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Writing in this morning’s ‘Telegraph’, arch bear Ambrose Evans-Pritchard claimed that central banks are creating a new gold standard. Meanwhile, in Germany the country’s Finance Minister Wolfgang Schaeuble gave a stark warning about the rising levels of debt in the US, the UK and Japan. The move towards gold and the reaction against debt is one of the most dangerous trends seen in years.


Consider this equation:  D=S. It is nice and simple isn’t it? D stands for demand, S stands for supply. To have growth you need both to rise.

Supposing we have lots of innovations, but demand stands still. The inevitable consequence of that is unemployment and recession; maybe eventually depression.

But here is another question for you. What came first: the demand chicken or the supply egg? How can demand rise, without an increase in wages? How can wages rise without an increase in supply? How can supply rise without an increase in demand?

I often return to this, but the simple fact is that growth was virtually non-existent until the early 1800s.  Nearly all growth in per capita income that has ever occurred took place over the last two hundred years. It is a staggering thing to say, but true nonetheless.  To an extent we were caught in a Malthusian trap. Sure, absolute GDP rose, but the per capita benefits were cancelled out by population growth.

For me the question ‘why did growth set in from around 1820?’ is probably the most important question in economics. Rarely, however, do you see it posed.

Some say it was the Puritan work ethic. Some say it was the discovery of the New World. Others put it down to the discovery of how to exploit fossil fuels. Still others talk about the rise of capitalism, and free markets. Then there are those who say it was down to exploitation; that the West got rich off the back of slavery and exploiting the rest of the world.

Well, I don’t think there is one single explanation. But here are three other factors that I reckon were even more crucial. First there was the end of the medieval system of king baron peasant relationship, which stifled dynamism. Things only changed with the emergence of a middle class, and reaction against laws, such as the Corn Law – which was designed to channel wealth to land owners. These changes had the effect of ensuring more wealth trickled down, creating the demand need to create growth.

Second, there was the discovery of gold in the New World leading to a growth in the money supply.

Third, there was the evolution of a banking system based on debt.

The 1930s depression occurred because demand had not been able to keep pace with the potential supply caused by the previous era of innovation. A reaction against debt, a contracting money supply and more uneven distribution of income all helped to ensure demand could not rise as fast as was required.

The post war years saw boom, because these three factors went into reverse. This 25 year period of rapid growth came to an end because we finally learnt how to maximise the potential implicit in the innovations of the previous era. Demand equalled potential supply.

If you believe innovation is dead, then our cause today is hopeless.  And the current levels of debts are indeed massively dangerous.

If you believe, as I do, we are in the midst of the greatest era of innovation to date, then the only way we can translate the potential implicit in innovation into growth is by ensuring a growing money supply, debt promoting demand, and measures designed to stop the gap between the very richest and everyone else growing further.

A return to the gold standard, a reaction against debt, and more extreme attitudes – especially in the US – suggesting that wealth creators, whoever they are, should be paid at a level consummate with the wealth they create, (which is based on a false argument by the way), and the revulsion that many have expressed at the idea of a trillion dollar coin in the US,  threaten to destroy any hope of long term sustainable economic growth.

See also: A new Gold Standard is being born
See: Britain has more debt than the eurozone, says Germany’s Wolfgang Schaeuble

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 2 comments

  1. Michael,

    How do you square the loop:-

    INNOVATION = RISING EMPLOYMENT = RISING WAGES = INCREASED DEMAND

    What we seem to have now is:-

    INNOVATION = FALLING EMPLOYMENT/RISING UNDER EMPLOYMENT = FALLING (REAL) WAGES = DECREASED DEMAND

    ???

    Garry.

  2. Peter F Mills

    Not a bad story, especially if you link up with the Telegraph. [last para's] The Triffin Dillemma

    The Triffin Dilemma – advanced by the Belgian economist Robert Triffin in the 1960s – suggests that the holder of the paramount currency faces an inherent contradiction. It must run a structural trade deficit over time to keep the system afloat, but this will undermine its own economy. The system self-destructs.
    A partial Gold Standard – created by the global market, and beholden to nobody – is the best of all worlds. It offers a store of value (though no yield). It acts a balancing force. It is not dominant enough to smother the system.
    Let us have three world currencies, a tripod with a golden leg. It might even be stable.
    ================================
    My thoughts.
    So the Chinese Yuan, becomes the World reserve
    currency. linked to gold and/or oil,
    The west can choose to peg their currency with the Yuan, or not.
    Currency speculators plunge in and buy the yuan, western currencies fall by 20-30%. or the yuan rise in value by 20-30% [take your pick]
    Chinese exports to the west slump, Chinese politicians have to placate their populations, by offering cheap consumer credit and other goodies.
    10-20 years later the yuan comes of the Gold standard and becomes just another fiat currency.

    The game goes on.

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