Western Europe Sovereign Debt crisis
and ensuing
depression
(Tragedy and Hope)
Trying to understand the
reasons for the financial crisis raging
in the Western world at the beginning
of the XXI century, especially in Southern Europe (allegedly associated with the crisis
called "Sovereign Debt" contracted by
the majority of modern Democratic States), and the ensuing economic depression,
I revisited an excerpt the work of Professor Carroll
Quigley (Tragedy and Hope –
1966) which is transcribed below.
These chapters don't focus on the monetary, financial and strategic control of natural and vital resources (demand for power), and it is not guaranteed that some
understanding of the facts that
are at the root of this crisis would alleviate the hardships of the depression. But
the knowledge of the basic mechanisms (economic, in this case) of their formation and its conduction may allow better interpret, decode or discard the "Bulletin
of socioeconomic meteorology" which daily
is presented in the media,
schools and in daily life.
TRAGEDY AND HOPE
XI - CHANGING ECONOMIC PATTERNS
THE ECONOMIC FACTORS
Economic
depressions and ways to deal with them
Pag.
545
The basic concepts ...
The way in which the
relative decline of investment in respect to savings results in economic crisis
is not difficult to see.
In the modern economic
community (closed economic system), the sum
total of goods and services appearing in the market is at one and the same time the income
of the community and the
aggregate cost of producing goods and services in question.
Aggregate costs,
aggregate incomes and aggregate prices are the same since they are merely
opposite sides of the identical expenditures.
The purchasing power available in
the community is equal to income
minus savings. If there are any savings, the available purchasing power
will be less than the aggregate prices being asked for the products for sale
and the amount of the savings. Thus, all the goods and services produced cannot
be sold as long as savings are held back. In order for all the goods to be
sold, it is necessary for the savings to reappear in the market as purchasing
power. The disequilibrium between
purchasing power and prices which are created by the act of saving is restored
completely by the act of investment, and all the goods can be sold at
the prices asked. But whenever investment is less than savings, the available
supply of purchasing power is inadequate by the same amount to by the goods
being offered.
This margin by which
purchasing power is inadequate because of an excess of savings over investment
may be called the "deflationary gap". This
"deflationary gap" is the key to the twentieth century economic
crisis and one of the three central cores of the whole tragedy of the century.
Pag.
546
THE RESULTS OF THE
ECONOMIC DEPRESSION
(Methods of outdoing the deflationary-gap)
The deflationary gap
arising from a failure of investment to reach the level of savings can be closed either by lowering the supply of goods to the level of available purchasing
power or by raising the supply of
purchasing power to a level able to absorb the existing supply of goods, or
a combination of both. The first solution will give a stabilized
economy on a low level of activity; the second
will give a stabilized economy on a high level of activity. Left to itself,
the economic system under modern conditions would adopt the former procedure
working as follows: The deflationary gap will result in falling prices,
declining economic activity and rising unemployment.
This will result in
a fall in national income resulting in an even more rapid decline in the volume
of savings. This decline continues until the volume of savings reaches the
level of investment at which
point the fall is arrested and the economy becomes stabilized at a low level.
This process did
not work itself out in any industrial country during the great depression because the disparity in national income
was so great that a considerable portion of the population would have been
driven to zero incomes and absolute want before savings of the richer segment
fell to the level of investment. Under such conditions, the masses of
population would have been driven to revolution and the stabilization, if
reached, would have been on a level so low that a considerable portion of the
population would have been in absolute want. Because of this, governments
took steps to arrest the course of the depression before their citizens were
driven to desperation (and uprisings).
The methods used to
deal with the depression and close the deflationary gap were all reducible to
two fundamental types:
a) those
which destroy goods (reducing production capacity), and
b) those
which produce goods which do not enter the market (monumental works
or armmement).
Preventing depression
through destruction of goods
The destruction of
goods will close the deflationary gap by reducing the supply of unsold goods
through lowering the supply of goods to the level of the supply of
purchasing power. It is not generally realized that this method is one of
the chief ways in which the gap is closed in a normal business cycle where goods
are destroyed by the simple expedient of not producing the goods which the system
is capable of producing. The failure to use full level of 1929 output
represented a loss of $100 billion in the US,
Britain and Germany
alone. This loss was equivalent to the destruction of such goods.
