Ambrose Evans-Pritchard has written an article on a United Nations report on debt and default.
He is a Keynesian. He worries about deflation. Deflation is the ultimate negative sanction in his view. Like all Keynesians, he does not understand the healing effects of deflation.
But I read him because he provides data on the fragility of today’s debt-based Keynesian economy. What he fears, I look forward to the day of reckoning on debt, which is the bastard child of central bank inflation and government deficits. Like an unwed couple, Keynesians want to continue the liaison, but without negative consequences. There are always negative consequences.
The third leg of the world’s intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.
The Jubilee was Mosaic Israel’s mandated year of return to the land distribution of the original generation of the conquest. It applied only to rural land. It did not apply to real estate in walled cities. The heirs of the families of the conquest got back their land. The larger the families, the smaller the parcels. The law also liquidated all debt, including commercial debt. This was supposed to happen every 50th year. There is no evidence that this law was ever honored.
It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.
The Bretton Woods institutions are all a bunch of interlopers. Bretton Woods died on August 15, 1971 when Nixon killed it. The Bretton Woods system rested on the gold exchange standard. The dollar was redeemable in gold by central banks at $35/oz. Without this limit, the U.S. central bank could inflate at will. The federal government could run massive deficits financed by monetary inflation. That is why Nixon did it, and the FED responded as planned. The USA got the worst peacetime price inflation in its history.
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The liberals in the IMF and World Bank rejoiced. So did politicians. So did Keynesian economists everywhere. No more pseudo-gold standard. “Free at last! Free at last!” Free to inflate. Free to run massive deficits.
The bills are about to come due. Now we hear a new phrase. “It’s just not fair!” Ambrose Evans-Pritchard shouts this with gusto.
“Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD).
Notice the limit: corporate debt. Not government debt. Government debt is always healthy in the view of Keynesians. There can never be enough government debt. They are apologists for the next round of government debt. But corporate debt — that’s dangerous.
We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.
But how did these rates come into existence? By central banks, that pursued zero rates after 2008 to stimulate the economy. This was done to encourage more borrowing by governments and businesses.
Much of the money was wasted, skewed towards “highly cyclical and rent-based sectors of limited strategic importance for catching up,” it said.
Of course, the money was wasted. Whenever any scarce resource is treated by the government as a zero price asset, it will be wasted. That has been the free market economists’ criticism of all government intervention for over a century.
What is a “rent-based sector.” That is econo-speak for people who pursue income based on government intervention into the free market. People seek government guarantees of income.
In the field of debt, this is the carry trade. The central bank forces down short-term rates. In the USA, this means the rate the Federal Reserve pays on excess bank reserves. Other short-term rates follow. Then big money investors borrow short at low rates and lend long at high rates: bond rates. They get free money: the difference between the two rates. They can be wiped out if short-term rates rise. They get caught in a massive squeeze. But in the meantime, they make hay while the sun shines. They seek those bond yield “rents.”
Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the “profit-investment nexus” that ultimately drives growth and prosperity.
Nobody is willing to cope with the consequences. That’s the foundation of all Keynesianism. It is the world without negative sanctions, only positive ones. The big one — the ultimate one — is massive debt that can no longer be funded.
That is what critics of Keynes have said ever since 1936. Keynesians have laughed in derision.
