“History is a record of ‘effects’ the vast majority of which nobody intended to produce.”
– Joseph Schumpeter
Unintended Consequences
About a year ago, IMF Director Kristalina Georgieva participated in a panel discussion hosted by CNBC. While such events are not unusual, the conversation that unfolded was anything but typical.
Centrally, central bankers tend to be cryptic in their communications. They often shy away from direct terms like recession or, even more rare, depression. Additionally, responsibility for mistakes is seldom acknowledged, as failures are frequently spun into accomplishments.
Consider Ben Bernanke’s so-called ‘courage to act’—an assertion most would dispute.
Deep down, central bankers likely recognize the futility of attempting to engineer an economy through an inflated money supply. Yet, they strive to retain the illusion that they are omniscient and far more intelligent than the average person.
In a surprising moment of uncharacteristic honesty, Georgieva admitted that central banks worldwide were responsible for the inflation crisis that impacted the global economy in 2022. She attributed this predicament to their excessive money printing without considering the unforeseen ramifications:
“I think we are not paying sufficient attention to the law of unintended consequences. We take decisions with an objective in mind and rarely think through what may happen that is not our objective. And then we wrestle with the impact of it.”
“Take any decision that is a massive decision, like the decision that we need to spend to support the economy. At that time, we did recognize that maybe too much money in circulation and too few goods, but didn’t really quite think through the consequence in a way that upfront would have informed better what we do.”
Playing Soccer
While Georgieva acknowledged past errors, she remains optimistic about the ability of central bankers to anticipate and mitigate unintended consequences in the future. She stated:
“We act sometimes like eight-year-olds playing soccer. Here is the ball; we are all at the ball. And we don’t cover the rest of the field.”
“Our ability to deal with more than one crisis at one time is very, very limited, and we have to zero in on the really big things that could determine the future and keep our attention on them.”
However, Georgieva seems to misunderstand the nature of unintended consequences. These are, by definition, events that arise unexpectedly or are unplanned outcomes. Merely increasing focus will not eliminate this inherent unpredictability.
The cycle of mishaps continues. As central banks raise interest rates in an attempt to counter the inflation caused by their prior monetary policies, they concentrate solely on the “ball” of inflation, neglecting the broader implications of their actions.
Sadly, history shows that central bankers struggle to rectify their past blunders. Interest rate increases, similar to rampant money printing, bring their own set of unintended consequences, including potential systemic banking crises.
Moreover, something else catastrophic will eventually occur.
For instance, not too long ago, Patricia Borges was operating machinery at a chocolate factory when disaster struck. The building was engulfed in flames due to a sudden explosion.
“When I began to burn, I thought it was the end for me,” Borges reflected. In an unexpected twist, the floor collapsed, and she fell into a vat of molten chocolate, extinguishing her burning arm and saving her life—though she sustained severe injuries in the process. Tragically, seven of her colleagues were not as fortunate.
Here’s the main takeaway…
“Something is Going to go Boom”
Just last week, Georgieva made headlines again, this time at an event hosted by the Meridian International Center. Speaking with transparent sincerity, she shared the following insight:
“There is simply no way that interest rates would go up so much after being low for so long and there would be no vulnerabilities. Something is going to go boom.”
While Georgieva did not specify what might explode, we can speculate on various scenarios. More banks could collapse, a public pension fund could face dire consequences, or the dollar itself could plummet.
The critical takeaway is that ‘something is going to go boom.’ When it does, a prolonged depression may follow.
Some individuals may lose their jobs only to find better opportunities afterward. This, rather than being viewed as a calamity, should be recognized as part of a necessary cycle of renewal.
A depression may be essential for recalibrating the economy and financial landscape. It is vital to clear the way for new generations of entrepreneurs to build upon a more stable foundation.
Current observations clearly indicate that something is amiss in the economy. This issue has nothing to do with a perceived failure of capitalism, but rather stems from a surplus of burdensome debt and past errors instigated by the Federal Reserve, weighing down progress.
An economic depression serves as a regular feature of the business cycle. Moreover, interventions by central planners aiming to smooth out this cycle often only exacerbate the booms and busts.
Discussing the business cycle is incomplete without mentioning the insights of Austrian economist Joseph Schumpeter. He identified four phases: prosperity, recession, depression, and recovery.
Growth, as Schumpeter noted, initiates with entrepreneurial innovation, which drives demand and increases production costs, including labor. Consequently, existing businesses suffer due to heightened prices and loss of market share to these new entrants.
As consumers gravitate toward innovative products, demand for older offerings diminishes, leading to price declines and signaling the end of a growth phase.
This sudden influx of innovation saturates the market and leads to a consolidation phase, possibly resulting in a depression.
The Creative Process of Government Destruction
According to Schumpeter, the depression phase, while challenging, also fosters creativity. It prompts economic equilibrium through necessary adjustments, thereby paving the way for new innovations during the subsequent recovery phase.
This ongoing cycle, where emerging and inventive companies displace established ones, is what Schumpeter termed ‘creative destruction.’ While disruptive to existing industries and resulting in numerous job losses, it is essential for fostering long-term economic growth.
Innovation generates new opportunities for workers, leads to better products at lower prices, and represents the natural rhythm of economic evolution. Businesses like Kodak, Pan American Airways, and Blackberry have faded into obsolescence, making way for more agile and inventive successors.
Governments, too, face potential extinction in this relentless landscape.
For over a century, robust economic growth disguised the poor decision-making prevalent in Congress and mitigated the negative impact of ineffectual government regulations.
However, the economic downturns of 2008 and the disruptions arising from COVID-19 revealed the failings of the federal government. It became apparent that financial interests had perverted governance.
It’s no longer merely a question of who influences political leaders—such as President Biden—but rather who remains unaccounted for in the corridors of power.
Additionally, longstanding government obligations now threaten economic stability as national debt stifles productivity.
Perhaps the impending depression will usher in a phase of creative destruction that addresses the roots of governmental corruption, leading to a smaller and more liberated federal apparatus. One can only hope for meaningful transformation.
But do not hold your breath.
[Editor’s note: Are there underlying provocations leading to potential conflict over Taiwan? Are you prepared financially for such uncertainties? These pressing questions are explored in a unique Special Report titled, “War in the Strait of Taiwan? How to Exploit the Trend of Escalating Conflict.” You can access a copy for less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
Return from The Creative Process of Government Destruction to Economic Prism
