I’ve become quite disquieted about the state of the economy.
I’m something of an economic pessimist. I’m not willing to write off society, humanity (though I’m certainly not a sunshine and rainbows type there), and technological progress.
But I’ve always been leery of the economy, and there are a lot of events going on right now that look really bad.
I’m going to talk about what they are and what I think people should expect, though who am I but some random person complaining on the internet?
My Prediction and Why
I’m not necessarily predicting a massive economic catastrophe. I don’t think we’ll see people shooting each other in the streets (at least not on account of the economy), investment bankers jumping from skyscraper rooftops, or mass starvation in the developed world.
But I think that we should expect to see a number of immediate and sharp negative downturns that have three effects:
- Savings become essentially useless, as the interest rate is well below both currency inflation and the felt effects on real prices.
- Any plan for future action based on long-term contractual arrangements will need to be lucrative to be worth taking (e.g. annual salaries will need to be adaptable).
- People without a sophisticated economic background are going to have major difficulties adapting to changes in costs and wages.
My prediction is not necessarily a Weimar Germany or a Venezuela, but rather a severe form of inflation that results in a 50-75% annual devaluation of currency that cannot be mitigated by technological innovation driving down the costs of goods. I would expect to see something like a 5% monthly reduction in purchasing power start within the next six weeks, if it has not already begun.
Cause 1: The Sick Man of the Americas
The United States is the sick man of the Americas.
Our fiscal policy has been essentially a perpetual pursuit of indebtedness, and our revenue policy has been the devaluation of our currency via printing alongside taxation rates that have become sufficiently punitive to discourage future work.
Combine this with welfare policies on account of the pandemic that make it more beneficial for low-skill workers to choose the short-term benefits of unemployment (which works out to about $16/hour at the current rate) over the equivalent employment.
From a practical perspective, people don’t need to be lazy or parasitic to choose this option. A single mother who can make $16/hour and still take care of children is making an entirely logical decision, and while there is some moral hazard in becoming a ward of the state and a burden on taxpayers it is difficult to insist that people struggling to support families take work for less than the rate of government benefits, since doing so would be against their interests!
There is some case to be made for the long-term benefit of having work as a tool to further develop oneself for future gainful employment, but this is unlikely to be the case because of the social stigma surrounding low-skill jobs (despite the fact that the character traits developed by diligent work are as valuable as technical expertise in many fields).
Even if this were truly temporary, and it seems unlikely to come to a grinding halt soon, it will still have rippling effect due to the loss of production and skill development it has brought about.
There are other social and political problems facing the US, but the mismanagement of the currency is enough to relegate all of them to irrelevance. There is only one other factor I consider important within the US domestic arena.
Cause 2: Energy Costs
We are heading into summer. Last year there were major issues with the US power-grid during this time of year due to load issues, and I suspect that we’re going to see that this year too. The consequence of this is that providers will likely increase prices as much as they can to mitigate demand, since the supply is hitting its finite limits.
Meanwhile, a fuel pipeline shutdown has caused shortages in parts of the Southeastern US, and this comes amid already rising prices for unleaded gasoline and diesel fuel.
This means three things will happen.
- Shipping and transport becomes very expensive, especially if shortages mean that long-distance transportation becomes subject to drivers and loads getting stranded.
- The demand for power for climate control (refrigeration, air-conditioning) will cause money that people would have spent on other things to instead be spent on utilities.
- The combined effects of expensive transportation (which leads to expensive physical goods) and expensive energy (which reduces household money supply due to expenditure on utility) have a radical negative impact on consumer purchasing power.
Combine these phenomena with legal restrictions and supply issues surrounding fossil fuels and a chance for major economic consequences seems inevitable.
Cause 3: International Conflict
Right now there are two major international crises.
In France, a majority of citizens predict a civil war within a year’s time.
In the Middle East, a new conflict is brewing between Israel and Palestine.
Neither of these things are guaranteed to escalate, but the mere belief in future problems can cause economic catastrophe. The human suffering these conflicts cause will not be limited to the battlefields they take place on or the combatants who engage in them.
Europe is a major trading partner for the US. While Germany is the dominant economy in Europe, the French civil war predictions are predicated on social issues that also exist across the Eurozone and there would be major damage done to all economies in the region if fighting broke out.
Israel and Palestine are both US clients, and the Middle East is filled with US-aligned interests and oil producers. Combine this with already elevated energy prices, and there is a real danger for a regional conflict to have major conseqences globally.
Cryptocurrency, An Indicator
I suspect that the rises of cryptocurrency value (barring the memes behind bitcoin, ethereum, and dogecoin arbitrarily inflating their value) are an indicator of the devaluation of money.
These cryptocurrencies aren’t really money, and they’re not really money substitutes either. They’re investments that function like real assets.
