If we understand what “depression” is, and if we
understand what “galloping inflation” is, we'll have a better grasp of what's
happening to the world today.
Depression is the expression of lost confidence in the
prevailing economic system. What happened in the United States of America in
the late 1920s and early 1930s, is that the people who were overconfident in
the soundness of the economy and abused it to the breaking point, saw their
mood swing to the other extreme when the economy began to falter.
Fearing what tomorrow will bring, they sold at
give-away prices, the hard assets they owned, and hoarded the cash waiting for
the situation to clear up. Hard assets –– from tools to instruments to
buildings –– being what's used to produce goods and services, it was the idling
of these assets that reduced the production of those goods and services. In the
end, that's what defined the word depression. In practical terms, it was like
the economy had gone into a coma.
As to the expression, galloping inflation, it is a
phenomenon that usually begins when shortages in one or more vital staples
become chronic. Prices rise and people ask for raises. If the economy is
otherwise sound and has the export potential to attract foreign currencies, the
jurisdiction will import what it needs, pays for it and the problem is solved
there and then.
But if the economy develops shortages and has no means
to pay for imports, an internal leapfrogging effect develops. That is, when a
segment of society –– such as the private sector, for example –– gets a raise
and causes prices to go higher still, the public sector will want to leapfrog
ahead of the private. It asks for, and gets a raise, which causes the private
sector to ask for still more money. The two sectors begin the process of
leapfrogging ahead of each other, causing inflation to gallop, and the value of
the currency to diminish to near zero.
What's happening in the world today, is that most economies
were hit by a virus named Corona. It forced governments to take measures that
save lives. The measures entailed telling people to stay home and not go to
work or any place where they might have conducted economic activity. And so,
whereas depression resulted from the economy going into a coma because of loss
of confidence, today's coronavirus forced the governments to send the economies
into a coma to save lives. Whether or not the economies will tailspin into a
real depression will depend on how long the pandemic lasts.
Having learned the lesson of the twentieth century
depression, the central banks and the treasuries rushed to flood their
economies with cash instead of tightening their monetary and fiscal policies,
the way they did nearly a century ago. Today's move is meant to maintain a
semblance of economic activity, thus raise the level of confidence before
people start selling their hard assets cheaply, and cause a real depression.
In the wake of two trillion inflation-inducing dollars
being injected into the economy, what will happen when the pandemic will have
been defeated? Upon reopening their doors, the companies will do what they
always do, which is to recall only some of their laid-off employees, keeping
the others out, and causing unemployment in the country to rise. It is that the
companies will find ways to produce as much if not more than before using a
smaller workforce, which is good for business. But will the rise in both
inflation and unemployment result in consequences we cannot foresee at this
time?
Richard Phillips sees some very real changes coming.
He wrote an article to that effect under the title: “The Sad State of US and
Global Affairs,” and the subtitle: “If –– or is it already when –– the current
crisis ends with the United States of America fiscally and monetarily bankrupt,
the idea of a full-blown depression becomes all too real.” It was published on
March 27, 2020 in The Globalist.
Here is some of what Richard Phillips has said:
“It is safe to assume that the federal budget deficit
in the current fiscal year will zoom past the $4 trillion mark –– and approach
$5 trillion before it's all over. Assuming there is a 15% decline in fiscal
2020 due to the pandemic, GDP looks like it will come in at around $18
trillion. It would put the projected US budget deficit at around 28% of GDP!
That would translate into a potentially massive expansion of the Fed balance
sheet. Just don't forget about the massive US corporate debt. It stands today
at over $10 trillion. If the crisis ends with the US fiscally and monetarily
bankrupt, the idea of a full-blown depression becomes all too real”.
And this is the advice that Richard Phillips is giving
out:
“The wiser solution now might be to judiciously provide
limited financial support to the needy and encourage forbearance in both the
public and private sectors for the next 60 days”.
But not everyone in the private sector will listen to
him. A good many, especially in the crowd of stockholders, will want to sell
now, and perhaps buy back later.