Greatest paradox of economy!

By Hema Senanayake
hemasenanayake@yahoo.com

There are things that happen only once. But Paulo Coelho, who wrote the book, ‘Alchemist’, has said that everything that happens twice will surely happen a third time. Any statistician will say that something happens twice, the probability of happening it another time will never be zero. Covid-19 pandemic badly hit us once. It is hitting again. It or some other pandemic will surely hit us gain. It would be just a matter of time.

Economists never anticipate such extremes but eventualities that are likely to happen. It is high time visionary leaders took up the challenge of reshaping the world with compassion towards humankind. They might need to think beyond neo-liberalistic economic policies and suddenly becoming Keynesians when hit b a crisis. Both approaches will not help face the challenges.

Unfortunately, our government leaders and bureaucrats do not think of the common good of humankind. They are more involved in providing piecemeal solutions to achieve their ambitions. They do not care to develop a lasting vision for the common good of humankind. Look at the virtual United Nations General Assembly meeting held recently. It became a forum of rhetorical boasting of the performance of respective governments under respective speakers’ leadership. But people are suffering globally. The G20 summit to be held in November will be no exception. No vision to ensure the common good of global citizenry will emerge from it. I am thinking in terms of the visionary leadership provided by Alexander Hamilton and Dexter White.

Hamilton was the first secretary of the US. Treasury, who built a financial foundation for the new nation. How he did so serves as an example to many countries. Dexter White, who was instrumental in penning the Bretton Woods agreement in 1944 united the world to act for the common good of all people including political foes. White is considered an American internationalist who was instrumental in establishing dollar as the world’s main reserve currency. the post-World War II economic recovery and modern economic marvel would not have been possible without his vision. Today, the share of global output of the United States is just around 15.2% but central banks around the world hold more than 60% of their reserve currencies in US dollars, which facilitates global trade as never before. This would not have been possible without the Dexter White’s original vision. He never imagined that the dollar should be a property of the United States only. Instead, he might have thought that dollar should be a global monetary instrument that helped people in each and every country including the people in countries of political foes, to reach their own economic destiny. Modern-day pseudo heroes act against Dexter’s vision. Their non-visionary egoistic actions might damage the position of dollar as leading currency of the world, in the very near future.

In the twenty first century, handling of the economy requires much more than common sense. This is especially true of the developed economies like the US and Japan, which are typified by low economic growth, low population growth, near full employment and less real sector inventions or innovations.

In these economies there is a quantity defined as realised supply which is sum of total sales made by all entrepreneurs. Then, what is sold must be bought either by consumers or another entrepreneur, which can be defined as the realised demand. Since what is sold must be bought, both the realised supply and realised demand must be in equilibrium in a given period of time (say one year).

The greatest paradox in economy is that this equilibrium between realised supply and demand is always met by creating a component of debt that can never be paid back. This is a systemic property. There are some systemic emergent properties in systems and they are not possessed by individual elements. The said economic property of the economy is something like that. Hence, it is imaginable that this component of debt should keep on accumulating faster than GDP growth. So, it is imaginable that total credit must grow faster than GDP. If you doubt, look at the Chart, in which pre pandemic data of total credit (debt) and GDP are plotted. Total debt consists of household debt, public debt and non-financial corporate debt.

If the economy grows faster, this accumulation of debt may be deferred, but when the economies are developed to a level with having near full employment and low growth, accumulation of the component of debt that can never be paid back; it will become significant and disastrous for the stability.

Is this the same thing former US Treasury secretary Larry Summers defined as modern “Secular Stagnation Hypothesis”; he refers to a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions.

If pre-pandemic behaviour of the economy shows severe inbuilt systemic weaknesses, can the economies face extreme vulnerabilities created by Covid-19 pandemic? This situation will demand visionary leadership and set another great opportunity for the whole world to be united for the common good of mankind. This means our leaders need to be true internationalists in order to be true patriots. The world needs visionaries in government in every country to make this world a better place to live in.