The World Economy​—Where Is It Heading?

Where Is It Heading? What Will It Mean for You?

“YOU just don’t know how hard it is making ends meet,” says Ann. True, her middle-class home is lovely, but the mortgage payment is almost heart stopping. And though her husband’s paycheck is substantial, inflation has chiseled away at its value. “Every week prices creep up,” Ann says, “while my shopping money stays the same.” She thus feels squeezed by unrelenting pressure. “I’ve offered to take on a part-time job,” she sighs, “but he doesn’t want me to.”

On the other side of the world, an African farmer named Alion faces similar frustration. Government controls have set prices so low that his work of tilling and planting is simply unprofitable. In times past, Alion says, “everybody would try to plant more than the next farmer. Now, everyone settles for growing the same.” It just isn’t worth the extra effort of growing more produce.

Anxiety and despair are the legacies of our troubled economic times. And no doubt you, too, are affected, regardless of what part of the world you live in. The future seems obscured by question marks: ‘Should I buy now before prices go up? Should I invest what little savings I have? Can I even trust that the banks are a safe place to deposit my money?’

Such concerns are not mere paranoia. In the United States, for example, 1982 saw more banks close than any other year since 1940. Bankruptcies were ominously close to the all-time peak reached during the Great Depression of the 1930’s. Towering interest rates had choked the life out of businesses, large and small. And the problems are by no means confined to any particular country. ‘So just where is the world economy heading?’ you might ask in frustration.

Frankly, no one really knows whether tomorrow will bring news of an economic rally or further retreat. The economy is just too unpredictable. Yet we can authoritatively predict where the world economy is headed in the long run. To do this, however, we must look beyond wage-price spirals and balance-of-payment deficits and search out the real causes of today’s problems. Nevertheless, it would be helpful first to take a brief look at some of the economy’s external problems.

Money​—How Created?

“FEASTING makes you happy and wine cheers you up,” a wise man once said, “but you can’t have either without money.” (Ecclesiastes 10:19, Today’s English Version) But just what is this mysterious thing​—money? Where does it come from?

Long ago man realized that neither bartering nor lugging around metal were convenient ways of doing business. So the ingenious Chinese invented paper money. And in time other nations, too, opted for the convenience of printing paper that was, at least in theory, redeemable for precious metal​—usually gold.

The gold standard, however, had a built-in flaw. It is said that the total value of all the gold ever mined is only about $85 billion dollars (using the old $35/​oz price of gold). Nowhere near enough of the shiny stuff exists to keep up with the frantic growth of population and business.

To illustrate, after World War II the U.S. dollar became the currency of international trade. Billions of U.S. dollars thus came to be in the hands of foreign governments. Claimed one writer: “Already by 1965 there were more dollars in the hands of foreign banks than the gold in Fort Knox was worth.” (Italics ours.) What if the nations all suddenly demanded their gold? So in 1971 the United States ‘closed its gold window.’ Foreign nations could not redeem their dollars for gold, though the United States still maintained huge gold reserves. For all practical purposes, then, the money was backed only by the good faith of the United States government. This threw the international monetary system into chaos.

Money, therefore, is worth only as much as people think it is worth. The more money governments print, the less value people put on it. But the printing presses are not the only source of money.

Out of Thin Air

“You ought to have deposited my silver monies with the bankers,” said a man in one of Jesus’ parables, “and on my arrival I would be receiving what is mine with interest.” (Matthew 25:27) Even in Bible times, bankers knew the art of lending money for a tidy profit and sharing some of this gain with the depositor as “interest.” In doing this, however, bankers are cleverly creating money.

For the sake of argument, imagine yourself depositing $100,000 (or a similar amount of your country’s currency) in a bank. Next is a customer who borrows $10,000 to start a new business. You may figure that your deposit, minus this loan, increases the bank’s assets by only $90,000. But that is not how a banker reasons. Rather than giving the borrower $10,000 in hard cash, the money is usually credited to his bank account for him to draw upon gradually. So instead of the bank’s assets decreasing, the bank’s ledgers show a total of $110,000​—$10,000 created out of thin air!

