ARTICLE - If the World's Economy Were a Haircut, It Would Be a Comb-over

Sometimes the logical thing to do is just shave it off.

Some one hundred years ago, the world went into one of its deepest recessionary down-spirals. It wasn’t the Wall Street Crash or the Great Depression. The business cycle had already gone pear-shaped some years before. This is the little-spoken-about crisis of 1920-21. You’ve probably never heard of it, right? That’s because the bust turned to boom barely eighteen months after it had begun. It also paved the way for the Roaring Twenties. How did this happen? It happened thanks to a radical form of de-lousing. Wanna get rid of hair lice? Hide it away. Choose a painful longer term treatment of chemical shampoos. Or, take the razor out.

The depression of 1920 bore all the hallmarks of Irving’s Debt Deflation Theory cycle, even though he hadn’t yet invented it. Irving put a name to the economic phenomena typical of boom-bust cycles. He explained that depressions are caused by overall levels of debt rising in real terms due to deflation. Sound familiar? You’ll understand that dynamic, if you are currently heavily in debt and the debt doesn’t seem to diminish in spite of your efforts. In a deflationary environment, debt holders are swimming upriver. Compare this to the debts of Italian or Spanish families and firms in the 1970s and 80s. A family with a fifteen year mortgage in lira or pesetas saw the value of their debts evaporate with high inflation. Bear in mind that many Italians or Spaniards worked in the public sector and had index-linked salaries adjusted for inflation. Businesses could raise prices accordingly. Now you’ll understand why that European baby-boomer generation was so rich in real terms. Most paid off mortgages easily and bought second homes. The Germans of the same period did equally well. They saw how their strong and stable mark could buy more of other European currencies. The Germans of the period were able to go on property buying binges across Southern Europe.  

Now with the common currency, this is no longer possible. We are some ten years into the economic crisis and sovereign states, local governments, businesses and households are still heavily burdened with debts. No amount of bond-buying programmes, QE or credit creation have been able to offset Irving’s deflation. Financial institutions and central banks have doubled down on fraud and manipulation to stop the whole racket from caving in. The thinning, receding economy is being treated with quick fix gels and hairspray. Donald Trumps phoney ear-to-ear carpeting has become a metaphor for the entire western economy.

Yet back in 1921, they found a simple and ingenious method to put the shine and bounce back into economy’s bangs. They simply allowed the downturn to hit rock bottom. There was no artificial stimuli, bailouts or propped up banks. There was no socialism for the rich. If your business failed, it was probably because it was inefficient. Good old school capitalism. Remember that? This purged the system of the weak actors and allowed the genuine firms to consolidate and add real value. We ought to take a leaf out of that book. 

The world’s pate continues to grow increasingly threadbare. The poor, who had virtually nothing in the first place, continue to have virtually nothing now. The main victims of the crisis, a decade on, have been the middle classes and the honest workers of the world. The wealth transfer towards the marginal sector of millionaires has been significant. World Club Elite has, quite literally, doubled its wealth since the Panic of 2008. The thousand richest families in the U.K. have increased their assets by 112% in ten years. They now own more than the lowest 40% of the entire British population. While the rich gorge on interest-free credit from central banks, the poor queue for a free meal from the food bank. The line is growing longer.

If the world’s economy were a haircut, it would be a comb-over. The strands from the earlobe periphery are being greased across an increasing barren bald patch. It’s not looking good.