Thursday, June 4, 2020

Are We Heading Into Another Depression?

The title to this post comes from an op-ed written for the Financial Times by former World Bank president Robert Zoellick.

In the essay, he gets it right when he points out the massive Federal Reserve money pumping (though he is technically off a bit by focusing on the Fed balance sheet rather than the actual increases in the money supply).
While 2020 has been an unusual year to say the least, I would argue that financial market behaviour has been quite predictable. The pandemic led to a sharp drop in the market, record unemployment and, tragically, 100,000 deaths thus far in the US. But it also prompted policymakers to respond with unprecedented support. The US Federal Reserve is now on track to expand its balance sheet by 38 per cent of gross domestic product over the next 18 months to $12tn, or twice as much as it did after the 2008 financial crisis. We project that fiscal spending plans will result in US deficits this year approaching 25 per cent of GDP, a level not witnessed since the second world war. 

Money supply is now growing, as I report in the EPJ Daily Alert, on a 13-week annualized rate of 40.5%.

This is probably the most irresponsible money supply printing ever done by the Federal Reserve.

It blows away the money printing done by Ben Bernanke during the Great Recession and the great money pump of Paul Volcker after he reversed his tight money policy in August of 1982. 

There is no way that we don't end up with a major acceleration in price inflation within a few short months with this kind of money pump.

It will, in a way, prevent a depression once the lockdown is over but the ultimate cost of Fed money manipulation will be the strong price inflation which could then lead to a business cycle downturn and stagflation.

So what is  Zoellick's policy advice?

To avoid an immediate depression, he wants more mad money printing coming indirectly through global bankster-controlled organizations.
Today, flexible exchange rates are the new orthodoxy, so that is not a constraint. But availability of dollar finance is. Unless institutions such as the IMF and the IADB sharply step up their lending, a new wave of debt defaults could make it the 1930s all over again. 
No, the halting of money printing won't set up a 1930s scenario. To the degree there are debt defaults, the debt just needs to be renegotiated. We live in a world of very sophisticated debt resolution practices.

The prolonged Great Depression of the 1930s was not the result of debt defaults, those could have been worked out even back then, it was government interventionist policies that prolonged the national economic nightmare for more than a decade, see:  America's Great Depression by Murray N. Rothbard.


1 comment:

  1. Rothbard's historical analysis in _America's Great Depression_ ends in 1932 along with the end of Hoover's term. To get the whole story of how the depression lingered all the way to the end of WWII because of interventionism, I suggest the various treatments of "regime uncertainty" by Robert Higgs. A free download of one is here: