As we saw in the previous posting on this subject, the global debt crisis has reached epic proportions. Naturally, this is being blamed on the pandemic, but that ignores the fact that the situation existed long before the pandemic. This “suggests” (to put it mildly) that the pandemic simply exposed the rather large flaws in the existing system and exacerbated an already bad situation.
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| Kenneth Rogoff |
True, the analysis in the article in the Washington Post (“Many Countries Facing ‘Debt Tsunami’,” Washington Post, 01/11/21. A-1, A-18) assumed as a given that the pandemic somehow caused the problem instead of showing up the disastrous weaknesses of the monetary systems of the world. That is, in fact, at the heart of the problem: the “new philosophy of public debt” noted by Dr. Harold G. Moulton of the Brookings Institution that assumes that the problem is not a government deb-backed currency per se, but a badly managed government debt-backed currency.
Nor is Costa Rica alone in its predicament; as the article noted, “National accounts are sinking into the red at a record pace.” As Kenneth Rogoff, a Harvard economist who was formerly Chief Economist of the International Monetary Fund, declared, “I consider the risk to be very high of an emerging-market debt crisis where a lot of countries run into problems at once. This is going to be a rocky road.”
Rogoff seems completely unaware that the economic and financial theories he espouses helped create the situation. The “rocky road” to which he referred did not happen “at once,” as he seems to believe. No, the “rocky road” has been the one virtually every country in the world has traveled since the Great Depression of the 1930s and the domination of the world’s economies by Keynesian economics. The cracks in the wall have always been there, but they were papered over — and the paper was massive amounts of government debt. The foundation was unsound from the very beginning and has been sinking into the swamp for almost a century.
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| Might be a bit more serious than this. . . . |
Of course, making it sound like a temporary situation, even an anomaly, the Washington Post article labeled the situation “cracks in the ice.” It’s a bit more than that, as the article itself suggests:
“A Big Crack in the Ice”
By the end of 2020, total government debt worldwide projected to soar by $9 trillion [U.S.] and top 103 percent of global GDP, according to the Institute of International Finance — a historical jump of more than 10 percentage points in just one year.
In comparison, the total cost of World War II has been estimated as $1.299 trillion. Of course, that is in unadjusted for inflation U.S. dollars, but keep in mind the war was from 1936 or so (depending on how you mark its beginning) to 1945, a full decade. Multiply that $9 trillion by ten and you get $90 trillion.
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| More like this. . . . |
Converting 1945 dollars to 2020 dollars gives us a total estimated cost of World War II as $18.75 trillion, or $1.875 trillion per year, using an inflation-adjusted figure of $14.44 as the value of a 1945 dollar in 2020 terms. In other words, the estimated additional global debt due to the pandemic for one year is nearly five times the total estimated cost of World War II.
Of course, a big part of that is due to the fact that World War II was financed in large measure by taxes, while virtually all pandemic costs were financed by debt. The safety cushion had already disappeared decades ago, so countries had no choice. There was no surplus to draw on in an emergency.
The big question, however, is what to do about it . . . and that is where the current system really has no answer. In the Keynesian paradigm that has ruled the world, if people need something, 1) give it to them, 2) give them money to purchase what they need, or 3) create a “job” (whether or not any useful good or service is produced) to get income to someone.
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| . . . or this. . . . |
From the perspective of the Just Third Way of economic personalism, the issue is not income, but power. That is the power to be productive and be able to take care of one’s self through one’s own efforts, whether we’re talking about an individual, a family, a village, a city, a state, a country, or the world.
This, in fact, was the substance of the final debate between George Bernard Shaw and Gilbert Keith Chesterton in 1927. Chesterton declared that he was talking about power: the power to be productive and to become more fully human. For his part, Shaw asserted that he was talking about income, because nothing else exists.
And that is the basic problem with the global debt crisis at any stage. Consistent with the Keynesian paradigm, production — which is where economics starts — is downplayed, even ignored in favor of consumption. This contradicts what, e.g., Adam Smith considered the first principle of economics. As he stated in The Wealth of Nations (1776), “Consumption is the sole end and purpose of all production.”
The problem is what to do about it, which we will look at in the next posting on this subject.
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