Why the 2020s won’t be like the Roaring Twenties – Dateway

The reincarnation of the Roaring Twenties – a century after the 1920s – is the main speculative narrative of this New Year on Wall Street, it seems.

Storytellers, well aware of how investors in starvation-interest income seek a “justification” for stocking up on ever-higher-priced stocks and risky credit papers, turn to the lab. history with its notoriously small samples. They noted that 2021 marked the 100th anniversary of a post-war decade renowned for its rapid growth in prosperity in the United States. Bingo: translate post-war into post-pandemic.

The story deserves to meet with rational skepticism on at least four points.

First, the explosion of public debt during the pandemic is a scourge for any emerging prosperity, notwithstanding Paul Krugman and Olivier Blanchard.

Second, there is no counteroffensive in sight against monetary inflation triggered during the pandemic. This contrasts with the Fed’s sharp monetary contraction of 1919-2020 to reverse wartime inflation before the Roaring Twenties, or even with the Fed’s subsequent abandonment of government bond pricing in 1951. which preceded Eisenhower’s long boom.

Third, a Wirtschaftswunder (economic miracle) in Germany is nowhere to be found – nor anything similar in today’s number two and three economies (Japan and China). Yet it was the fantastic recovery and economic expansion of the Weimar Republic, then reverting to being the second-largest economy, that played a key role in extending and deepening the Roaring Twenties. It is important to note that this has happened against a background of extreme, albeit short-lived, optimism about world peace.

Fourth, an attack on monopoly power in order to restore the freedom of entry essential to the prosperity of free market capitalism is still only a provisional project. In contrast, President Teddy Roosevelt’s loss of confidence had already occurred in the first century of the twentieth century.

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Why the pessimism on the public debt? After all, the explosion of debt during World War I did not stop the Roaring Twenties.

However, the high consumer price inflation during the war and its immediate consequences had already considerably reduced the outstanding debt in real terms. In the case of Germany, severe inflation and then hyperinflation from 1920 to 23 had largely eradicated debt before the late onset of the economic miracle.

The dominant view on Wall Street now is that no serious reduction in real debt and no decline in monetary inflation in the United States should occur as a precondition for the start of a second Roaring Twenties. . Such complacency ignores the infernal illusion of spending booms financed by public debt nor the growing debris in terms of malinvestment due to monetary inflation.

Individuals feel richer as their holdings of public debt and debt-backed money skyrocket during a public spending spree. They imagine that the taxation of debt service will fall on the shoulders of others (including unborn future generations or even pre-adults), surely far in the future. Those who think of the protracted raids by Uncle Sam or his foreign counterpart in the form of monetary repression or the taxation of inflation confidently hope to escape loss and even make gains.

Yes, some nontraditional economic experts might warn that the monetary inflation that accompanies the explosion of public debt will ultimately impose a high economic cost in the form of cumulative malinvestment. In the long run, however, we are all dead! Meanwhile, inequalities can worsen and the individual hopes to be among the winners.

By the early 1920s, there was not much overhang in the United States of previous malinvestment – asset inflation at the turn of the century had ended with the crash of 1907 and the great recession that followed. There had been misinvestment associated with the wartime inflation boom, but this had been liquidated during the depression of 1920–21. The second industrial revolution of the roaring twenties (mass electrification, engine assembly line, radio) presented new technologies with wide possibilities to improve the standard of living of every man, and not an already hyper-advanced cutting edge technology. by the excess of long and virulent asset inflation.

In contrast, at the post-pandemic dawn of 2021, the flagship technology, digitization, may have already been the driving force behind many malinvestments, fueled by monetary inflation in the 2010s. Subsequently, digitization benefited a tremendous boost, some would say, of the pandemic, which has made it an essential economic activity in the war against covid-19.

New Keynesian economists, for various reasons, express their skepticism about a boom in technology-related capital spending in the coming years. They focus on factors such as an aging population and the low capital cost of digitization equipment to advance the hypothesis of structural savings surplus. For them, there is no problem of over-indebtedness. Governments should take advantage of the low interest rates evidenced by this by issuing piles of debt to finance spending. There would never have been a health crisis if governments had ignored the belligerents of the debt crisis and subsidized an emergency expansion of capacity to deal with potential pandemics.

These savings glut diagnostics rule out the possibility that low interest rates are in fact a construct of central banks who are in effect levying a monetary repression tax on the government. It is absurd to use low rates with this tax deducted to justify government spending. Low aggregate investment might reflect the dizzying effects of long-term uncertainty created by currency radicalism and the build-up of monopoly power that this has fostered by stimulating speculative narratives in the stock market about current or future wealth. monopolies. The aging of the population could in principle be a source of downward pressure and not upward pressure on overall savings; the elderly population, by drawing capitalized pensions, reduces the capital accumulated previously.

Global outlook

An economic miracle abroad is also unlikely. Modern Germany has taken on its shoulders the burden of the EU and its explosive costs under Angela Merkel’s long reign. China is far from a Weimar-type moment in 1925, with Communist dictatorship deepened and monetary inflation, though camouflaged and suppressed in commodity markets, rampant. There is no global relaxation on the horizon as if to resemble the Franco-German rapprochement of the mid-1920s culminating with the Kellog-Briand Pact (1928) banning war.

Could there be a reincarnation of the roaring twenties without the relaxation, without debt liquidations by prior inflation of consumer prices, without an introductory drop in monetary inflation, without a foreign miracle and without a large-scale technological revolution? Perhaps it could take place in the virtual reality of a market with the longest and strongest asset inflation on record. Here, if it’s Wednesday but enough people think it’s Thursday, then it’s Thursday – but only for so long.

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