In an earlier column, I reflected gloomily on the terminal debt crash that the world is likely to suffer around 2040, and on the possibility that productivity growth is slowly disappearing. If those hypotheses are true – and I would not claim them as more than probable — then we will return in our economic management to the last period before industrialization brought perpetual progress – the 17th Century.
We have grown used to living in an environment of perpetual economic growth, and our policies have adapted to it. We in the West are very rich indeed compared to our ancestors, and we assume our relative wealth will continue, perhaps widening to a broader proportion of the world’s population, but never being seriously knocked back. The debate revolves primarily around whether we should devote a greater proportion of our wealth to fighting “climate change” or other potential environmental catastrophes.
As I suggested in a previous piece, that may be over-optimistic, for two reasons. First, through decades of interest rates being set far below the market-clearing level, we have built up an enormous amount of debt, personal, corporate and above all public sector. If that debt pile finally becomes unsustainable, which I have suggested may happen around 2040 (albeit with previous debt crises like that of 2007-08 before then) then most of the world’s capital stock will be wiped out, as will the ability to borrow, the banking system and the value of “fiat” paper money. The last century in which borrowing was truly difficult was the 17th — I explore below the implications of this.
Second, our living standards for the past two centuries have been sustained and steadily improved by a rise in productivity, year after year. Productivity’s rate of increase may have peaked in the quarter-century after World War II (we do not have official figures before that date) and has been declining more recently, falling close to zero during the regulatory excesses of the Obama administration. From examining international data, artificially low interest rates have also contributed to the recent decline in productivity growth; such low or even negative rates encourage “malinvestment” in unproductive assets, which crowds out healthy investment in assets that contribute to long-term economic well-being.
Professor Robert J. Gordon, in his 2016 “The Rise and Fall of American Growth,” postulated that productivity growth would fall to zero, as the easy advances in human capability had already been achieved. At the time of his book, I believed he was unduly pessimistic, and that the election of a President with a commitment to deregulation, balanced budgets and the return of interest rates to market levels, would restore U.S. productivity growth to its historic levels, possibly with an element of catch-up. Regrettably, President Trump checks only 1 out of 3 of those boxes. Therefore, after a strong recovery in the first two years of his Presidency, the latest BLS labor productivity growth figure, at minus 0.3% for the third quarter of 2019, suggests that declining interest rates have caused a return to growth anemia.
If over the next 20 years we get a series of Presidents committed to foolish monetary “stimulus,” unbalanced budgets and, worst of all, economically disastrous “climate change” regulations, then productivity growth will fall to zero and stay there, or even go long-term negative. In 2040, not only will we be poorer than we are today, but we will have forgotten how economic growth is produced. In other words, in terms of growth as well as borrowing capacity, we will be back in the 17th Century. With a global debt default and a productivity blight, we may not immediately return to 17th century standards of living, but we will regress a substantial part of the way, perhaps to the living standards of 1925. Regrettably, since we now have all this tech rubbish, we will be able to afford fewer Stutz Bearcats and coonskin coats!
Since we are heading for a global debt default, of an extent that breaks the global debt markets, we had better prepare for it. Following the default, investors (to the extent there any left) will buy only debt of first-class corporations with sound balance sheets – if there are any of those left. They will not buy consumer debt; most of the consumers will have filed repeatedly for bankruptcy (to the extent they can) and with the banking system collapsed, that universally useful payment method, the credit card, will also disappear.
Investors will certainly not touch the debt of bankrupt governments, whose expenditure will be far greater than their income, which will have been shrunk by the global economic collapse. Nor will they invest in “money” printed by those governments or their tame “central banks” – the experience of hyperinflation will be too recent and too painful, so the “fiat money” Law/Keynes confidence trick will no longer be possible.
Essentially, governments will be in the position of King James I’s Britain, which after the expensive and lengthy Elizabethan war with Spain, was able to afford almost no government expenditure. Not only will government not be able to run deficits, but many functions of government now considered essential will prove impossible to finance, either through tax revenues or borrowing. Fiscal “austerity” will be needed, at a currently unimaginable level; the only successful example of such severe austerity was that of the second Earl of Liverpool and Nicholas Vansittart, cutting expenditure by 69% in 1814-17. One must hope that statesmen of this caliber appear when they are needed; there is certainly no sign of them currently.
