Why the global economy has peaked in the short to medium term
tldr: demographics look bad and global debt is at unsustainable levels
On a Monday morning in the late summer of 1931, the lobby of the First National Bank of Ogden, Utah, was jammed with nervous depositors. Another Ogden bank, older and more distinguished, had failed to open that morning. Prudent citizens figured First National would be next, one more victim of the bank panics sweeping the country. “We can’t break this run today”, Mariner S. Eccles, the forty-year old president, told his tellers. “The best we can do is slow it down. People are going to come here to close out their savings accounts. You are going to pay them. But you are going to pay them very slowly. It’s the only we have to deal with the panic.
All day, as people waited nervously to get to the window, the tellers moved, as instructed, with maddening lethargy. They paid out withdrawals in small bills and paid slowly. They looked up the signatures of everyone, even customers they had known for many years. As closing time approached, the bank was still jammed and tension increased. If the bank closed at the regular hour, scores of disappointed depositors were going to be powerfully angry. If Eccles kept his bank open, it might well run out of money.
Just in time, an armored car arrived at the door, delivering fresh cash from the Federal Reserve’s branch office in Salt Lake City. “As in the movies when the Union Cavalry charges in to save all from the Indians,” Eccles wrote. He made a great show of ushering the armed guards to the vault. Then Eccles mounted a counter to address the crowd:
Many of you have been in line for a considerable time. I notice a lot of pushing and shoving and irritation. I just wanted to tell you that instead of closing at the usual hour of three o’clock, we have decided to stay open just as long as there is anyone who desires to withdraw his deposit or make one. Therefore, you people who have just come in can return later this afternoon or evening if you wish. There is no justification for the excitement or the apparent panicky attitude on the part of some depositors. As all of you have seen, we have just brought up from Salt Lake City a large amount of currency that will take care of your requirements. There is plenty more where that came from.
In truth, Eccles was lying. There was more cash at the Federal Reserve branch, but none of it belonged to Eccles and First National of Ogden. Nonetheless, his theatrics worked, and First National lived to see another day.
The trauma profoundly altered Mariner Eccles and his view of the world.
I awoke to find myself at the bottom of a pit without any known means of scaling its sheer sides
Eccles was Mormon and Republican, reared in the conservative economic doctrines taught by his father: thrift and hard work and free enterprise. As his father himself was known to preach: A business, like an individual, could remain free if only it kept out of debt, and the West itself could remain free only if it kept out of debt to the East
Eccles’ bitter lived experience during the great depression caused him to lose his faith in this simple economic theory. Eccles own analysis lead him to believe that the root cause of the 1929 depression was not inadequate savings for investment, as his father might has assumed, but rather the opposite. There was insufficient consumer demand for the products that America could now make. There was too much money channeled into savings, too little into spending.
As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth- not of existing wealth, but of wealth as it is currently produced- to provide men with buying power equal to the amount of goods and services now offered by the nation’s economic machinery… instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth… by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify reinvestment of their capital accumulations in new plants.
The consequent maldistribution of incomes guaranteed that millions of potential consumers- workers, farmers, everyone who did not earn enough to join the ranks of accumulating wealth- would eventually exhaust their purchasing power.
While the national income rose to high levels, it was so distributed that the incomes of the majority were entirely inadequate and business activity was sustained only by a rapid and unsound increase in the private debt structure, including ever-increasing installment buying of consumption goods.
Eccles solution to this problem was ingenius, and resulted in the political compromise between capital and democracy that preserved the American republic throughout the entire 20th century.
To solve the economic problem of how to get money moving again- how to get money from those who had a surplus (but could not possibly spend enough of it) to those who did not enough (and, out of harsh necessity, would spend money promptly if they got some, Eccles decided that the federal government should borrow money from the few and put it in the hands of the many.
The political institutions responsible for this distribution of wealth is the Department of the Treasury, and that most curious of institutions, the Federal Reserve. The Federal Reserve is in fact the “second congress” of our great republic, and represents the bondholders, the small percentage of American households that controls the vast majority of capital. In times of crisis, the Federal Reserve has and will act in the interests of bondholders, such as when they restored real interest rates to near 7% following the inflationary 1970s. The Federal Reserve’s job is to keep capital holders happy while surreptitiously transferring some of their wealth to the masses.
One of the primary ways this is done is through persistent inflation and the encouraging of home ownership. By subsidizing fixed rate mortgages, the Federal Reserve explicitly subsidizes borrowing by the masses. Better yet, the masses borrow in dollars, and so their debt is inflated away over time. This created the American middle class, not hard work or particularly competent industry.
Unfortunately, the Federal Reserve finds itself in a serious moment of crisis. Challenging demographics and disintegrating social cohesion has made the balancing act between the rich and poor much more difficult to strike. Additionally, housing prices and debt levels have increased to unsustainable levels. The long standing, persistent policy of monetary inflation and low interest rates is also now met with rampant financial speculation, as America repeats the Hunt Brothers crisis in 2021, though with new assets that better capture the imagination of our millenarian zeitgeist.
Put simply, increased debt now greatly damages productivity as it encourages speculative and non-productive investments. Additionally, our once robust demographics are declining. This double whammy of lowered productivity and a smaller worker base poses serious challenges the the Keynesian status quo. Because we can no longer stimulate growth with debt and low interest rates, there is no escape valve for the serious class and racial tensions building up under the surface of American public life. If the civil rights movement was only possible thanks to robust growth, I fear that the flat or negative real growth in the coming decades will result in open violence and collapsing institutions.
The defeat of Donald Trump and restoration of the coastal, liberal consensus seems to indicate a stabilization of American politics, but this could not be further from the truth. In reality, the election of Joe Biden is simply a “circling of the wagons”, a desperate attempt by the disparate tribes of the Democratic party to nominate someone electable. If real growth does not accelerate, and it won’t due to the aforementioned debt and demographics problem, it seems likely that Generation Z will elect even more extreme political platforms in the future. Much as ISIS was a terrifying return to pre-Saud state raiding, it seems likely that future generation will degenerate ever backwards unless technological progress dramatically improves productivity in the next century. However, this growth has to come soon, before demographics doom us, and additionally we have to squash a fear of technology that’s clearly been cultivated in our culture (show me a sci fi story written after 1980 that isn’t a dystopia. You can’t).
In short, we are probably fucked.