Recessions can be caused by many things; the only connection between different ones is that society’s poorest always suffer most.
The recession that followed the 2008 financial crash was fundamentally a financial crisis – a credit-fuelled bubble and some not-so-clever dabbling by investment bankers in the US mortgage market was a house of cards that collapsed when banks stopped lending to each other. It is not true that no banker served time in jail for their role in the 2008-09 financial crisis – the Financial Times identified 47 who did – but it’s certainly true that materially they suffered less than the poorest. As a result of that recession in the US, the average working-age adult in the bottom 10% of earners suffered a relative loss of income two-and-a-half times bigger than the richest 10%.
The global recession that has sprung out at us this year could be termed a ‘black swan’ event. The concept of a black swan event, a metaphor to depict the overturning of previously-held convictions, has been developed by the enormously clever writer and distinguished practitioner of mathematical finance, Nassim Nicholas Taleb. Taleb takes the ancient belief that black swans don’t exist – in the 17th century it was discovered that they do exist – and applies it to all kinds of events that appear as if from nowhere.
For Taleb a black swan event “lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I… summarize the triplet: rarity, extreme ‘impact’, and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.”
Taleb suggests that many things can be explained thus – the rise of the internet, World War One, the collapse of the Soviet Union, all are examples of a black swan event. Covid-19 is arguably just the latest. Not that Taleb believes that – for him the pandemic is a white swan event; entirely predictable in its onset and outcomes. But for me, the economic recession that has resulted from Covid-19 is indeed a black swan event – unpredictable, even unnecessary if the pandemic had been handled more astutely.
A harsh world
Yet those who suffer most from job and income losses have the least control over events that brought them low. Why should those most in need also be the ones that do worst in any economic downturn?
Even before Covid-19 struck the poverty rate in the US in 2018 was put at around $25,000 for as a household with two children under 18. There were more than 38 million people, above 11% of the population, living in poverty. It’s even worse in the European Union – in 2017 22.4% of the EU’s population, 112.8 million people, were living in households “at risk of poverty or social exclusion” while in the UK the figure is one in five or 14 million people, classified as having less than 60% of the median income after housing costs. Even having a job might not prevent you from living in poverty; 56% of those living in poverty in 2018 in the UK were in a household where at least one person had a job. Globally, 1.3 billion people around the world live in poverty. All these people are likely to find their lives getting harder with the economic recession brought about by Covid-19. Professor Brian Bell of the London School of Economics and who co-authored a report on previous recessions in August said: “Similar to previous recessions, the Covid-19 crisis has the potential to scar a large number of individuals, most of them already in a precarious situation.”
This is not fair. The most vulnerable usually have very little to do with a recession, or the fall of a bank or a financial crisis, and yet, because of the monetary system that we exist in, have no control of what happens to their money. If the purchasing power of the Pound or the Dollar drops and what once allowed the purchase of a car now only affords an apple because a bank’s or government’s gamble didn’t pay off, why should those who trusted that bank or government with their hard-earned money be the ones to suffer?
We need an alternative, more reliable form of money, to sit outside of the current system.
How about a black swan solution?
Governments have reacted to this latest recession in knee-jerk fashion. Rather than taking a rational look at the social problem of poverty that pre-dated the crisis they have lobbed borrowed money onto the fire – and discovered only that there is not enough paper to suffocate it.
According to a poll carried out by the Financial Times and the Peter G Peterson Foundation, 90% of Americans want Washington D.C. to pass a further stimulus package to cushion the economic blows. Adding more borrowed fiat money to the $27 trillion national debt of the US will not alleviate poverty or help those most vulnerable.
It may be time for a series of genuinely radical measures, some black swan moves, perhaps starting with a universal basic income (UBI) that is paid in gold, giving people the liberty from want and the ability to stand on one’s own feet that everyone craves. Paying that UBI in gold would mean that people remain free from the risk of government’s interference with their currency’s value, and have greater certainty that what they want to buy tomorrow will cost the same as today. That inflation or deflation would not have to be factored into their future financial planning. Make gold – and Glint – part of the solution to the never-ending cycle of boom and bust, and give everyone a decent living standard at the same time. Maybe even Nicholas Taleb might relish the thought.