And 2025 is ignoring it
We are in tumultuous political times. Soon, we might be in tumultuous economic times. More tumultuous than the depression of the 1930s. We could lose our currencies.
My economics training
Circa 1993, I enrolled in a distance MBA program from Heriot-Watt University. Getting this degree seemed like a good use of the increased spare time I had at that point in my life.
I got a grade of 57% in my economics course. However, that score is misleading. Methinks I did quite well in the microeconomics, macroeconomics, and Keynesian economics. But the fourth section, monetarism, was a section I did not understand well. My mark went down because of this section.
Despite my poor mark in monetarist theory, I did learn that governments have certain tools to play with the money supply, and that enables them to run budgetary deficits for decades. My recollection is that as long as the GDP is growing, government deficits are manageable. The world’s biggest corporations do not have this tool.
One of my bucket list items has been to understand monetarism. As time has passed, I have amateurishly tried to study this topic. Occasionally, I have grasped it, only to forget my understanding a day or week later.
Despite my fleeting understanding, I still see a tsunami on the horizon.
Central banks
Ever since central banks were set up several centuries ago, there has been a gentlemen’s agreement that the political leaders — elected or not elected — do not run the affairs of the central bank. The premise was that monetarism is too difficult for most of us to understand. If politicians were running these banks, they would use monetarism to temporarily enhance their power or popularity, only to see the central bank collapse a decade or two later.
With no functioning central bank, the nation’s currency would eventually lose its common understood value so that citizens, commerce, and financiers could exchange goods, services, and labor. When this common understanding is lost, the currency collapses. So there has been some distance between the political leaders and the central bankers, each side respecting the other’s sphere of influence.
Central banks do have their own controversies and critics. Whether central banks are good or not for society is not a matter for this essay. It is where we are today.
Modern government borrowing
Prior to 2008, governments financed much of the borrowing by issuing bonds. Customers were average people who could save, rich people and corporations looking for places to park money, risk-free mutual funds, and other governments, like Russia, China, Saudi Arabia, and Norway. To prevent inflation, these countries needed to curtail demand in their own backyards, so excess national funds were tucked into foreign assets rather than goodies for the citizenry.
Then the 2008 recession hit. Russia and China needed their internal cash flow to finance their internal operations. They were no longer buying western bonds. This left the western central banks to create a new way for governments to continue with deficit financing. This way is called “quantitative easing.” It had been used before.
From what I can understand of quantitative easing, the central bank sets up a second central bank. This second bank is given a charter to create money by issuing loans to the first central bank, which promises to pay the second central banks back, including interest. Then the first central bank loans the money back to the government, which promises to pay back the first central bank, with interest. In essence, the government, with its two central banks, is essentially the creditor and debtor of these loans at the same time. No average investors or rich foreign governments are needed.
Let me explain this in a different way. Previously, when a government issued a bond, the purchaser of that bond believed the government would pay it back plus interest. So the government had to conduct fiscal policies to convince buyers of bonds that the government will be solvent when the bond matured. But with quantitative easing, this obligation is no longer there. The government can loan money to itself, with no real-world incentive to pay it back.
I suspect there are a whole whack of economic theories that tell governments and the central bank how to manage quantitative easing while giving money its stability and legitimacy. It other words, the common understanding of value of money holds. Citizens and commerce can plan for that value. But, again, the GDP needs to grow to make this work.
To me, being both creditor and debtor sounds like a Ponzi scheme. But this arrangement has been going for 17 years without falling apart. So maybe I am wrong.
Quantitative easing in WW2
Imagine a country that had its own internal economic challenges and is asked to go to war to help its friends. Well, this is the story of USA in 1940. It was struggling to pull itself out the Great Depression — and had no appetite to fight other people’s wars.
Then in late 1941, the USA went to war. All of the sudden, the USA could afford to build battleships, submarines, supply ships, bombers, fighters, tanks, artillery, trucks, and bullets, shells and nuclear bombs! And while taking many of its hardest working citizens from the real economy and putting them into the war economy! Classical economics cannot explain how funds were raised to support this military buildup.
Well, quantitative easing is how the USA financed World War 2. Quantitative easing continued after the war, funding the Marshall Plan.
But when the western world stabilized, the central bankers moved the American economy back toward Keynesian-type economics.
In other words, quantitative easing is a tool that can be used for an economic emergency. But it should not be (in my opinion) relied on indefinitely, which seems to be what we have been doing since 2008.
Quantitative easing in 2025
My engineering training often designs structures and machines with “safety factors.” This safety factor accommodates for an unknown force or two. In that way, failures are less likely. And safety factors probably give structures or machines a longer life.
I suspect the monetarism economists have also put in some safety factors into their quantitative easing calculations. For example, most economies made it through the COVID crisis without currencies falling apart — even though COVID was not anticipated.
The Republicans are running the American economy more arbitrarily than most European nations in feudal times. Many new government directives are concocted daily. Often without much input from experts. Usually without serious oversight from Congress.
It is doubtful the monetarism theorists, a decade or so ago, planned for:
1. American tariffs and trade wars,
2. Firing many federal workers, including those responsible for collecting taxes,
3. Cutting of social programs,
4. Funding of other new government programs with no oversight (i.e. massive corruption),
5. And the upcoming social chaos.
Will the safety factors built into today’s quantitative easing be sufficient to handle all these crises? At the same time?
Remember that we have been in a state of quantitative easing for 17 years. Can we add the new quantitative easing to address the economic dislocations of 2025 to the quantitative easing acquired since 2008?
In other words, all the theories that keep the central banks and national economics on a sustainable path are probably going to fall apart. Maybe the central banks can fix the mess. Methinks we are in uncharted territory.
Our western currencies could collapse outright. There will always be an economy, but barter is not an efficient way to exchange goods, services, and labor. We should not be surprised that the Great Depression will look like a picnic compared to what we could soon be going through.
But, Dave, you are speaking so dystopian
I have been critical of many political writers in their dystopian outlook. I believe these writers are more about cashing in on our pessimism than warning us of the doom to come. This essay is certainly of a dystopian nature.
If the dystopian title lured you into reading this article, why not give building the new democracy I am suggesting some serious thought?
Maybe this new democracy might find a better relationship between society, political leaders, and central banks. Or maybe it might be able to manage the economy without central banks — because we would be electing more sensible decision makers.
But first, we must build. Build. Build. Build. Imagine average people building a new way.
I’m a builder, not a dystopian. How about you?
Published on Medium & Substack 2025
Addendum
When I published this article, I was not expecting much traction. Most of my Medium article of these times seldom got more than $1.00 in revenue. There was nothing in the title to suggest this article would be special.
However, it had a five-week run on Medium and generated $140.77! From Medium statistics, it had 2,000 readers.
However (again), maybe only 20 readers interacted with this article. Methinks the vast majority did not like article. Yet the Medium algorithms kept putting it on feeds, which they should not be doing to articles that readers do not like. I'm at a loss why this article did so well.
My previous best on Medium happened 2.5 years ago. It got $66.
Medium is so weird some times. I have better articles than "Elephant."
