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ShareBut wasn't one of the big lessons of the Great Depression that governments need to step up with spending in times of economic recession?
That's one of the lessons that's been taken from the Great Depression. But the Austrian School of Economics -- to which I belong -- would say that the simplest lesson of the Great Depression was: 'Don't let it happen in the first place. Don't let a big credit upswing happen, don't let monetary expansion happen and you won't have to deal with a Depression.' But we didn't learn that lesson. So now we're treating the symptoms rather than the causes.
The whole process at the moment has been justified by Keynesian economics, by people who say that the response to the Depression wasn't fast enough and wasn't big enough. Well, nobody can accuse us now of not being fast enough or big enough. And if it still doesn't work, what are we doing to do then?
Have we given the spending programme enough traction time?
Presumably not yet. But there are no signs from the early indicators of the stock market that even in 6 or 9 months' time, it's going to work.
It may better to avert a Depression than to deal with it, but given that we are here, is a Keynesian response not right?
In my view, it's the worst response, not the best. What it does is try to support industrial and capital structures that are unsupportable. They are already unprofitable and already inefficient, and people who own the capital, the factories and the businesses know that they've made bad investments. To try and shore them up is to go down the Japanese road. Maybe that's what people think is the best way out. We could go down a 10-year zero-growth path. We are certainly quickly heading in that direction.
Personally, I think we should take the pain as quickly as possible and hope we can get back and running as quickly as possible as well. That would of course be very nasty. But it's going to be very nasty anyway.
It's becoming hard to ignore the chatter about the 'imminent death of the dollar', with the trillions of debt that the US is piling up. What's your outlook on the dollar?
I can't remember which comedian it was, but his response to the fairly standard question -- "How's your wife?" -- was "In comparison with whom?" It's the same with the dollar. Yeah, the dollar has problems, and we've seen the response of the central bank and the government, but tell me which government is not doing the same thing? Which other currency is more attractive than the dollar?
Is that insurance enough for the dollar?
The biggest danger is that every single currency comes with a loss of confidence in the guardians of monetary stability. To be honest, there should be no confidence in them anyway: they have grossly mismanaged the whole situation. Unfortunately, commercial bankers and investment bankers are being sacked and are losing their jobs, rather than central bankers and politicians, who are the real culprits in this whole process.
It points to a different sort of value going forward. It's been pointed out that gold will make a comeback. People are looking for something that will not be mismanaged by human beings, looking for something with intrinsic value. Gold and other precious metals will become, at some point, the anchor of the global currency system again.
When we emerge from this crisis, what kind of a world will it be?
We all know that the financial system will be smaller, less profitable, much more mundane and much more regulated than it's been over the past few years. We'll probably be back to something akin to the 1970s and 1980s in terms of what banks are allowed to do and the vehicles that are available. From an Austrian School perspective, that's good for the future; it will avoid some of the huge credit run-ups. The shadow banking system won't be able to create money as it did for much of the last decade.
But industrially, it's much more difficult to envisage. We need to realise that the global economy is going to shrink in the next year or so, and perhaps longer. Capacity will be destroyed, capital will be destroyed, people will be made unemployed. And people will take a very different attitude towards risk going forward. They're going to have much less faith in central banks, and that will be a good thing!
The upshot is that we'll have a much more risk-averse borrower and a less credit-orientated world with a significantly slower growth on a global basis. The IMF now flags global GDP of around 3% as close to recession; it will revise that benchmark to 1.5-2% for the next 5-10 years. That will be considered reasonably good growth.
So, going forward, it won't be Apocalypse, but death by a thousand cuts...
It's been pretty apocalyptic so far. I hope it doesn't get any more so. I think the outlook is for slower growth and a less exciting world for the next few years.
