Many people feared the economic consequences of the COVID-19 pandemic. A relatively benign financial situation was created for some, with injections of government money to support various institutions and categories of individuals and businesses throughout 2020 and 2021, but the fear was it could not last. Still, the shift to a sense of an all-embracing financial crisis throughout 2022 has been stunning. This crisis comprises various elements, including rapidly rising inflation and interest rates, against a background of sustained historic lows over many years and government indebtedness that has been expanding without control. The impacts vary to some degree around the world. While those in Australia don’t compare with those in some other countries, they are undoubtedly serious. And Australia cannot escape the growing instability that now typifies the global financial system.
Needless to say, financial consequences are only part of the pain and trauma experienced by many in different institutions, especially the elderly and people with disabilities and their families, and in the various settings of everyday life—so much so that some long-standing patterns of urban living appear to be breaking down, perhaps for the long term. But the financial upheaval now upon us will create its own pain and suffering. We need to understand how the present financial crisis has taken shape if a rational response is to be made.
Rather than being a stand-alone cause, COVID intensified a global situation that goes back to the Global Financial Crisis (GFC) of 2008. In turn, that crisis was an outcome of processes of globalisation that date back to the early 1980s, when intense difficulties were responded to by authorities drawing upon the technological revolution of the time—de-regulating exchange rates and finance across much of the world. Globalisation was the ‘miracle’ that enhanced whole realms of life, but especially communication, through other such miracles as the internet and, later, social media. Products of a techno-scientific revolution, they have transformed our world, making it unrecognisable to many and broadly shifting our everyday social relations and focus, and economy, away from the local.
An important consequence of the GFC, the first major crisis of these global arrangements, was a very large injection of government money to keep the economy afloat. For Australia this took government indebtedness to the order of $400 billion, a matter of considerable controversy at the time. But this occurred in a period when the cost of borrowing was low. There is little agreement among economic commentators as to why this cost was so low, although it was arguably related to the monetary contractions associated with the GFC, as well as the very establishment of the globalised order. This globalised economy was unprecedented—singular in its consequences—with many effects that are outcomes of the ‘creative destruction’ necessary to move towards this new world. That the great loss of monies in the GFC led to the financial world being immune to the consequences of other forms of money expansion, at least in the mid-term, is an important further development. Reserve Banks took the world down the path of ‘quantitative easing’, with the consequences of this still not fully known. Quantitative easing—effectively the printing of money as a pattern of response to many crises—was in due course also the response to the pandemic.
A strong case can be made that these money injections were essential under the circumstances, but the combination of quantitative easing and the belief there would be no consequences from the loose use of money created a fantasy that this ‘solution’ could be pursued without cost. Interest rates kept falling, apparently justifying further debt—including, of course, for the buying of homes. Then came the pandemic, which drew further massive money injections that have left Australian government debt standing at over $1000 billion and still expanding.
The other side of low interest rates is low inflation. The causes of inflation are hotly contested. The Right has often blamed wage rates (hardly relevant today) and uncontrolled money supply (all too appropriate after a decade of quantitative easing). It is true that the latter must weaken the currency, at some point if not immediately. Depending on various circumstances, a weakened currency might have no effect for a decade, but ultimately there will be a price to pay.
The significant degree to which the general global move towards minimal inflation was attributable to economic globalisation processes is seldom recognised. On the contrary, it has often been put down to good management by central banks. But the transformational shifting of manufacturing away from the leading economies of the West to emerging markets, especially China, cut deep into the prices of commodities for thirty years or so, undermining the main tendencies towards inflation. When we ask why inflation has re-emerged today, we should first ask what has happened to globalisation.
This is often discussed indirectly by reference to supply-chain problems. These are real, of course, but supply chains sit at the surface of complex global processes. China, as the world’s leading manufacturer, has begun to exhaust its comparative advantages because cheap labour from its hinterland is no longer as available as it was. Wage rates in China are also rising. No doubt these effects can be overstated, but the point is that the effect of lowered prices, taken for granted for so long, has come to an end. The pandemic and how it has been handled within China have added to this shift.
In the main this is a structural shift, one that will reverse what we have assumed for thirty years. There are also other shifts of a structural kind occurring, such as those related to ageing populations, which will progressively place pressures on inflation. At the moment wages do not contribute to inflation, but the withdrawal of workers from the economy caused by the proportional shift in ageing will soon enough have this effect. The further withdrawal of workers from the economy to service aged care institutions will also enhance this process.
COVID-19 has made a contribution here because the closure of borders has, especially for Australia, undermined immigration programs, reducing the number of workers available to industry. While hardly as calamitous as Europe’s Black Death, in which 50 per cent of the population was lost, COVID is nevertheless having real economic impacts.
