When the Money Runs Out | Stephen D. King

Summary of: When the Money Runs Out: The End of Western Affluence
By: Stephen D. King


Embark on a revealing exploration of Western economies’ turbulent pasts and the dangerous delusions that rose to the forefront in Stephen D. King’s ‘When the Money Runs Out: The End of Western Affluence’. This insightful summary offers an in-depth comparison between the recent financial crisis and the Great Depression, revealing the patterns of hubris and nemesis that shaped these historical events. Delve into the intricacies of government policies, fiscal positions, and monetary actions, while evaluating the effectiveness and potential perils of these strategies. Gain an understanding of the role quantitative easing plays in our economic landscape and the challenges faced by different societal groups. Prepare to be informed, enlightened, and perhaps even cautionary as you navigate the economic storm that continues to buffet Western affluence.

The Delusions of the American Property Boom

The pre-2008 American property boom was a classic example of hubris. Economists failed to realize the seriousness of the subprime crisis, causing a catastrophic credit expansion that led to illusory prosperity. The government’s favorable recording of risky activity in GDP figures further encouraged subprime risk, which eventually resulted in the inevitable hangover. Stagnation removes opportunities for economic growth and makes it difficult to distribute its benefits. The book highlights the similarities between the recent financial crisis and the Great Depression, both of which were caused by low-interest rates and a binge on easy credit. The gap between the “risk-free” interest rate and higher interest rates for uncertain ventures creates a reward for risk-taking, which contributed more to the GDP’s “banking services” component before the crisis. Lehman Brothers and Bear Sterns were star performers in GDP creation during the run-up to the crisis. This book argues that we need to avoid the collective delusion of recurring bubbles in Western economies and learn from the mistakes of the past.

FDR’s Policies and Today’s Crisis

The legacy of President Franklin Delano Roosevelt’s policies during the 1930s is often brought up in discussions about the current crisis. However, crucial differences set them apart. One of the key differences is the nominal dollar value of the economy. During Roosevelt’s time, the nominal dollar value of national income dropped 50%, while in 2012, four years after Lehman Brothers’ collapse, it was already almost 10% higher. Another difference is the government’s fiscal position. When Roosevelt was president, the shortfall between government receipts and spending peaked at 9%, and America had already reached that deficit rate by 2012. Finally, public sector debt was around 38% of national income in 1934, while by 2012, it was more than 100%. Observers shouldn’t mistake stagnation and disappointing statistics for all-out deflation and depression. Besides, persistently low-interest rates are a sign of lasting economic failure, not a harbinger of future economic success. Even though the US government has exercised stimulus, it has gone much further than Franklin Delano Roosevelt’s policies in the past.

The Controversy of Quantitative Easing

The government’s implementation of quantitative easing (QE) has made central bankers more politically controversial. The policy aimed to reinvigorate the economy but resulted in higher prices for commodities and assets, financial repression, and a corroding anchor for all asset values. QE has also caused low yields on US Treasury bills, leading to a downgrade from Standard and Poor’s. While low rates help fund national debt more cheaply, pensioners and investors suffer, and big blue-chip companies can easily raise funds despite not needing extra money. Although QE seeks to stimulate results, it fails to incite ordinary economic growth.

Cracks of Modern Economies

The economic crisis has exposed serious schisms in modern economies which fall into three broad types: “intergenerational,” “haves and have nots,” and “creditors and debtors.” While healthy rates of growth can paper over these cracks, difficult times have brought more “fighting over the spoils”. The new money created by QE boosted stock markets, benefitting the already rich at the expense of low-paying new jobs for wage earners. This has revealed a contrast in fortunes between wage earners and the rich, who own the majority of shares. As unconventional policies have become increasingly conventional, the separation of monetary church from fiscal state no longer holds. Further, the high inflation that baby boomers enjoyed when they were younger helped pay their mortgages, but now boomers want low inflation to protect their retirement, and younger people see their standard of living falling. Meanwhile, high levels of indebtedness to foreigners put future national assets at risk. The schisms in rich countries show that everyone can “be on the make and on the take”, and hitting an inflation target when the economy is on the ropes is a bit like taking pleasure in one’s exercise regime even as the cardiologist tells you that you need a heart transplant.

International Debt and Its Consequences

The 2008 financial crisis had an international dimension, revealing the massive lending between northern and southern Europe and China’s large purchase of US Treasury bills. To favor the US electorate, actions such as debasing the national currency or bond yields are taken, causing foreign investors to purchase real assets like London property or American brands, putting the younger generation at a disadvantage.

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