Destruction of goods
by failure to gather the harvest is a common phenomenon under modern
conditions. When a farmer leaves his crop unharvested because the price is too
low to cover the expense of harvesting, he is destroying the goods. Outright
destruction of goods already produced is not common and occurred for the first
time as a method of combating depression in the years 1930-1934. During this
period, stores of coffee, sugar, and bananas were destroyed, corn was plowed
under, and young livestock was slaughtered to reduce the supply on the market.
The destruction of goods in warfare is another example of this method of
overcoming deflationary conditions in the economic system.
Page 548
Preventing depression
producing goods that don’t enter the market
The second method of filling the
deflationary gap, namely, by producing goods which do not enter the market,
accomplishes its purpose by providing purchasing power in the market, since the
costs of production of such goods do enter the market as purchasing power,
while the goods themselves do not drain funds from the system if they are not
offered for sale. New investment was the usual way in which this was
accomplished in the normal business cycle but it is not the normal way of
filling the gap under modern conditions of depression.
We have already seen
the growing reluctance to invest and the unlikely chance that the purchasing
power necessary for prosperity will be provided by a constant stream of private
investment. It this is so, the funds for producing goods which do not enter the
market must be sought in a program of public spending.
Any program of
public spending at once runs into the problems of inflation and public debt. These are the same two problems mentioned in
connection with the efforts of government to pay for the First World War.
“The environment
in which any solution may be implemented”
The methods of
paying for a depression are exactly the same as the methods of paying for a war,
except that the combination of methods used may be somewhat different because
the goals are somewhat different.
In financing a war, we should seek to achieve a method which will
provide a maximum of output with a minimum of inflation and public debt.
In dealing with a depression, since a chief aim is to close the
deflationary gap, the goal will be to provide a maximum of output with a
necessary degree of inflation and a minimum of public debt. Thus the use of fiat
money is more justifiable in financing a depression than in financing a war.
Moreover the selling of bonds to private persons in wartime might well be aimed
at the lower-income groups in order to reduce consumption and release
facilities for war production, while in a depression (where low
consumption is the chief problem) such sales of bonds to finance public
spending would have to be aimed at the savings of the upper-income groups.
These ideas on the
role of government spending in combating depression have been formally
organized into the "theory of the compensatory economy." This
theory advocates that government spending and fiscal policies be organized
so that they work exactly contrary to the business cycle, with lower taxes and
larger spending in deflationary period and higher taxes
with reduced spending in a boom period, the fiscal deficits of the down
cycle being counterbalanced in the national budget by the surpluses of the up
cycle.
Page 549
This compensatory
economy has not been applied with much success in any European country
except Sweden.
In a democratic country, it would take the control of taxing and
spending away from the elected representatives of the people and place this
precious "power of the purse" at the control of the automatic
processes of the business cycle as interpreted by bureaucratic (and
representative) experts. Moreover,
all these programs
of deficit spending are in jeopardy in a country with a private banking system.
In such a system, the creation of money (or credit) is usually reserved for the
private banking institutions and is deprecated as a government action. The argument that
the creation of funds by the government is bad while creation of funds by the
banks is salutary is very persuasive in a system based on traditional laissez
faire and in which the usual avenues of communications (such as newspapers and
radio) are under private, or even banker, control.
Public spending as a
method of counteracting depression can vary very greatly in character,
depending on the purposes of the spending.
Spending
for destruction of goods or
for restriction of output, as under the New Deal agricultural program, cannot be justified easily in a democratic country
with freedom of communications because it obviously results in a decline in
national income and living standards.
Spending for
non-productive monuments is somewhat easier to justify but is hardly a
long-run solution.
Spending for
investment in productive equipment (like … Dams and other productive equipment) is obviously the best
solution since it leads to an increase in national wealth and standards of
living and is a long-run solution but it marks a permanent departure
from a system of private capitalism and can be easily attacked in a country
with a capitalistic ideology and a private banking system.
