 Heather Farmbrough "How Iceland's Banking Collapse Created An Opportunity"December 23, 2019www.forbes.com

5 Brad Glosserman "Zombie companies feed off the living"The Japan TimesDecember 8, 2020www.japantimes.co.jp/opinion/

6 Leika Kihara and Tetsushi Kajimoto "Japan unveils $954b stimulus to aid recovery"The Australian Financial ReviewDecember 9, 2020 (page 16)

7 Greg Earl article “Taking note of a currency conundrum”The Australian Financial Review January 20, 2011 (page 13) This article is also available from www.afr.com

8 Edward White and Kang Buseong“South Korea's GDP snaps back”October 28, 2020FINANCIAL TIMESwww.ft.com

9 Stephen Roach “Isolating the contagion has China leading US again”The Australian Financial ReviewOctober 28, 2020

10 Joseph Stiglitz Freefall: America, Free Markets, and the Shrinking of the World Economy2010

11 Gavyn Davies “US surge could trigger double-dip recession”The Australian Financial Review July 21, 2020 (page 27)

12 Sam Fleming, Jim Brunsden and Mehreen Khan

13 “EU leaders agree on Euros 750 b rescue plan”FINANCIAL TIMESww.ft.com