Covid-19, the ‘white knight’ for irresponsible policies
At the annual Gaidar economic forum in Moscow last week, Kristalina Georgieva, the managing director of the International Monetary Fund, made a startling declaration:
She went on to say, “I continue to advocate for monetary policy accommodation and fiscal policies that protect the economy from collapse at a time when we are on purpose restricting both production and consumption.”
Before heading the IMF, Ms. Georgieva was CEO of the World Bank. Prior to that, she had served in various European Commissioner positions, including as vice president of the Commission for the budget.
Not only was her message that policymakers should spend as much as possible. She also advocated what amounts to a global planned economy, suggesting that public spending should be coordinated by the G20.
Using public spending to manipulate an economy can only be effective in the long term when it is carefully targeted and implemented at the regional or local level. Globally coordinated spending can offer a short-term boost, but it is not a sustainable solution.
Savers are becoming increasingly alarmed
The IMF should be a guardian of the purchasing power of money. The message it is sending adds to many recent worrying signs for savings and monetary stability. Savers are becoming increasingly alarmed.
Bitcoin, a cryptocurrency whose volume cannot be inflated, traded at $40,000 in January, up from about $10,000 just a year ago. It is an amazing valuation, since it is based on trust in the technology. Although such investments can be considered speculative, the total value of all bitcoins in circulation is now some $700 billion – equal to nearly 20 percent of Germany’s gross domestic product (GDP).
It is worth considering why people are investing so much in a non-state backed currency.
We can see a similar trend in the prices of gold and other precious metals, which are considered safe havens for savings. These developments are not surprising, as they are symptoms of the weaknesses in – and in consequence distrust of – central bank-issued currencies such as the U.S. dollar and the euro.
This process has been ongoing for a while. It started with ever-increasing government overspending, which fueled oversized public sectors and welfare systems. These lose effectiveness as they grow in both size and complexity.
The results were already alarming before the pandemic hit. In 2019, the U.S. federal deficit amounted to $984 billion dollars. The national debt amounted to 22.8 trillion at the end of 2019, some 102 percent of GDP. These are staggering figures, explained by government spending amounting to 34 percent of GDP.
The European Union and its member states also recorded startling pre-Covid figures. In 2019 the EU’s GDP came to 13.9 trillion euros, while public debt equaled 10.8 trillion euros, a ratio of 77.6 percent. Public spending in the EU, at 47 percent of GDP, exceeds the OECD average.
Before the pandemic, central banks already had to finance enormous amounts of public spending through excessive money creation. Though we have mentioned the U.S. and European examples here, the phenomenon is, unfortunately, global. It is a disaster waiting to happen.
State-dominated economies became addicted to ever-increasing inflows of money to stave off inevitable collapse. But it grew more and more difficult to artificially raise the doses of the “drug” they craved. Doing so became impossible to justify any longer.
Covid to the ‘rescue’
Global debtors’ white knight came in 2020, with Covid-19. The lockdown became the new justification for flooding economies with money. A quick fund injection was necessary to rescue businesses and alleviate suffering, but the way the funds were allocated was slow and inefficient.
The pandemic was also a pretext for a variety of agendas that required more money and debt to achieve. These were mainly political: to maintain or increase government planning and control of the economy worldwide (see Ms. Georgieva’s statements above).
U.S. federal spending increased from the already excessive $4.4 trillion in 2019 to $6.6 trillion in 2020. Spending at the state and municipal level rose as well, and the national debt ended 2020 at $27 trillion. While some measures to dull the effects of the pandemic were required, such figures appear dangerously high. And now the Biden administration intends to add another $1.9 trillion stimulus program.
The EU grasped the opportunity to increase centralization and to institutionalize economic planning
All EU member states implemented Covid relief programs based on increased spending. Yet the EU itself, spearheaded by France, Germany and some southern European countries, also grasped the opportunity to increase centralization and to institutionalize economic planning.
European Union leaders agreed on a 1.8 trillion-euro budget of debt-financed economic stimulus for 2021 to 2027. A significant portion of this funding must be spent implementing “green economy” initiatives. An environmentally sustainable economy is all well and good, but the evidence shows that government attempts to nudge it along financially have failed, since bureaucrats usually make for poor entrepreneurs.
The budget comprises the Multiannual Financial Framework (MFF), at 1.1 trillion euros, plus an additional 750 billion euros for Covid relief, to be distributed from Brussels. The main goal for such eye-popping figures was probably to give the European Commission (and thereby the bloc’s power brokers, like France and Germany) more control over national governments. EU leaders claim so much spending is necessary to improve EU cohesion. However, it could lead to more centralization, which in the end would have the opposite effect.
All these measures, as well as similar ones implemented in Japan, China and elsewhere, are financed by debt based on additional money provided by central banks. As there is no economic substance behind this issuance of funds, and since we know that governments will be unable to repay their debts, inflation or other financial disasters have become unavoidable.
The key positions in the central banks, governments and international economic institutions, be it the IMF (Ms. Georgieva), the European Central Bank (President Christine Lagarde) and the U.S. Treasury Department (Secretary-designate Janet Yellen) are now occupied by people who favor increasing public debt.
Covid-19 and additional debt creation can only delay the calamity. But we must remember: the bigger the debt, the higher the price that will have to be paid down the road.