It is not a coincidence that Thomas Mun wrote his “England’s Treasure by Forraign Trade” at the end of James I’s reign. For him, the central problem of Britain’s government, and of its economy in general, was the extreme scarcity of “Treasure”, by which he meant gold and silver.
At that time, the most common way of increasing government revenues was to conquer somewhere, either a nearby territory or a “New World.” That had brought Spain untold wealth in the sixteenth century, but it over-expanded, settling most of Latin America, thereby wasting the resources of the Potosi silver mines. Louis XIV tried the same approach, late in the 17th Century, but confined himself mostly to conquering his equivalently-armed neighbors, thereby making the process impossibly expensive. The richest 17th Century ruler, whose success had been gained by generations of conquest, was the Moghul Emperor Jahangir (ruled 1605-27, so a contemporary of James I) who is said to have had an annual revenue of £100 million, compared to James I’s revenue of well under £1 million.
Unfortunately, Jahangir and his successors failed to invest their exorbitant revenues in economic development, while their extortionate taxes over time impoverished their subjects. Consequently, while their buildings (notably the Taj Mahal, built by his son Shah Jahan) were exquisite and their collections of precious stones probably unparalleled in world history, their empire lasted barely 200 years (precious stones being notoriously easy to loot, notably by the Persian sack of Delhi in 1739), with few intellectual or scientific triumphs to its name.
Mun had a better idea, just as exploitative in some cases but less warlike. By developing sources of addictive products such as tobacco, sugar, tea and coffee, which could be sold to European markets, Britain could generate a revenue base that, while nothing like Jahangir’s, was competitive in European terms for a fairly small island.
For governments of the 2040s, lacking the easy pickings to conquer of Spanish America and Mughal India, developing trade items that customers demand will be the only way to pay for government. Such a method will certainly cause less economic damage than James I’s own favorite financing mechanism – selling monopolies in selected items. The New Soap monopoly of 1632 was potentially lucrative in principle, but in practice, even though it was shown that the New Soap “washeth whiter,” a dismal failure. That failure, and the suppression of other unlicensed soaps, produced a regrettable increase in the pungency of the lower orders, which became a significant cause of the English Civil War. In any case, the best-laid schemes of mice and Mun would not finance welfare states or the National Health Service.
Governments will no longer be able to print money and receive any value by doing so; they will thus have to bite the bullet and return to the Gold Standard. The more tech-minded among them may try to launch an Official Crypto-Currency, but there will be no more appetite by then for the productions of tech geniuses than for those of bankers.
The revived Gold Standard will unquestionably be awkward in practice. If the gold New Dollar is set at the size of the old sovereign, it will be worth some $350 in today’s money. That makes it usable as a store of value, but cumbersome as a means of exchange. Fortunately, an 18th if not 17th Century solution exists for this in the “cartwheel” copper coinage produced in 1797 by the steam presses of Boulton and Watt under the direction of the first Earl of Liverpool, the prime minister’s father, then President of the Board of Trade. Britain had just been forced by the war to go off gold, but workers would never accept payment in paper – they had all heard of the “Continentals” and the French “Assignats,” both of which had resulted in hyperinflation. So, Daddy Liverpool created copper coins of one and two ounces, issued at their bullion value of one and two pence. As he wrote: “This Coin will certainly be very bulky and heavy, but I doubt much, whether this would be any Objection, to that Description of People, for whom the Coin is principally intended.”
Today’s “cartwheel penny” would be worth $0.16 in bullion value, or perhaps $0.20 including the cost of minting. That gives ample granularity for retail transactions, although in most cases the payment would weigh more than the goods purchased. The only problem then would be giving change; the copper coins to the value of a New Dollar would weigh 134 pounds!
That will be just one of the inconveniences of continuing for the next 20 years with current economic policies.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)