by Usman Hayat, CFA
"Don't sell economic stability to buy economic growth" warned Tomáš Sedlácek, chief macroeconomic strategist at CSOB Bank and author of The Economics of Good and Evil to an audience of investment professionals at the CFA Institute European Investment Conference in Prague. Sedlácek's unconventional view is that our problem is not lack of growth, but too much of it. He believes that the role of the economist should not be to encourage economic growth but to decrease the swings of the business cycle.
Sedlácek said that there are parallels between how a depressed economy is treated by today's economists and how a depressed patient is treated by the doctors. The economist's prescription of running budget deficits and thereby increasing debt is similar to the doctor's prescription of anti-depressants. The problem with both debt and anti-depressants is that they can become addictive.
Sedlácek said that "Our problem is not lack of growth but too much of it." An economy that uses debt to grow must continue to do so by taking on more and more debt, or alternatively face a slowdown that will lead to bankruptcy. It is like owning a car that explodes when it stops, argued Sedlácek.
In Sedlácek's view, European countries have amassed "a Mount Everest of debt," to continue to grow, which becomes a problem in economic slow-down. He contends that in the past, economists sold stability to buy growth but now we need to do the opposite: sell growth to buy stability.
He argued that Greece is not behind the rest of Europe but ahead of it because it has gone bankrupt before the rest of Europe. If other European countries do not change their economic course, he argued they will follow Greece. He also highlighted that Ireland used to be in a much worse economic situation than Greece. Then before the start of the financial crisis in 2008, Ireland was portrayed as an example of achieving economic success through debt-driven economic growth. Now Ireland has come full circle and financial crisis has exposed the Irish model.
Elaborating upon his point of debt and growth, Sedlácek suggested that an economy with no debt and no growth has to face social problems but not bankruptcy. An economy grown through debt has to face both social problems and bankruptcy sooner or later. More credit and better credit ratings cannot solve the problem caused by excessive credit and questionable ratings. He said that the words "debt" and "credit" used in modern finance bear similarities to the word "sin" and "faith" in the Christian scriptures and we have become "slaves of debt" the way the Bible warned people of becoming "slaves of sin."
He referred to the embedded warning of what he termed "subject-object reversal" that has been found over the centuries in myths such as Aladdin or the Golem of Prague. Sedlácek said that this reversal is also portrayed in modern movies, where human beings create machines to serve them as slaves but the machines take over and enslave human beings. Sedlácek was of the view that the same subject-object reversal has happened in debt-driven economic growth. It was supposed to serve us and lead us to prosperity but now we are serving it and it is taking prosperity away from us.
Sedlácek explained that economists were prescribing policies that favour debt-driven growth because they were under the false impression that they have the economies figured out. The financial crisis has brought back the realisation that there is a lot of uncertainty in how economies work and we cannot predict the effect of a contractionary or expansionary monetary policy. This uncertainty calls for a cautious approach favouring economic stability rather than economic growth. If you were driving a car in which the brakes and accelerator randomly swapped, you would drive it very slowly. However, we were racing with it, argued Sedlácek.
Sedlácek is clearly in love with what he calls the "beautiful economics" but critical of how it is being taught and applied. To quote from the conclusion of his book, The Economics of Good and Evil, Sedlácek says:
"For economists, the philosophical question 'what do we think a human being is?' needs to be rethought. Perhaps we also teach economics in a strange way. Although, we are the strongest believers in human freedom of choice, we do not allow students to choose their own school of economic thought; we teach them the mainstream only. After they are safely indoctrinated for a couple of years, only then may they learn of alternative, "heretical" approaches — and a history of their own field. Even the history of economics is often thought of as a display of "trials and errors" of the (stupid and primitive) history before us — before we finally hit the mainstream truth, which the past was so clumsily grasping for. This book tries to take the exactly opposite tack, to take our present state of the art with a grain of salt and take ideas of our forefathers a bit more seriously. Let us hope that we will be treated as kindly by our sons and daughters. Wild things are not in the past, in heroic stories and movies, or in distant jungles. They are within us."
The presentation by Tomáš Sedlácek was broadcast live from the conference in Prague. You can watch the recording of his presentation here.
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