This figure juggling may give you a headache, but it brings a smile to the banker. In this way banks are able to lend more money than they really have. ‘But isn’t that dangerous?’ you ask. It can be. Especially if a bank lends money irresponsibly. Nevertheless, it is rare that all the depositors and borrowers come at the same time demanding their money. So banks keep enough hard cash on hand to handle their day-to-day business.

Governments, too, create enormous amounts of funds without necessarily running their printing presses. For example, according to the book The Money Balloon, the Federal Reserve Bank of the United States “goes through an obscenely complicated series of bookkeeping entries​—moving numbers around, buying and selling Government securities, making loans, buying securities and agreeing to sell them right back, selling securities and agreeing to buy them right back . . . but when all this activity is analyzed, the Federal Reserve System is creating money out of thin air.”

You, too, may unwittingly create money. The credit card lets you borrow money every time it is used. Checking accounts often let you write checks for more money than is actually deposited. In this way, the supply of money grows​—and inflation is fueled.

The money system is therefore a bubble that could easily burst if people lost confidence in the system. Nevertheless, if money is so easily created, where does it go?

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World currency is no longer backed by gold

Money​—There’s Never Enough!

SAID King Solomon: “Your money can be gone in a flash, as if it had grown wings and flown away like an eagle.” (Proverbs 23:5, Today’s English Version) Many squander their money, like the highly paid army general who went bankrupt after purchasing “two Cadillacs and a second mink coat for his wife.”

Similarly, a government can live beyond its means. The United States, for example, has accumulated an internal debt of over one trillion dollars! Other countries have likewise piled up astronomical IOU’s, including large external debts to foreign sources, such as the Soviet Union’s (16 billion dollars) and the Philippines’ (10 billion dollars).

‘But why haven’t the nations been more prudent?’ you ask. For one thing, ours has been a time of unprecedented demand for material goods. Economist Irving S. Friedman thus explains: “After World War II, governments could not survive, nor could opposition parties come into power unless they promised rapid, general, and major improvements in material well-being.” Governments therefore needed money​—lots of it—​to build the roads, schools, hospitals and housing that people clamored for. The results? Huge borrowings, resulting in towering global debts. The situation dramatically worsened after 1973.

In that year OPEC (Organization of Petroleum Exporting Countries) drastically cut the flow of oil to the rest of the world. The world reeled from this devastating move. Prices of oil soared. Hardest hit, however, were the developing nations.

The March of the Petrodollars

OPEC’s tactic worked, and its members were suddenly fabulously rich (although more recently they find themselves in financial difficulty due to the oversupply of oil and falling prices). But back then much of their newfound wealth marched to the cash-starved developing nations. But this desire for profit proved to be at the ‘root of many injurious things.’​—1 Timothy 6:10.

All this cash helped fuel inflation, which some countries have tried to control by letting interest rates soar. The heavily indebted nations, however, were trapped​—they needed more money but could not pay even the interest on their old loans. As we will later see, these debts now threaten the solvency of the entire world economic system!

Financing the Third World

After World War II the World Bank and the International Monetary Fund (IMF) were established to lend money to needy countries. Wealthier member nations finance these organizations. Recently, the president of the World Bank, A. W. Clausen, declared that “a key and central aim of The World Bank is the alleviation of poverty.” And these institutions have indeed funneled much needed money to developing nations. We are reminded, nevertheless, of a bit of wisdom found at Proverbs 22:7: “The rich is the one that rules over those of little means, and the borrower is servant to the man doing the lending.” Some developing nations therefore resist accepting help from these organizations. Why so?

In order to protect its investments, the IMF typically requires that a borrowing nation drastically alter its economic policy by attempting to balance the budget, cut government spending and devalue its currency. These may be sound economic ideas, but they can also throw a poor country into chaos. One economist thus concluded that forcing these policies on a developing country is “like throwing an anchor to a drowning man.”

Simply printing more money is a futile ploy​—it merely tightens the death grip of world inflation. So, heavily indebted nations may have no choice but to succumb to the policies of the international lending organizations.

YOU go to your favorite café and order a cup of coffee at an already inflated price. But when you go to the cashier you are informed that in the time it took you to drink it, the price has nearly doubled. Impossible? No, for people in Germany during the 1920’s had this very experience​—a chilling example of how inflation can accelerate.

