The western world is overflowing with cash. This is a consequence of quantitative easing and monetary stimulus combined with fearful and debt-laden consumers. The Virgin Islands inhabits a paradoxical place. It sits between a United Kingdom austerity culture and a world apparently drowning in cash. But the territory cannot access that cash.
Economic recovery will cost billions of dollars in the medium to long term. This is cash that could have been borrowed very cheaply on global money markets. However, it appears that access to global sources of funding is blocked owing to a VI political culture that has lacked transparency and accountability.
UK financial overseers are reluctant to give the territory the leeway to access global financial sources. The ability to borrow up to $3 billion over a period of, say, five years, would have offered a recessed and contracting economy the cash required for an appropriate and sufficient jumpstart out of recession.
But that political culture of a lack of transparency, accountability and completely ignoring public feedback has been the territory’s undoing. Add to the preceding that the VI has no clear long-term economic plan, and lacks direction of where it is headed. There is no concise answer to an important question: Where do you see the VI in 20 years? This writer will offer a visionary prototype in a proceeding article.
Lessons from abroad
Now, the United States Federal Reserve, the Bank of England, and Germany’s Deutsche Bundesbank are three of the most powerful central banks in the West. And after these colossal banks pumped more than a trillion dollars into the global financial system — quantitative easing — to offset the effects of the Great Recession of 2007-2009, inflation was expected to grow modestly along with economic growth. However, economic growth post 2009 was modest. Inflation was nonexistent. Consequently, quantitative easing and monetary stimulus were regenerated after 2012, with hundreds of billions of dollars put into money markets by the sale of US treasury bonds and various mechanisms of fiscal stimulus. This financial stimulus continued for years until very recently.
But the rate at which currency was exchanged in western markets — also termed the velocity of currency exchange — was disappointing. Consumer demand remained anaemic, especially in Europe. This was a puzzle to economists. Why did consumer demand remain flat after so much cash was essentially given away?
The answer lay in consumer behaviour. Putting extra cash into the pockets of Joe Plumber through government stimulus — in the form monetary stimulus, tax breaks or spending to create jobs — does not mean Joe will go out and buy that speed boat or take that cruise.
Instead, consumers used the cash to pay off debt, and then after paying off debt they put the rest of their cash in the bank. Consumer weariness to go out and spend is one factor in deflation. Deflation is the stagnation or contraction of consumer demand.
‘Jack Austere’
Austerity lovers argue an opposite case. For Jack Austere, government spending leading to deficits is bad for business, and therefore society as a whole. Why? Because Jack asserts that unsustainable government borrowing destroys business confidence. It creates a debt trap where the interest rates paid to banks by government eventually swallows up government revenues and taxpayer cash.
Government is burdened by this huge debt and thus is unable to carry out its role as provider of public safety and national security. Ninety percent of gross domestic product and higher is stated to be an unsustainable annual deficit.
However, this idea of unsustainable debt has proven to be a red herring. In the era of deflation and year after year of near zero rates of interest — brought about by contracting consumer demand — governments were never strapped for cash after 2009.
And apart from the Greek crisis, which seasoned economists describe as an anomaly, stimulus spending in western developed economies has not created unsustainable national debt.
In fact, there is evidence of the reverse. Countries where stimulus is practised have actual reduced annual deficits through economic growth. On the other hand, a country like the UK suffered increasing annual deficits as it cut public spending with a Conservative government love affair with austerity.
‘Mysteries of economics’
The preceding has been one of the mysteries of economics. Austerity can actually create higher deficits while government spending in the form of stimulus reduces deficits by generating greater demand and market activity in an economy.
Consequently, nearly seven months after Irma, the lack of any aggressive economic stimulus may actually worsen the VI’s economic woes.
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