The Great Inflexion

Ed Lander
The New Economics Forum
5 min readSep 26, 2021

This is my first article on Medium specifically about economics. Whilst I’ve written extensively about economics in the past, my publications on Medium have largely been focused on the environment, specifically climate change, and also political crises. However, underpinning environmental mismanagement and politics itself is economics — it is the force of the markets, of supply and demand, of currency inflation and deflation; it is the domain of economic crises, debt bubbles, credit crunches and sovereign debt crises.

At the time of writing, and in the wake of the 2019 / 2020 COVID-19 pandemic, we’re starting to see some growing pains in the global economy. As demand is increasing once again, supply is lagging, largely due to COVID-19 mitigation inefficiencies, but also due to genuine lasting impacts of the pandemic on working people and health services around the world.

One such crisis we’re currently witnessing is the European gas price surge. Europe has long been an importer of natural gas, very much reliant on the Russian Federation, and the quite marked increases in gas prices we’re currently seeing are one sign of post pandemic inflation. Whilst some commentators say that the high natural gas prices are artificial, driven by a lack of will to supply [1], there is also the case that this is a generalised issue of inflation in the wake of historic amounts of government stimulus to stave off the worst effects of the pandemic and its effects on livelihoods.

Gas prices from 2016 to 2021

And let’s not forget that energy prices underpin all prices in the economy — transport costs feed into prices in the shops for goods and services; costs of electronics goods feed into the costs of running Internet and data companies, such as Google, Amazon and Facebook; and of course domestic energy bill increases reduce demand for all goods and services in the economy.

But the aspect of the economy I want to draw attention to with this article is the act of government stimulus itself. In many cases, the United Kingdom included, government stimulus comes effectively in the form of money printing, where the central bank creates new money to buy government debt (or bonds). This is formally known in economics as quantitative easing or QE, and has been proven to exacerbate inequality, through driving inflation.

Since the Great Financial Crisis of 2008, government central banks have struggled to increase interest rates, and they have largely stayed close to zero, or in some cases even gone negative. The COVID-19 pandemic brought even more shocks to the economy and interest rates were largely reduced, where possible. Perhaps the fundamentally most worrying aspect of the current monetary paradigm, is that it is estimated that as much as 98% of all money in circulation is debt, created in the form of loans. This creates headaches for central bankers, as they are perpetually fearful of a sharp contraction in the monetary supply, also known as debt deflation. As a consequence most central banks target a positive rate of inflation, typically around 2%.

But what does this mean for ordinary people? Well, it simply means that any savings are perpetually debased, and any fixed salaries are continuingly losing purchasing power. This includes pension fund pay-outs. It also means, conversely, that all existing loans are continually, slowly decreasing in severity over time. In other words, it’s a Ponzi scheme that disincentives savings and encourages people to take out loans, and is arguably a key driver for global inequality, which only continues to exacerbate.

So this goes some way to explain why the world is drowning in debt. We have businesses who are indebted, we have governments who are heavily indebted, and we also have ‘consumers’ who are, in large, heavily indebted, with mortgages, car loans etc. Everyone is in debt. But to whom? Well, largely central banks and private banks.

And this is where I want to return to current events. Ordinarily, to combat inflation, governments will get their central banks to target higher interest rates and slow down debt accumulation. They also will act to limit existing stimulus programmes, such as winding down targeted stimulus programmes, like those created during the COVID-19 pandemic. However, if the underlying economy is so anaemic, then it becomes difficult to wind down the stimulus programmes and runaway inflation is a very real consequence …

And so why is this relevant? Well, we’re currently seeing the beginnings of a complete failure of the second largest property developer in China, Evergrande. Evergrande is estimated to have over $300bn of debt, and has been accused of some very creative accounting, running a very risky business model propelled by massive amounts of borrowing. And as the housing market in China starts to cool off, after many years of boom and investment, it looks like this could be the moment the Chinese property bubble popped. And this is significant, as it echoes in many ways what happened in the United States in 2008, where epic levels of fraud and malfeasance were uncovered as the property market tanked …

And this doesn’t just have implications of economic difficulties and social unrest inside China — one area of economics and business that economists like to talk about is ‘moral hazard’. Moral hazard is simply the idea that incentivising risky behaviour only results in more risk being taken on, and as a consequence, you end up with highly volatile markets. Linking things together, there is currently much speculation about how the Chinese Communist Party will deal with the Evergrande collapse, either following a model based on the failure of Long Term Capital Management, demanding a private bailout, or the 2008 crisis, where the public purse was raided to bailout the banks, deemed ‘Too Big to Fail’. Either way, the failure of Evergrande will send shockwaves throughout Asian markets and likely reverberate around the world.

So, in the wake of the COVID-19 pandemic and as the global economy struggles to get off its knees, it looks like Capitalism itself is in crisis, and the only way forward is to rethink and reimagine all aspects of the economy, particularly monetary policy, and especially in mind of the climate crises that looms large in the background and will demand a lot of attention, investment, innovation and adaptation.

[1] And perhaps an opportunistic attempt by Gazprom to get the European Union to approve the Nord Stream gas pipeline (a direct link from Russia to Germany, bypassing the Ukraine)

--

--