Voices from the Grave: Keep the Money Flowing and the Spending Going.
We can reduce the economic pain of Covid-19 if we act wisely and boldly and learn from history. After the global financial crisis, I developed a strange fixation on the Great Depression of the 1930s.
My fascination stemmed from the effect this extreme period had on world history and on my own parents' lives. My mother was raised in a tent in the Woodhill Forest in the 1930s. She died with cupboards full of expired baked bean cans. The Great Depression facilitated Hitlers rise to power in Germany. I was fascinated by what could have been done to prevent this catastrophic global disruption to ordinary peoples' lives. We are facing a similar extreme calamity. This is survival Economics 101.
At the start of the Great Depression many people could not pay their immediate debts and bills. Central banks failed to act In the right way. Central banks can create as much money as they want if a country has its own currency. It's about keeping the economy afloat during an extreme disruption. It requires Flooding the economy with liquidity to prevent the worst case scenario. Here are the two key insights from my trawl through literature about the Great Depression. History doesn't repeat, but it can rhyme.
Rule Number one; Give an immediate debt holiday to those people and businesses who are struggling. Put the financial sector in deep freeze during the immediate crisis. The Reserve bank can provide the necessary liquidity for the banking sector to allow them to meet their expenses while their revenue is halted. This provides assurance to anyone dealing with sudden disruption about not having to service their debts until things improve.
The alternative is the banks keep requiring interest and debt repayments. They have to stay afloat themselves. People and businesses start defaulting. Stress levels escalate. People simply can't pay. They have no money. The housing and stock market collapse. People feel poorer and stop spending which magnifies the downturn. People worry about becoming unemployed and stop spending. Eventually the banks collapse due to an epidemic of bad debts. No one wins. That was the key initial feature of the Great Depression.
Rule number 2; People need to be able to meet their basic needs until it blows over. And It will blow over. We are very fortunate in this country in that we produce basic necessities particularly food and electricity and water and toilet paper and beer and wine. We just need to ensure everyone has access to their basic needs. Those who are lucky enough to keep their jobs will be fine. They will generally be in essential areas of production such as farming, healthcare, electricity, water, core retail and transport, healthcare, telecommunications or in government employment.
The money can be created by our central bank at the click of a mouse. It is known as quantitative easing. We have the statistical ability to closely monitor any potential inflationary effects. We are not Weimar Germany or Mugabe's Zimbabwe. What We should be fearing is a deflationary spiral rather than hyper inflation.
We must appreciate that all of us are going to take a hit. But We need to support those who have taken the biggest hits. They are people who have suddenly lost their livelihoods and have debts to service and children to feed.
No one can be blamed for losing their job in this extreme time. They need to be assured of a liveable income for the interim. We must hunker down together as a nation to fight this situation. We need to Look after each other.
A basic tenet of economics is that one person's spending is always another person's income. If total spending collapses in our economy so will total incomes and output and employment. We can't allow this to happen otherwise we have learned nothing from history. Keep the spending going and the money flowing otherwise we all lose.
We are being hugely challenged as a society for the first time in generations. How we respond will define us as a society for a long time.
Peter Lyons (M.Comm) teaches scholarship-level Economics and has authored several New Zealand curriculum economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.
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