Your experience with inflation may not be quite so drastic. Nevertheless, Argentina has experienced an inflation rate of 500 percent and is one of several countries suffering from disastrous, rapid inflation. Nevertheless, students of the Bible are not surprised at this development, since Revelation 6:6 told of a time when a day’s wage would buy a mere “quart of wheat.”

Like most of us, however, you may be confused as to who (or what) is to blame for inflation. So let’s ask the “experts”! Imagine a courtroom gathering of businessmen, politicians and economists. You have the solemn privilege of presiding over the proceedings.

Down comes the gavel as you commandingly say: “Order in the court! The world economy is near death and one of you is to blame! Who would first like to defend himself?”

“If it pleases the court,” says an economist, “I would like to try to shed some light on what has taken place. Inflation,” says he, “is a simple result of the law of supply-and-demand. When the banks extend a lot of credit, the money supply grows. Now, the more money people have, the more they can demand goods. The more goods are in demand, the more they cost. It’s really quite simple.”

“Don’t go putting the blame on us bankers,” objects a man in a business suit. “If we didn’t extend credit, the whole economy would lapse into a recession. Without credit, people can’t buy houses, cars or even household appliances. Business and industries suffer. The stock market sags as investors pull their money out. Now, I admit we have at times got a bit carried away extending credit. But it was OPEC who gave us all that money in the first place. And they’re the ones who drove prices sky-high with that embargo of theirs. (There are murmurings of agreement.) But the real culprits are the politicians.” Before the angered statesman can utter a word, the banker cuts him off, saying, “Yes, you’re the ones spending all that money on your pet government programs. Why, because you fellows do so much spending, there’s greater demand for goods. So prices naturally go up!”

“Now that’s all I’m going to take,” says a politician. “First of all, it is the military establishment that is always demanding more money for those ‘toys’ of theirs, even though there are already enough bombs to blow up the world several times over! And I remind you that you bankers are the ones that cry when interest rates are raised to control inflation.”

“But all that has accomplished is to plunge the world into a recession,” the economist says. “Besides, prices almost never come down once they go up. Several times the cost of raw materials went down. And what did some industrialists do? Instead of passing on the savings to the consumer, they invested their money in more advertising to try to increase consumption of their products!”

An industrialist is red-faced. “Now, just a minute,” he says. “How can we lower prices when labor is constantly demanding higher wages? Sometimes the labor unions have demanded a raise in anticipation of inflation​—before it even happens! What can we do but raise prices? Besides, we keep people employed. So what if our growth leads to inflation?”

With this remark the room erupts into chaos, broken only by the slam of your gavel. “Now I’ve heard enough of your excuses,” you say. “I may not be an economist, but it’s plain to me that all of you have had a part in this. All have contributed to this dreadful situation. I therefore sentence you . . .”

But your gavel is frozen by a sudden realization on your part. You think about all those credit cards in your pocket and how you’ve overused them. You think of the things you purchased out of excessive want​—not need—​and a fear that prices would go up. Your confidence as a judge wanes, and with head bowed low you join the ranks of the guilty.

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Some of the Causes of Inflation

● Excessive Credit

● Government Spending

● Military Expenditures

● High Wage Demands

● OPEC’s Oil Embargo

● High Interest Rates

● Floating Rates of Exchange in International Money Market

● Unprecedented Consumer Demand

Your Money​—Safe in the Bank?

‘MONDAY morning they began lining up. They braved bitter cold and an estimated five-hour wait. The calm assurances of bank executives, economists and political leaders merely heightened the sense of panic. All over the nation, indeed all over the world, an ever-increasing crowd of people were besieging the banks, making the same demand​—GIVE US OUR MONEY!’

Might this be the news that you will read sometime in the near future? The Wall Street Journal recently quoted economist Alan Greenspan as saying that “the chances of a dangerous [bank] breakdown are the greatest in a half century.” Why so?

Where the Money Has Gone

Recall how thoroughly you were checked out the last time you applied for a small bank loan. Surprisingly, banks are not always so prudent when large amounts of money are involved. For example, Mexico, with its sizable oil reserves, easily obtained some $57 billion in loans. Then came the worldwide surge in interest rates and a drop in oil prices. Mexico stood at the brink of bankruptcy. A mini-panic among bank investors occurred as rumors spread that Mexico might default on these enormous loans. Emergency steps were therefore taken to pipe yet more money to this nation. While a crisis may have been headed off, other nations, such as Poland and Brazil, are also having difficulties paying off their huge debts.

