Markets Are Manic Depressive, Equilibrium Is Elusive

In his landmark book, Sedlacek argued that minimizing debt, not maximizing GDP, should be the goal of economic policy.

Runaway debt forces the economy into wild swings between excess and recession.

Nearly 15 years ago, as the world was still in the grip of the aftermath of the Global Financial Crisis, Czech economist Tomas Sedlacek diagnosed the problem in the markets, characterizing it not as depression but manic depression. The treatment, or goal of economic policy, he argued, should be minimizing debt—not chasing GDP growth.

It's a diagnosis that still holds true today—and one that might be about to gain new meaning as we enter the next phase of the economic cycle.

Fetishizing Economics

Sedlacek's 2011 bestselling book The Economics of Good and Evil is widely regarded as a landmark study that challenges key assumptions of economic theory. Sedlacek, who was an economic advisor to former Czech President Vaclav Havel, characterizes economics as a cultural phenomenon, and argues that it cannot be free of ethics.

We have, he states, "fetishized" economics, coming to believe that it will deliver benefits it can never be expected to provide, due to a wider vacuum of values in society.

I am of course an economist and I have nothing against economics, capital markets or wealth. However, the problem occurs when economic values are the only values you see. Even the biggest virtue, if overdone, becomes a vice. We have fetishized the economy, to the point that we expect it to do everything for us. We expected it to solve problems of inequality, to give our lives meaning and even some kind of spirituality. These are things the economy will never do.

Manic Depressive Markets

One of Sedlacek's insights is that the goal of modern economic policy is flawed. Attempting to maximize GDP forces the economy into dangerous excesses, and the medicine then required tips it into recession. Debt and interest rate changes drive these swings, leading him to characterize the economy as "manic depressive".

Times of crisis are good for asking the right questions. We have to abandon the obsession with growth in economics. We have to get out of the manic-depressive cycle within which our economic everyday reality operates. And to do so, we have to pay more attention to the manic than the depressive phase, and we have to change the general goal of economic policy. Instead of maximizing the gross domestic product, the goal should be to minimize debt.

Tipping Point

Although Sedlacek's book was written almost 15 years ago now, it has important lessons for the present. We have just been through a period of excess, as low interest rates—designed to stimulate the economy through a period of slowdown—ended up driving inflation higher. The reaction, an aggressive rise in interest rates by central banks, is now biting. Inflation is coming back under control, but there is the risk of overshooting.

The challenge for the coming months may now shift. If inflation truly has been tamed, central banks must be wary of crushing growth, pushing the economy into recession and swapping inflation for deflation.

Instead of maximizing GDP, Sedlacek argues that minimizing debt is the answer. With a total debt pile of almost $34 trillion, and interest payments now surpassing even military spending at $1 trillion per year, the US is learning the need for that approach. Unfortunately, there is no indication that the country's addiction to debt will come to an end any time soon.

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