COVID-19 can kill off crony capitalism, if we let it

The Globe and Mail

Jeff Booth is the author of The Price of Tomorrow: Why Deflation Is The Key To An Abundant Future.

The economic system we have relied on is breaking down.

Amplified by COVID-19, society is on a collision course that most are not even aware of, caused by two competing forces moving in opposing directions: the exponentially deflationary aspect of technology and an inflationary monetary policy trying to overcome it.

Today, through a simple cellphone and set of interfaces, people have more power at their fingertips than leaders of most countries had only 30 years ago. Technology has changed our lives so much that we take it for granted; we get frustrated when, say, our WiFi won’t transfer in two seconds what would have taken us 20 minutes in the year 2000. Today’s fourth-generation wireless is, on average, 100 times as fast as a dial-up modem two decades ago — and 5G will soon make that feel slow.

Technological advances have swept across society and they have been hugely beneficial. Your smartphone provides a compelling example. Invented only 13 years ago, it is no longer just a phone: It is your camera, assistant, map, music device, guitar tuner and hundreds of other applications that you no longer pay for. When we use technology, we gain efficiency, and with more abundance should come less cost.

That efficiency will reshape our future, across every industry, from automotive, to agriculture, to energy and to health care. In doing so, technology will deliver better outcomes at a lower price.

If technology makes everything cheaper and more abundant, and it’s moving into every industry, it is logical to assume that prices should go down and society should enjoy increasing benefits everywhere. If our economic systems were designed that way, we might be able to enjoy a similar lifestyle to the one we have now while only working 15 hours a week, as John Maynard Keynes famously predicted in his 1930 essay The Economic Possibilities for Our Grandchildren.

That logic, though, defies current economic theory, which has us on a growth and inflation trajectory that must never end, at all costs. The facts of a new reality — that prices should follow a downward trajectory gained from the efficiency of technology — means that today’s policy is at odds with technology’s growing influence over our economies.

Instead, central banks and governments continually bail out the existing system — not driven by desire, but out of fear that letting the system fail and go through a disorderly unwind is a worse alternative in a set of bad choices. Society is thus forced to run on a treadmill, working more to support ever-higher prices, which have themselves been inflated through monetary easing, artificially low interest rates and bailouts. Enriching some while impoverishing many others.

A financial system based on credit is just an exchange of money today for money later. If I give you dollars today, I temporarily lose the utility of my money in exchange for having more later; you would get the inverse, which is the benefit of more money today and less tomorrow as you pay back the loan with interest. This system works on trust: that you will pay what you said you would pay. While you may look wealthy for a time by spending more of tomorrow’s dollars today, eventually that bill comes due — which means that in the future, you must spend less as you pay back the loan with interest. This is always the case, whether that trust is in a person, company, or government. Remove trust and it affects the creditworthiness of an individual or company, and they can be forced into bankruptcy. Remove trust from a system, and it can unravel very quickly.

Yet, since 2000, the world has been using a lot more credit to achieve growth, adding US$185-trillion of debt to achieve US$46-trillion of global growth a year.

All of this was the case even before our current crisis, which has seen an explosive rise in debt while the economy shrinks even more. In itself, that debt burden must slow growth in the future because taxes will need to go up on the range of industries and households that will have to pay for it.

In their desperate effort to achieve growth and inflation, central banks and governments — through artificially low interest rates and monetary policy — have only created more pain. Incentives designed to make cash less valuable and encourage more spending reduce savings and encourage individuals and companies to take on additional debt.

For the wealthy and those with assets that were artificially boosted by years of this kind of leverage, that has played out well. Assets, including real estate and stocks, were the beneficiaries, and before the pandemic, they had run up in value far beyond what they would have been without the easing. But for every person on the winning side of those decisions, there are many others on the losing side. Their costs of food, shelter, gas and health care are rising because of policies designed to make their cash and wages less valuable. Assets that they don’t yet own are running away in price and they are feeling the squeeze of a system that no longer works. It is no wonder that societies all over the world face a rise of anxiety, anger and populism.

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Source: Jeff Booth | The Globe and Mail

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