Which means that their price going up is the result of two things (outside the memes):
- The devaluation of the currency via inflation (the printing of money to expand the supply of circulating currency)
- The increased demand for a flight to “real” assets
The latter case is worth treating with some skepticism, since cryptocurrencies are intangible and are likely not going to be exchanged as an emergency currency unless there is still a more or less intact economy to permit them to be redeemed for goods and services with a reasonable confidence that this exchange behavior can be repeated at a future date. Compare to specie, consumer goods, or real estate, and cryptocurrency is not as ideal for these purposes.
I might be unduly pessimistic, and I don’t necessarily want to come across as dismissive of cryptocurrency. Its functional role as a transaction processing tool has intrinsic value, it’s just not clear what that value is and brighter minds than mine need to take a serious and disinterested look at it.
I just think that the majority of the increase in its price is due to the desire to have it stemming from memes and the fact that currency is becoming less useful elsewhere.
Does this Hurt Everyone?
People who use the US dollar as a reserve currency (the US dollar makes up about 60% of international reserve holdings) will suffer whatever loss of value the dollar suffers based on the relative proportion of their reserve holdings.
The economic fallout of a decrease in US productivity will also be a factor in future economic productivity, and threatens to have major impacts on world trade.
Further, the US is a food producer. The US is an intellectual property exporter. The US has all sorts of industries and businesses that prop up the rest of the world, and winding up with a massive economic collapse here means ripple effects throughout the world.
I do not know that a collapse in the US economy would make the US less of a global superpower. The fundamental reason for this is that the poor decisions made in the US are also being made anywhere else that would seek to step into the gap, most notably within China (a country that uses rape as a form of torture).
The Crack-Up Boom and Flight to Real Assets
Something Austrian economists predict is called the crack-up boom.
In basic terms, the crack-up boom comes as a result of bad fiscal policy and fiat currency interacting to cause a loss of confidence in the money supply.
We can understand this as a complete loss of faith in paper money.
The consequence of this is that there is an infinitesimal demand for paper money, and a massive demand for goods due to the increased difficulty of acquiring them.
We can call this the flight to real assets. It’s distinguished from a flight to money substitutes (e.g. cryptocurrency) because many of these money substitutes lose value as well; an economic collapse comes with a loss of function in multiple sectors, and the goal is to have useful things on hand more than it is to have things which can be traded for useful things.
Without a stable currency, the incentive to transport goods falls, and barter becomes less useful.
But Don’t the Austrians Always Predict a Crack-Up Boom?
Yes. Since the turn of the century, there has been a massive wave of predictions of the complete collapse of the US dollar.
This comes from a variety of different schools of thought.
It is worth noting that some of the people who promote the crack-up boom theory have a vested interest in other things. If your goal is to sell gold or silver, since specie is valuable, you want to push the idea of an imminent inflation of the currency.
One thing that the Austrian economists have right is this: the dollar’s value is a matter of faith. It’s been heavily abused over the past century, and different people find different last straws.
What the Austrians are predicting is not some econometric phenomena, but rather the loss of faith in the US dollar.
So long as the US has been willing to take actions to ensure that the dollar is valuable, both through backroom deals and foreign policy and by making statements that people still believe about the security of its currency, the dollar can be used as a means of exchange.
For instance, it does not matter that I think that the dollar is no better than the money found in the children’s board game Monopoly. It is, ironically enough, literal monopoly money (since it is legal tender for all contracts within the US), but this is not how it gets its value.
I can still go out and exchange my dollars, which I have no desire to hold, for something that I want.
When that changes, we hit the crack-up boom stage.
Why is it Called a Boom?
The reason why the crack-up boom is called a boom rather than a bust is that the boom is an artificial invention of inflation (see the Cantillon effect for the economic phenomenon at work).
Basically, worthless money has been entering the economy, but has been treated as equally valuable to originally valuable money. Ignoring the fact that the fiat currency we use has no actual value, in the sense that it cannot be redeemed for specie or real goods other than by exchange to others as a token of value, the newly printed money moves ahead of the realization of the implications of its printing.
The implications of this fake money are several, but the most important one is that it becomes easier to get money. The crack-up boom occurs when money is functionally non-scarce; when it hits the point where anyone who wants money can have as much as they desire (in an arbitrary sense, since people may desire it for purposes like the insulation of walls or as an ersatz toilet paper in a move which speeds up the collapse of plumbing infrastructure).
For a while, though, people are able to get this money more easily but have not yet adapted to the realization that money is more easily obtained. Consumer goods become more readily available to more people, at the cost of an eventual bust.
The crack-up boom is just the period of mania that precedes the bust.
Go back to the gold standard. Or the silver standard. But start using some specie for exchange. People will be able to sort this out in and of itself, since they will simply choose to use whichever mode of exchange they see fit.
Specie is ideal because it is divisible, stores well under habitable conditions, and likely to retain its value across time. That sets it apart from most other options.