As a Political Science major at Brown in the 70’s, I spent lots of time analyzing and writing about the theoretical war that occurred between two broad schools of Economic thought: Capitalism, as initially formulated by Adam Smith, and Socialism, as it evolved through the teachings of Marx, Engels, Lenin, and Mao. But there was also an important, second set of fascinating theoretical battles in Macroeconomic theory that took place within capitalism itself between the Keynesian view, led by Englishman John Maynard Keynes, and what came to be known as the Austrian School of Economic thought, rooted in the teachings of Ludwig von Mises and F. A. Hayek.
There were a number of significant differences between the two schools, but perhaps the biggest lay in their varying approaches to the concept of “money”. Austrian school economists believed in “sound money”, convertible currency backed by gold or other hard assets. Keynesian economists supported fiat currencies, which could be manipulated by central banks to adjust the money supply and stabilize economies. In light of the events surrounding the worldwide Depression of the 1930’s, we should not be surprised that the Keynesians ultimately won. But in doing so, they may have set off a ticking time bomb that is now about to detonate. So, for this month’s article, let’s explore what endgame in a Keynesian world might look like.
The current global economic system was established by the Bretton Woods Agreement in July, 1944, creating a collective international currency regime based on the US dollar and gold. In a temporary, partial win for the Austrians, the 44 countries agreed to tie the value of their currencies to the US dollar, with America linking the value of the US dollar to gold. In essence, we took on the role of global economic custodian, and in return the US dollar acquired the mantle of the world’s Reserve Currency.
During the years that followed, the combined impact of the redistributive ideas incorporated into Roosevelt’s New Deal, in concert with a second generation of redistributive initiatives in the form of Johnson’s Great Society, applied considerable pressure for decision makers to engage in the two monetary deadly sins: massive expansion of the money supply, combined with deficit governmental spending.
It was also during this period that we began to see extraordinary friction between the two mutually exclusive founding principles of America: Freedom and Equality. In general, government initiatives that make us more Free tend to make us less Equal, while conversely those that make us more Equal tend to make us less Free. And as proponents of Equality (of outcomes) trumped proponents of Freedom during the post World War 2 period, the movement to reduce poverty, combined with expenditures for government programs intended to improve racial equality (exacerbated by expenditures in the Vietnam War), resulted in expansions in the money supply that left America with over four times as many dollars in the global system as were backed up by actual US gold reserves. Something had to give, and as the Federal Reserve continued to print ever more dollars, in 1971, President Nixon took the US dollar off the gold standard, planting the seeds of inflationary destruction.
A lot has happened in the past 53 years, but the consistent expansion in our budget deficit as well as our money supply is now reaching what appears to be unsustainable proportions. Consider the fact that our national debt now increases by a trillion dollars every 90 days, compounding the already 33 trillion-dollar debt figure. Interest on the debt now costs over one trillion dollars annually, dwarfing the defense budget. And just as irresponsibly, the folks in charge failed to” term out” the debt, so that an incredible 17 trillion dollars will need to be refinanced in the next five years, all at much higher interest rates than the current debt service. And what has kept the dollar from collapsing from this recklessness is the incredible reality that as bad as we are at our own economic stewardship, the rest of the world is even worse.
We have seen the results of this insane style of governmental decision making before in other countries. Currency debasement in Germany’s Weimar Republic during the 1920’s led to the point where a loaf of bread cost a billion deutche marks. And in Venezuela, once one of the richest countries in the Western Hemisphere, hyperinflation collapsed the food supply chain, resulting in mass starvation. Imagine: in just one year, the average Venezuelan adult lost 17 pounds.
It’s important to recognize that these kinds of nightmarish events can have an enormous impact on political discourse. In Germany, the societal chaos resulting from the collapse of their currency led to Hitler’s ascendancy. And in Venezuela, food shortages were so catastrophic that people actually began to eat their pets. I submit that many of the current issues with which we are so politically engaged will cease to matter in an environment where hyperinflation drives societal chaos. Consider the diminished importance of issues like global warming when people start to view their pets as a potential source of protein.
All of this is going to create challenges in your company, starting with the unfortunate fact that the cost of everything your business consumes is going up, while the price of the most important revenue stream in your store- diamonds- is actually declining. You are going to have to find ways to compensate by raising your margins, raising your transaction counts, or finding ways to raise your average unit retail. Business has been remarkably good since the beginning of Covid, but I keep having this feeling of impending doom, as though at some point the other shoe is going to drop, and we are all going to be confronting some very powerful headwinds. One thing is certain: if the fools in charge keep doing what they’re doing, it’s going to be time for you to start thinking outside of the box.
Class dismissed!