War possible
solutions
Spending on
armaments and national defense
is the last method of fighting depression and is the one most readily
and most widely adopted in the twentieth century.
A program of public
expenditure on armaments is a method for filling the deflationary gap and
overcoming depression because it adds purchasing power to the market
without drawing it out again later (since the armaments, once produced, are not
put up for sale). From an economic point of view, this method of combating
depression is not much different from the method listed earlier under
destruction of goods, for, in this case also, economic resources are
diverted from constructive activities or idleness to production for destruction.
The appeal of this method for coping with the problem of depression does not
rest on economic grounds at all, for, on such grounds, there is
no justification. It's
appeal is rather to be found on other, especially political, grounds.
Note1 - from third party: (Military spending tends to help "heavy"
industry directly and immediately. Heavy industry suffers earliest and most
drastically in a depression, which absorbs manpower most readily (thus
reducing unemployment). This tends to make it very influential in most
countries)
Page 550
The adoption of
rearmament as a method of combating depression does not have to be conscious.
The country which adopts it may honestly feel that it is adopting the policy
for good reasons, that it is threatened by aggression, and that a program of
re-armament is necessary for political protection. It is very rare for a
country consciously to adopt a program of aggression, for, in most wars, both
sides are convinced that their actions are defensive. It is almost
equally rare for a country to adopt a policy of re-armament as a
solution for
depression. If a country
adopts re-armament because of fear of another's arms and these last are the
result of efforts to fill a deflationary gap, it can also be said that the
re-armament of the former has a basic economic cause.
Note 2 - from third party: (Increasing defense spending enhances the
political clout of the military-industrial complex and tends increase a
nation’s reliance on the military in the conduct of its foreign policy and an
escalation of conflict which leads to further increases in military
spending. The vicious cycle ultimately results in the emergence of fascism: the
adoption by the "vested interests" in
a society of an authoritarian form of government in order to maintain their
vested interests and prevent the reform of the society.
In the 20th century,
the vested interests usually sought
to prevent the reform of the economic system (a reform whose need was made
evident by the long-drawn-out depression) by adopting an economic program whose
chief element was the effort to fill the deflationary gap by re-armament.
Note 3 - from third party: (Quigley’s analysis, based on the historical
developments in the aftermath of the economic depression of the early 1930’s
closely parallels today’s events. The economic crises which germinated from the
same systemic feature present in the modern economic system, followed a similar
pattern in economic and political developments that we are witnessing today).
…………………..
CONCLUSION – Quigley “TRAGEDY AND
HOPE”
Tragedy and Hope? The tragedy
of the period covered by this book is obvious but the hope may
seem dubious to many. Only the passage of time will show if the hope I
seem to see in the future is actually there or is the result of mis-observation
and self-deception.
The historian has
difficulty distinguishing the features of the present and generally prefers to
restrict his studies to the past, where the evidence is more freely available
and where perspective helps him to interpret the evidence. Thus the
historian speaks with decreasing assurance about the nature and
significance of events as they approach his own day. The time covered by this
book seems to this historian to fall into three periods: the 19th century from
1814 to 1895; the 20th century after World War II, and a long period of
transition from 1895 to 1950.
The 20th century is
utterly different from the 19th century and the age of transition between
the two was one of the most awful periods in all human history. Two
terrible wars sandwiching a world economic depression revealed man's real
inability to control his life by nineteenth century techniques of
laissez-faire, materialism, competition, selfishness, nationalism, violence,
and imperialism.
These characteristics
of late nineteenth-century life culminated in World War II in which more than
50 million persons were killed, most of them by horrible deaths.
The hope of the twentieth
century rests on the recognition that war
and depression are man-made, and needless. They can be avoided in the
future by turning from the 19th century characteristics just mentioned and
going back to other characteristics that our Western society has always
regarded as virtues: generosity,
compassion, cooperation, rationality, and foresight, and finding an increased
role in human life for love, spirituality, charity, and self-discipline.
On the whole, we do
know now that we can avoid continuing the horrors of 1914-1945 and on that
basis alone we maybe optimistic over our ability to go back to the tradition of
our Western society and to resume its development along its old patterns of Inclusive Diversity.
Portuguese translation in the link bellow:
