(Kitco, Tues. Sep. 13th, 2022) – As the Federal Reserve raises interest rates and a technical recession has hit the U.S. economy, the U.S. is more likely to experience social unrest and even authoritarianism, said Hans-Joachim Voth, Professor of Economics at the University of Zurich.
Voth said that recent economic events and a “fragile” democracy “raise the probability” of bad political outcomes, especially with “interest rates going up” and a looming recession.
“Once you have a recession, getting out of it takes time,” he said. “And a large stimulus comes with all sorts of extra baggage. And that might be the time when everything is going to hell, when you have the next election.”
Voth, whose research deals with the rise of fascism and sovereign debt crises, spoke with David Lin, Anchor and Producer at Kitco News.
Unrest and Budget Cuts
Voth’s work with Jacopo Ponticelli of Northwestern University shows that across Europe, from 1919 to 2008, budget cuts were associated with more social unrest. The research was published in The Journal of Comparative Economics in 2020.
“What we found is a pretty remarkable one-to-one relationship between rises in austerity, cutting expenditure on the one hand, and a broad set of measures of instability,” said Voth. “On one end of the spectrum you have revolutions, but you also have violent demonstrations and things like this. All of these events indicate that instability becomes much more likely as you cut expenditure and you make especially poor people less well off.”
When asked whether government spending and inflation could lead to unrest, Voth responded, “It’s just not something you see in the data… It’s a sign of political weakness typically that inflation takes off.”
He pointed out that Weimar Germany, which had a monthly inflation of 29,500 percent in October 1923, was hesitant to take strong measures to reduce inflation.
“The reason why [the government] never did anything about this is they were incredibly afraid that the communist, and also the right-wing parties at the time, would stage a revolution and just sweep away the newly-founded democratic regime,” Voth explained.
The Rise of the Nazis
Voth’s recent work, in The Journal of Finance, demonstrates that Germany’s 1931 banking crisis paved the way for the election of Adolf Hitler in 1933.
“In those areas most affected by banking failure, you see the biggest rises in Nazi support,” he said. “There’s obviously a direct mapping from bank failure to economic misery, but then there’s an interest twist.”
He proceeded to explain that of the two banks that failed, one had a “really prominent German-Jewish banker leading the bank,” and “it’s where this bank fails, and has branches affecting local people, that you see the biggest rise in support for the Nazi party.”
The implication, according to Voth, is that the banking failures amplified anti-Semitism and made the Nazi party more attractive to German voters.
“This narrative about the Jews conspiring with the elites of democratic Germany against the ordinary workers, the shopkeepers, and so forth, gained credibility,” he explained.
To find out Voth’s views on the gold standard, watch the video above.
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Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com