Imagine
being prime minister of a near-bankrupt nation. What drastic measures would you
take? Suppose all forms of debt –
governmental, personal, commercial and financial – were at record levels and
could no longer even be serviced, let alone settled. Taxes were already
prohibitively high; squeezing the rich would induce massive capital flight to
safe-haven dominions; while even the merest hint of substantial public spending
cuts would dump you out of office in an eye-blink. What would you do?
If
it were a sovereign nation, in control of its own (fiat) currency supply, you
might opt to print paper money out of thin air. However, if this had already
been tried, and failed, as a desperate attempt to bail out insolvent banks, you
might be reluctant to repeat the exercise. Indeed, the main effects of the
policy were inflated house prices and an overvalued stock market.
What
if, though, a second blast of ‘funny money’ could be injected directly into the
economy, as opposed to using it to blow up asset bubbles? This so-called
‘helicopter drop’, of perhaps a year’s average salary, could be credited to the account
of every taxpayer. Personal debt could then be reduced significantly, and those
with none would be encouraged to splash out on more consumer goods. If only it
were that simple. Producing vast quantities of (unearned) paper money would be
inflationary, perhaps hyperinflationary, and ultimately ruinous. Thus, your
choice would be: printing, leading to hyperinflation Zimbabwe-style; or not
printing, allowing a deflationary spiral to fuel mass unemployment. Severe
civil unrest might result from either.
So,
what else could you do? You might choose to cut interest rates – all the way to
zero – in order to make debt-servicing possible. What if, however, they already
were close to zero, having been so since the previous financial crisis only seven
years ago, when public debt was only half its current level? What then,
particularly if this cheap money tactic had facilitated not a reduction of debt
but a reckless expansion of it? Well, how about introducing a negative interest
rate policy (NIRP), where banks would charge interest on deposits? This might,
at first view, sound fanciful; and a rational public would immediately withdraw
their funds, stuff their mattresses with cash and create runs on all high
street banks.
Given
that potential outcome, perhaps panic withdrawals could be outlawed. The
outright abolition of cash, leaving only digital bank account credits, would
preclude any such crisis. After all, card purchases now account for the
majority of current account transactions. Individuals would at least have a choice:
leave their money in banks and allow it to be taxed (stolen); or spend it the
moment it is credited to their accounts. Additional consequences of cash
abolition would be that all monetary transactions could then be recorded by the
State, and any financial usage unapproved by the State could result in funds
being sequestered. Increased social control would make policy
acceptance more likely.
There
is another possible strategy which could operate in tandem with the aforesaid
NIRP. Economic activity, measurable by gross domestic product (GDP), could be
increased simply by population growth. More people means more total spending –
and ever more borrowing. Such growth would, though, need to be significant and
ongoing. A 0.5% annual population increase would create a mirage of steady
economic growth, so long as it could be maintained. For example, a nation with
a population of 60 million would require a net rate of immigration of 300,000
per year, every year, to increase the GDP statistic continually.
Such
policies might, if good luck prevails, maintain a notion of prosperity in the medium
term. This illusion of economic health and normality could fool the majority of
a nation’s population, especially if they were sufficiently financially
illiterate, enslaved by debt and had no independent medium of exchange.
In
the long term, alas, just like the Wizard of Oz, you would eventually be seen
for the illusionist that you were (Figure 91.1). By that time, the catastrophe
would be someone else’s responsibility; and only then would the enslaved, indebted
masses realize that their collective fate had been sealed many years before.
Figure
91.1: Frank Zappa (1940-93)
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