A global economic depression may mean seven years of hardship and turmoil, so be prepared.

The ancient story of the Jew Joseph and his dream of a world plunged into a seven-year famine is relevant today. History and fables have a way of returning to the present. And geography decides the existence of humanity.

The world today is learning that $10 trillion in stimulus may not mean a return to the economic normal of sustained growth.

The coronavirus pandemic threatens to overturn economic orthodoxy and may herald a new age where much more thoughtfulness is required in governance, replacing the stupid and short-sighted worship at the altar of rising gross domestic product as a panacea for “all things bright and beautiful.”

The world has been plunged into a war with an invisible enemy that could care less about economic philosophy and global power matrices. Coronavirus is an enemy that decides its own trajectory and direction.

The West is finding out that willful disregard of scientists’ advice and hubris will kill rapidly.

There in nothing like a crisis to offer the deep learning one never receives when life is “a cushion.” And what severe economic shocks teach us is the critical importance of banking to economics.

The world’s central banks, led by the Federal Reserve in New York, are where politicians and wealthy investors flee when the “fat lady sings” and when the black clouds overhead become a fiery cauldron that threatens to consume everything.

Another lesson is for all the supply-side, trickle-down economic theory advocates: that stimulus is where they will find answers and refuge when the economic volcano erupts.

 

‘Cyclical events’

Recessions are typically cyclical events that begin with a contraction in consumer demand followed by either anaemic growth or strong growth. The length of time between contraction and growth and back to contraction varies.

However, most recessions are fairly predictable affairs.

The problem with a severe economic shock, such as the coronavirus pandemic, is that it is frequently caused by some external event or factor that could hardly have been foreseen.

Catastrophic leveraging driven by subprime mortgages, war, a devastating natural disaster, pandemic, internal instability — these are events that can suddenly appear, throwing daily life in turmoil.

That is why the analogy of the Hebrew Joseph is a wise example of good governance in an unpredictable age.

 

Planning ahead

When economies grow, good governments plan for the inevitable rainy day. They build up their fiscal reserves and invest in social and physical infrastructure that drive GDP growth and sustainability.

Then, when the dark clouds gather and society enters the storm, those reserves and strong infrastructure hold communities together during the years of famine and hardship.

Hospitals are well equipped; there are strong shelters to protect the population; the storage facilities hold enough water, food and fuel to see the country through the difficult days ahead.

Before the end of the period of hardship, as stores dwindle and social and physical infrastructure require renewal and repair, the green shoots of recovery appear.

However, the country, in spite of these promising signs, must still live on what it saved and harvested in the years preceding the long recession or depression.

So, just like the wise and prudent family that saves for a rainy day, countries wisely governed do the same.

 

In prosperity

During times of prosperity, even the wealthiest countries limit public spending and encourage wealthy investors to build their personal wealth by deregulation. Bank interest rates tend to be higher during the years of prosperity as businesses demand loans and credit to increase their supply chains and inventories.

Profitability and high employment put cash in bank accounts and equity into property. Stocks and shares increase in value; investment returns are robust.

Then when the lean years arrive, government spending reverses to the stimulus prototype to keep people at work and the factory floor humming. Commercial banks have access to financial capital provided by central banks to encourage these lending banks to pump money into a failing economy, to prevent a steep contraction in demand and supply.

Families begin to appreciate their savings and equity, and those that lose income live off of what has been put aside. Thrift becomes a good word.

 

A ‘cycle’

The world is a cycle, and the coronavirus depression will come to an end one day. The thing is, no one can tell when.

So let us all heed the wisdom of the ancients and learn to live simply and wisely in these lean years that are about to come upon us all.

 

 

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