In the midst of these general developments has come Russia’s attack on Ukraine. This development has been widely blamed for increasing inflation and rising interest rates, and there is no doubt that some of its effects, such as energy pricing and food shortages, are serious. The world will continue to experience intense crises related to this war.
But the Ukraine war is the icing on the cake as far as inflation and interest rates are concerned. If that war suddenly ceased it would provide only temporary relief. More enduring are the consequences of the general upheaval that globalisation has wrought in societies around the world—effects that are largely ignored because globalisation is now taken for granted as the way to achieve social development. But rather than being the way to overcome difficult circumstances, as recommended by many economists, it is arguably a major causal force in the emergence of this war, which is, like many of today’s conflicts, potentially a ‘war without end’.
The upheavals unleashed by the globalisation strategy have resulted in widespread citizen despair and revolt in many Western countries. Our political leaders and related advisers simply do not wish to draw this conclusion. In the United States, social and political division have taken on crisis dimensions, with the Republicans role-playing proto-fascist policy and Democrats continuing to pursue the global way even after bonds with China have collapsed. Large parts of the electorate have rejected the Democrats because of the consequences of their policies for everyday life, including the break-up of community and the decimation of local industry. In the United Kingdom, the Brexit decision to leave the EU was grounded in a revolt against the EU’s technocratic, globalist policies that marginalised whole regions and large segments of the population. In the EU there is increasing division between those who value the way of the market and those who wish to retain ways of life, the latter groupings now feeding into an orientation towards a radical Right. There are also divisions within Ukraine and Russia. Putin’s wish is to establish some version of a traditional Slavic bulwark, if not a civilisational re-direction, against the ‘Enlightenment’ West (see Roger Markwick’s article in Arena Quarterly no.10). Quite apart from attempts to suppress the reality of the emergence of China, the world is in a very difficult situation. This is illustrated by the fact that the common response today is to ask how it may be possible to re-arm.
For Australia this can only mean further levels of excessive debt. To purchase military equipment to protect the Australian public is one thing, but to purchase a whole complex of sophisticated armoury in order to fight China in Taiwan is another. If this foolishness were not enough, there is something profoundly irrational, verging on a death wish, in being seduced by nuclear technology as a way forward in the name of supporting citizens. It ignores the potential long-term disaster, through a radically degraded environment, that this may bring to the everyday life of all people. On top of all this comes to nuclear submarines, and they will send us broke.
A strong case can be made that for half a generation Australia has been living a fantasy. Borrowing to finance nuclear submarines is only the latest example. This fantasy of a world withoutconstraint is based in a form ofecstatic transcendence made possible by the money excess promoted by central banks. Arguably unleashed by the globalisation process itself, it gained clear material expression in the processes of printing money, especially as dated from the GFC, under the rubric of quantitative easing. There have been many expressions of this ecstatic transcendence in history related to monetary phenomena, and ours is now coming to an end. But such endings are seldom easy.
The way this fantasy works is important. For example, the handling of disabilities in Australia through the creation of the National Disability Insurance Scheme (NDIS) points to two important factors. First, there is the real achievement of recognising a gross injustice done to people with disability in society. Second, there is the belief that the NDIS can be financed without redistributions of income—that is, without impacts on how other people live. This is the kind of fantasy that leads to ever-increasing indebtedness. The same can be said about the very real and massive demands associated with ageing populations. Of course the aged deserve proper care, but the belief that this can be achieved without cost to the broad population leads to unsustainable debt. If the crisis in aged care is to be solved it will require much higher wages in, and general expansion of, caring institutions. But will this be financed by debt, or by an acceptance that we have to curtail our assumption that expansion has no limit?
And now our gross indebtedness carries the cost of inflation and rising interest rates, and we are faced with the dilemma of how to service debt, which makes impossible demands. The short-term thinking of markets has helped to lead us up this blind alley, but markets bite back when it becomes apparent that the situation has turned out to be unsustainable. This was the lesson of the crisis in the Truss government in the United Kingdom, and the sacking of the Chancellor of the Exchequer because the markets regarded his budget as unrealistic, which it was. Truss proposed borrowing to finance both tax cuts and subsidies to cost of living. That this expression of excess was cut off at the knees suggests the unreality of the past generation or so is moving towards an end.
We do not yet know where this instability and the nervousness of markets will take us. There are ominous signs. But there is no doubt that Australia is immersed in something much larger than the usual concerns of budgets and economic assessments. It would be good to be exploring paths outside of the conventions of the present social order, which is now crumbling. For the moment, however, we stumble on and expand our military. When expansion runs up against a wall there are always other sectors ready to take over.