In my opinion the greatest men have their Prejudices. Men learn the elements of Science from others: And every learner hath a difference more or less to authority, especially the young learners, few of that kind caring to dwell long upon Principles, but inclining rather to take them upon trust: And things early admitted by repetition become familiar: And this familiarity at length passeth for Evidence.
Bishop Barkeley 1685-1753 * The above passage comes from “A Discourse addressed to Magistrates and Men of Authority (1736)”.
I was not surprised to learn that the origin of the word addiction comes from the Latin addictus which refers to a person who is bound and dependent as a result of unpaid debts. Metaphorically, this term came to be used for any behavior that results from a heavy dependence on something, such as a drugs. But here, we are not trying to understand the concept of substance abuse in relations to drugs. Rather, the role addiction plays in formulating our economic thinking and the policy response to economic challenges. Addictions such as an easy access to cheap money or addiction to an idea that real growth is just around the corner are few examples of this addiction.
The journey from a habit to addiction is not that far. First, it is assumed that your consumption of a substance is nothing out of ordinary-even though people around you can see that you are consuming way too much than a norm. But off course you are still under the impression that: no, it is all under control. However, the body has its own limits. This unregulated consumption creates an imbalance between Serotonin and Dopamine (the two most important chemicals in the brain) and because of this imbalance, the mind detaches itself from the reality (consequences) and creates an internal reality (perception). Now, we are an in interesting phase of understanding the world through this imbalance and our actions will demonstrate that. After creating the reality, the addiction phase moves onto a territory what I call the”No Impact Mindset” or NIM where the manufactured reality sees no consequences of any action.
In that reality, the assumption is this: the substance which has caused the addiction is an abundant supply and will never run out. This is a very powerful point because the addicted has lost all capacity of distinguishing between perception and reality. As long as the substance is there, all is well. The economy is getting better. The crisis has been avoided. The stock market is up so our economic challenges are slowly fading away. Jobs have been created. We are on the road to recovery. Happy days are here again. Well, you get the picture.
This is the result of powerful drug called the cheap money- supplied by the central banks. This drug has been an abundant supply and will continue to be available as long as there is an addiction. But as we all know, as the addiction grows, so does the quantity of a given substance. Both feed of each other creating a vicious cycle with no end in sight. This process, if continues, for a long term will make it very painful to get rid of this addiction. So, deeper the addiction, larger the quantity is required to feed of that addiction. This analogy fits perfectly with the global binge of bond buying. Interestingly, the similar point is made by the legendary Bill Gross of PIMCO. He writes: “Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result”.
This astronomical growth of the cheap money has changed the collective psyche of those who were trained in the classical sense of understanding the role of the monetary policy and its impact. But as we have seen it, the zero-interest dogma has changed the definition of real growth in the economy. Inflated numbers and misguided rise in the stock indexes are the result of this addiction to cheap money. But, one must be balanced in its analyses concerning grave issues of the day. Blaming the Fed or the ECB or BOJ alone is no way to provide a serious analyses of the ongoing economic mess.
When the “growth” based on borrowed or printed money is celebrated and preached, the blame lies in the whole social order. In that sense, we are all addicted. Addicted to cheap credit to buy things; addicted to live beyond our means through binge consumption (this applies to both the public and private sector); and addicted to satisfy our most immediate needs without taking into account the future consequences of our current economic behaviour. In that context, it has been mentioned here many times, structural changes are urgently needed in regards to the way we analyse, understand and execute economic policy decisions at the highest level in the decision making bodies.
By Raja Kadri