Garrett Fisher
March 18, 2020
Before delving in the substance of an anatomy of a meltdown, it is necessary to consider a variety of viewpoints and theories that have sprung up in response to not having previously faced catastrophe. While as I write this COVID-19 is raging with fear and volatility, there is talk of the largest stimulus package in American history, with little discussion about the consequences of the production of such debt. That tells me that viewpoints that we are newly exempt from classical economics still remain. It is necessary to analyze these ideas before delving into a theory of meltdown as some would see such exemption from consequence as an automatic anesthesia from a catastrophe.
The New Economy
In our first major bubble of recent times, the dotcom bubble was heralded as “The New Economy.” While people were at first shocked that companies without revenue or solid business plans could IPO and raise untold amounts of cash, with astronomical percentage gains upon initial offering, it soon became the new normal, lasting for years. Believed to be a product of magic induced by “productivity” from information technology, we got used to such extravagance and it was popularized as “The New Economy.” In other words, the normal rules of economics must not apply anymore, as we can literally manufacture wealth at whim.
A massive reduction in the Nasdaq bubble, a cessation of exuberant IPOs, mass layoffs in the tech sector, and the first “nuclear winter” in VC tech funding thought otherwise. Enron and 9/11 didn’t help, with something so basic as cooking the books bringing Sarbanes-Oxley with its attendant costs and regulatory requirements. A public IPO was relegated to the place it long held instead of an easy cash machine. It took a decade and a half for the Nasdaq to recover.
“Cycles of Boom and Bust Are Over”
Some were heard saying prior to 2008, even on television, that gone are the days where we have such deleterious concepts as “depressions” and that our new future is nonstop economic growth. While anyone thinking that was left licking their wounds after the Great Recession, our recent flirtation the illusion of never-ending growth caused the idea to come back. Some have again been saying the idea (before March of 2020, I might add) on television, and I have run into many people in person observing that “things like 2008 won’t happen anymore.”
Some of it is exuberance, similar to the New Economy. The premise is that, because the consequences we long expected to take place did not materialize, they must not be true. I have heard other wisdom pointing to the inherent lack of toxicity in the financial system now that was present prior to 2008 as evidence that another severe downturn could not happen. While the specific mistakes that led to 2008 have somewhat been addressed, one must recall that we are not making the same mistakes now (or prior to 2008) that we did in the 90s: IPOs for virtually non-existent companies. Yet, we made other mistakes, as manifested through frothing growth, and the same result took place.
The idea that booms and busts are viewed as a thing of the past is common in the later stage of an expansion. One maxim of economics is that “booms last longer than expected,” which is a testament that they can outlast our natural assumption as to how rules and consequences work. I confess to expressing great worry in my 2013 article and still struggle to believe how we made it another seven years before the concept of a recession surfaced. For many, the lack of enforcement of commonly held assumptions and norms around economics is interpreted that one should reconsider such norms, as perhaps they are not true. To complement this idea, it is also noteworthy that individuals are incentivized for personal gain; thus, if the consequence has not occurred and others are profiting on a current market, then there is a short-term gain to be had participating.
Modern Monetary Theory
This idea is an offshoot of a long-term violation of conventionally held maxims. National spending deficits have long been considered to be a negative, with the exception of extraordinary circumstances. The Great Depression, World War II, and the terminus of the Cold War were noteworthy periods where the country went into debt. Even in the 1990s, as the United States began to produce nominal surpluses, there were howls as to the size of the national debt, which at the time was a fraction of now.
The 2000s brought the first period where America went to war and lowered taxes instead of raising them. Since that point, we have not generated an annual surplus, and all indications are that we will smash single-year deficit records in 2020.
Convention said that we would be doomed from this reality; yet, here we are, approaching 20 years of debt accumulation. During this process, MMT becomes popularized in niche circles as a potential explanation for why the shit has not hit the fan. It’s an interesting basket of concepts, resting on the philosophy that sovereign debt issued in its own currency is theoretically indefaultable, as a nation could print money to meet the obligation. Further to that theory is a host of contrarian views about inflation, monetary supply, and other factors, essentially concluding that unlimited money supply and deficits are fundamentally inconsequential.
Without devoting significant space to a complete analysis of MMT, I note that its overtones sound similar to the New Economy and a cessation of booms and busts. Because an act that was conventionally assumed to have consequences escaped them for a period of time, an idea develops that propounds that said consequence must not exist. MMT, in its distilled substance, is propounding the same thing. If that is the case, one must ask, how is it that many developing countries have run the printing press and ended up in an inflationary spiral of doom?
Things Change
While classical economics generally holds true, societies and economies evolve. There are myriad reasons why things change – there are too many to specifically list in any major society – and these are part of economics. Remember that people spend money, that economics is an act of getting needs and wants met, and while circumstances around the lives of people change, core motivation stays relatively the same. Economics is based on a negotiated equilibrium of selfishness of all parties involved; change one input and the system adjusts yet core motivators remain the same.
Each expansionary and recessionary phase of a business cycle happens with different characteristics capturing headlines. While core motivators for value exchange (i.e., “economic fundamentals”) remain the same, the items that are growing and contracting differ. We should expect as much as conventional economic theory notes one of the beneficial side-effects of recessionary periods: excess in the system, dying businesses, and obsolete ideas are extinguished during a recession, whereas many of the future’s leading companies are born during the same period. The business cycle ensures that we have variations in nuance as to the seeming rationale for the situation at hand, whereas an underlying escape from economic fundamentals has not occurred.
That lends to a very important question: if economic fundamentals have not changed, yet things seem very different from the years leading up to 2008, how could our unexpected period of economic expansion have taken place?