EUBULLETIN talked with Simon Q (nom de plume), a senior executive in a Fortune 50 Company, a lecturer on macroeconomic realities and the author of the bestselling ‘2084’ book. With a seasoned career throughout today’s Global World, his credentials on the disturbing points raised in the interview – concerning the gloomy prospects facing the Eurozone and future economy – are indisputable.
EUBULLETIN: Deflationary forces have been a source of a great concern in Europe, prodding Eurozone leaders in early 2015 to finally embrace quantitative easing (QE) as a way to drive economic growth. But fast-forward eight months and, despite billions of euros pumped into the Eurozone economy, annual inflation in Germany turned negative in September and Europe’s long-projected economic recovery is anything but anaemic. Can we then consider the ECB’s QE a failure?
Simon Q: Well, historically, economic crises would trigger hyperinflation (Germany in the 1930s, and more recently Zimbabwe, Argentina or Venezuela… not all comparable, however, but let’s keep it simple), and that is quite easy to understand: great demand for goods and scarcity of those goods, thus skyrocketing prices… What we have today is quite the opposite.
EUBULLETIN: So, why then are we faced with deflation now?
Simon Q: Why now? Well, let me tell you a story: I remember being in school and learning about the three sectors of the economy. Primary, i.e. agriculture, Secondary i.e. industry/manufacturing and Tertiary, i.e. the services sector… at the time, the United States were on the verge of reaching 50 percent of their GDP from the services sector, and it was believed to be “crazy”… Fast forward and today, a “developed” economy has anywhere between 60 percent to >95 percent of its GDP in the latter (Romania/Bulgaria to Dubai) and no one thinks twice, though the impact is that there are plethoric offer of goods, i.e. people’s time and lack of demand, thus the same “goods”, i.e. services will drop in price, thus deflation.
All the so-called re-launch plans will therefore not work, as the Keynesian theory of starting big projects (eg. infrastructure) represent a too small piece of the GDP to have an impact and if you invest in the services sector, it is the equivalent of throwing money into a black hole… Lots of people paid to produce nothing, and maybe continue to consume only. QE is the ultimate fuel for this, representing humungous amounts of money sent down a black hole. This is what we say in the past years, governments running a 5 to 10 percent budgetary deficit to “re-launch” the economy and that would maybe trigger 1-2 percent of GDP growth… not very efficient!
EUBULLETIN: All of this makes sense. But if not QE, what other measures could spur Eurozone economy out of deflation?
Simon Q: I often use the example of the “Big-shot City lawyer” who today will invoice GBP 1’000 per hour and think it is not enough. That same lawyer’s time was worth maybe GBP 200 per hour 15-20 years ago. The difference of GBP 800 has been accounted for as “GDP growth”, though it remains one hour of someone’s time…. With hyper-deflation, that same lawyer will soon work for a free lunch, ending the famous proverb “there is no free lunch”…
Furthermore, we train our youth to have services sector jobs, i.e. to work “in offices”, through fancy university studies that only prove they can read, write and maybe count and we lack engineers, craftsmen, and people who can indeed produce something with their ten fingers (and brain). We are discovering that this creates incredibly high youth unemployment, especially of highly educated people, a good example of which is Greece with its youth unemployment rate soaring to around 60 percent!!!!!).
EUBULLETIN: So, would you agree here with many pundits who have warned the European leaders of the emerging so-called “lost generation”?
Yes, this has triggered theories about the “lost generation”, usually from so-called experts (usually way above 50 years of age), all having as a “job” to express irrelevant “expert” opinions extrapolating on the past and not able to see what future the present might bring… The youth will not just say “too bad, I have no future”, they will want one and build it, thus the socio-political time-bomb visible through the various movements like the indignados (outraged) in Spain and through the many elections where, whoever is in power and just cannot do anything about the “crisis”, gets creamed in the next election by the “other side” who will promise the moon and deliver nothing to then get creamed, etc…. We are going from one extreme to the other, with the pendulum swinging faster and faster between the two extremes and no solution in sight.
EUBULLETIN: But, unfortunately, deflation is not just Europe’s problem – in fact, it has been a trend that has affected countries around the world, especially major economies like the United States and China. The EU, comprising about 25 percent of the global market, is big enough to effectively ‘export’ its deflationary contagion to the rest of the world. Bearing in mind that deflation was a major cause of the Great Depression in the US and stagnation in Japan in the 1990s, do you think that a similarly grim scenario – in line with your ‘2084’ book – is now looming large?
The World has indeed “globalized” over the past 50 years, and the only driver was “cheaper” costs and more profits rather than “better for all” – whatever that would mean will also differ a lot depending on who you ask… I would like to encourage all to read the book, as it does show our future as history and the silliness of it all just becomes obvious, though no one will likely do anything about it until it all blows up. The good news is that the book is at least entertaining!
Mixing your previous question with this one brings me to China, where they are now experiencing a huge problem with too many graduates and not enough jobs. Read that chapter in the book and imagine what could happen? Reality could be far worse….
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