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The articles proclaiming doom won’t go away. So called gurus predicting economic meltdown won’t shut up. It is all an illusion they say. And, continues their gloomy prognosis, there is only one thing for it: buy gold. Are they right?


Those who support the view that the economy is heading for a kind of oblivion seem to base their forecast on two unfortunate circumstances. Firstly debt levels are too high, and by debt I don’t just mean government debt; I refer to household, and both financial and non-financial institutions’ debt. Secondly this problem has been compounded by quantitative easing and, maybe connected with that, with forbearance.

This hypothesis seems to drawn supporters from four different spheres. There are those on the left, who see the solution in banks creating money and dishing it out to everyone; those on the right, who seem to think we are doomed whatever happens; and there are libertarians, who hate what is known as our fiat currency, and call for a return to a gold standard. They also love the concept of Britcoins – in particular they like the idea that the ultimate supply of Britcoins is limited. A fourth set of supporters might point to peak oil, and say that all economic growth over the last 200 years has only been made possible thanks to fossil fuels. We are running out and, to quote Private Fraser, “we are doomed.”

Let me divert for one paragraph and quote one of those gurus: Jim Rogers. A couple of months ago he told ‘Money Morning’: “This is the first time in recorded history where nearly all the central banks in all countries are pumping out lots of money, debasing their currencies, printing money. I’ve never seen this in history, and now we’ve got everybody – or nearly everybody – doing it.”

Some argue that China, in contrast, has it sussed. It looks on incredulously as the West debases its currencies. China sees the future in a currency backed by gold. It is buying gold, and when, as it were, we hit the day of reckoning China will become the undisputed world’s premier superpower.

As it happens, I have some sympathy with most of the arguments above, but that is not the same thing as saying I agree with them or the conclusion.

One thing is for sure; across the developed world we need growth. The combination of zero or very low growth, massive levels of debt and a falling working population as the baby boomer generation retires is potentially very dangerous.

I have a dislike for any scheme that pushes up house prices, but does little to address the lack of investment in business. QE has been used to pump-up asset prices, but it is far too blunt an instrument. What we need is investment. We need investment into infrastructure, appropriate and relevant education and more money available for would-be entrepreneurs to dig into. What we get is rising house prices; an asset boom that has many hallmarks of a bubble.

Yet for all that there is something the prophets of doom overlook. And that something is innovation. How can they not have spotted it? Ideas that not so long ago seemed like the stuff of science fiction are becoming real. The latest I read related to a combination of stem cell research and 3D printing being able to create cartilages on demand.

Part of the problem here is that economists are not admitting to the importance of innovation. They are so busy denying innovation is not impacting on productivity that they miss what is happening right in front of them.

At a time of innovation we need the money supply to expand. I am not sure, but I don’t think it is possible to have significant growth without debt. Gold is not fit for purpose, precisely for the reason that its supply is fixed.  How can the libertarians’ aversion to fiat money and their attraction to versions of money that can never grow make sense at a time when the global economy has the potential to produce more goods and services? Think about that. Money supply is fixed, output grows. That strikes me as a recipe for economic depression and massive levels of unemployment.

Fortunately the conspiracy theorists are not determining policy. And while I am not a fan of all policy, and think major errors are being made, I think that we come through this smiling and that, despite the errors, innovation ensures it.

My fear relates to economists’ inability to factor in innovation. I don’t think innovation will necessarily lead to unemployment, but it may lead to only a small proportion of the population working in highly productive areas and enjoying the fruits of innovation. The rest may work in poorly paid areas on little more than the minimum wage, and that does worry me.

 

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


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