Billions more are invested in businesses. In times past, large businesses financed their organizations by selling bonds (long-term loans) to the public. But when interest rates climbed, investors sold their bonds and invested in more profitable areas. Businesses were forced to turn to short-term, high-interest bank loans. Banks, however, could lose a fortune if these businesses went bankrupt. The recent collapse of the Drysdale Government Securities Corporation is a scary example of just how vulnerable banks are​—it cost them $285 million!

Global Dominoes?

Economists thus fear that these factors could work together to produce a global domino effect. Suppose a foreign nation, or a number of large corporations, defaults. One or two major banks could go bankrupt. This, in turn, could frighten depositors in other banks, who might start a frenzy of bank withdrawals. Since banks keep only a moderate amount of cash on hand, there could be a massive liquidity crisis. Bankers would be desperate for cash. This chain reaction could expand into a worldwide economic collapse!

Bankers nevertheless say that such a scenario is unlikely. David Rockefeller, former chairman of the Chase Manhattan Bank, claimed in a recent interview that the banking system “is very sound.” True, “banks do a lot of business with one another, so there is tremendous interdependence.” But he felt it “most unlikely” that such a global domino effect would pull down the world banking system. Since the success of the banking system rests on public confidence, however, it is understandable that banking leaders speak so optimistically.

‘But surely a nation would not allow its major banks to fail,’ you might say. But that is exactly what the central Bank of Italy did! The collapse of the Banco Ambrosiano received much publicity because of its close connection with the Vatican. When the scandal-ridden bank failed, the Bank of Italy, to the surprise and consternation of European bankers, withdrew its support. Bankers fear this may have set a dangerous precedent.

“Peace and Security” in the Financial World?

The New York Times of October 10, 1982, claimed “insiders predict that fear of a breakdown of international finance will ultimately drive the parties to agreement.” During the economic collapse of the 1930’s, however, the nations shunned cooperation, and, instead, “sought to shelter themselves from the prolonged world-wide economic storm without regard to the harmful effects of their actions on other countries.” And there is little indication that the nations have had a change of heart. Inflation-ridden governments have, for example, allowed interest rates to rise, regardless of the devastating effect that it has had on poorer nations.

Economic Problems​—What Solution?

“FROM what source are there wars and from what source are there fights among you?” asked the Bible writer James. “Are they not from this source, namely, from your cravings for sensual pleasure that carry on a conflict in your members? You desire, and yet you do not have. You go on murdering and coveting, and yet you are not able to obtain. You go on fighting and waging war.” (James 4:1, 2) Does this not ring true? Is not the real problem man himself? Does not his insatiable desire to possess things cause economic conflicts?

It is greed for profit, not unselfish concern for one’s fellowman, that has caused bankers to lend such enormous funds to countries that cannot pay them back. And the Bible roundly condemns such profiteering. (Nehemiah 5:1-11; see also Exodus 22:25.) It is greedy self-interest that prevents the nations from cooperating together and working out a solution.

Since the Bible has so accurately described the emotional factors that lead man into such difficulties, it should not surprise you that it also predicts the outcome of the problems, economic and other, that beset the nations today​—the complete demise of the present world system. This will come right on the heels of a proclamation of “Peace and security!” A nightmarish period of time called the “great tribulation” will expose, among other things, the worthlessness of trusting in the material goods that people have feverishly accumulated. “Into the streets they will throw their very silver, and an abhorrent thing their own gold will become.” Imagine! Even gold and silver being viewed as worthless. But will this merely be because of inflation? No, for the prophecy continues: “Neither their silver nor their gold will be able to deliver them in the day of Jehovah’s fury.”​—Matthew 24:21; Ezekiel 7:19.

True Christians, however, do not fear that day of execution of divine judgment, nor any accompanying economic collapse. They know that the “great tribulation” will culminate in the destruction of this wicked system of things, which will be replaced by a righteous new government of God. (Revelation 21:1-4; see also Daniel 2:44.) This government will bring real economic security to all earth’s inhabitants.​—Isaiah 65:21-23.