After a lot of grandstanding and partisan wrangling, Capitol Hill answered at the eleventh hour on August 2nd. The federal debt cap was to be raised by some 2.4 trillion greenbacks. This would, they promised, be paid back over the next 10 years, by cutting public spending to the tune of $2.4 trillion. Harmonious numbers, yes. But did it do anything to address the real problem? No - because the underlying debt remains untouched. The whole hullabaloo was, therefore, nothing more than a protracted exercise in posturing, followed by kicking the debt can far down the road and, most importantly, well beyond the next election.The Land of the Indebted
Now, I'm no economist (and please correct me here if I'm wrong), but it would seem to me somewhat optimistic to say that a country in debt to the tune of $14.5 trillion (and counting) that has a current labour force of about 181 million people (current census figures multiplied by the current employment population ratio of 58.1%), whose average earnings are some $49,800 per annum, then by my calculations it would take just over a year and a half for America to pay off their debt mountain. That is, assuming that every single penny of income is used for this purpose alone, as opposed to buying food, gasoline, electricity, Predator drones and such - the usual stuff America spends its moolah on. Or, another way of looking at it is that every tax payer is $110,000 in the red - an amount most certainly not to be sneezed at.As Christopher Cadwell sums up neatly in this week's Spectator, Republicans and Democrats alike are still convinced of their "God given right to receive $5 in government services for every $3 they pay in taxes." So, today's version of the American Dream is clearly a way of life based on a fiscal fantasy, in a galaxy far, far away from reality.
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| 1 billion in $100 notes |
Europe's fiscal tale of two regions
But I digress. Let's turn to the Old World, then. Well, we ain't doing much better. The Eurozone countries are in deep, deep trouble, mainly due to disparities between the currency union's northern and southern members. The north (read Germany) have been bankrolling southern debt, while the Med countries and Ireland have kept themselves busy buying up BMW's and other sweet gizmos made in Germany. So, while the so called PIIGS are more than often portrayed as lazy leeches, bringing the Euro down by their insatiable profligacy, the other side of this coin should also be taken into consideration, namely that Germany has done exceedingly well as a result of the artificially low exchange rate it gets from the Euro, making its exports more affordable, which in turn fuels its economy nicely.
The Irish government, for example, in an act of recklessness or desparation (or both) passed all the debts accrued by its banks onto the backs of its citizens, while foreign bond holders, the ones who had willingly made the bets that had now turned sour, were let off the hook unscathed.
The Irish government didn't even contemplate "doing an Iceland", basically telling foreign creditors to go stuff themselves - which actually doesn't look like too bad a deal considering that the economy of this tiny country has been growing in strides ever since. Ireland's leaders chose to instead throw their electorate to the wolves, effectively yoking their citizens into servitude to their new paymasters in Brussels and the IMF, so enthralled were they of their banking buddies abroad.
And what does Ireland have to show for this decade of overindulgence? An unemployment rate of 14.3%, wage reductions and mass emigration. Not to mention the grand but empty shopping malls in small villages and decaying ghost towns that litter the country, all built by developers who took advantage of the generous tax breaks offered by the government, using money borrowed from banks, and becoming very wealthy in the process. The politicians, in turn, were all too happy to spend and spend the tax money coming in from the financial and construction sectors, without leaving anything for a rainy day.Meanwhile, in the Med, the Greek government and its citizens were a tad too enthusiastic in using up their newly acquired credit facilities and they splashed out on construction, swimming pools and champers galore. On becoming members of the Euroclub, Greece's politicians were indeed swift to take advantage of its perks - in particular, the low interest rates as a result of their country being linked to the economies of the stronger Eurozone members - and took out huge loans, swelled up the public sector, promised retirement at 56 and more than generous employee benefits, while their tax revenues never came close to matching these outgoings, and wouldn't have even if the majority of people - the well-off in particular - paid their taxes, which they didn't.
Closer to home, despite what MiliBalls and Labour proclaim, the UK's accounts haven't been in balance since 2002. Always quick to quote Keynes on the solution to today's recession - that to spend in a downturn is good, to cut is bad - Miliband, Balls and Brown consistently fail to acknowledge that, when in government, they completely ignored the first pillar of Keynesian economics: to save up a surplus when the going is good. Instead, they chose to do the opposite and rack up a deficit even before the going got tough.
Moreover, since the 80's the UK economy had been propped up by Northern Sea oil, which by now is pretty much gone, and by Gordon Brown's great idea to sell off 400 tons of the UK's gold reserves at the bottom of the market in 1999 (telling everyone about it in advance certainly didn't help him get a better price either). And, like Ireland, the third major source of income was tax receipts from the banking, finance and the real estate sectors. So growth prior to the housing bubble of the naughties was a fiction, based on that oh so finite black gold and Brown flogging off the national heirlooms and the world of sub-prime loans.
It was thus unsustainable all along, and when the Coalition government took over from Labour in May 2010, the new Chief Secretary of the Treasury, David Laws, was greeted by a cheerful note from his predeccor, Liam Byrne, helpfully informing him that "there's no money left." At least he was honest, I suppose.
Politicians thinking they're bankers
So, how did we in the West get here and how did we let this happen? People are usually quick to blame bankers when discussing the predicament we find ourselves in. In this popular narrative, it was they who crashed the system in 2007/2008: they shouldn't have lent all that money to governments, nor should they have offered all those 110% mortgages, equity release deals, credit cards and 0% finance on purchases. They acted irresponsibly, made huge bonuses, and should've kept their houses in order so we wouldn't have had to bail them out.Well, to an extent. The fact that banks were totally out of cash and it was their own fault but they were still not allowed to fail was a diabolical farse to say the least, albeit a somewhat necessary one to avoid an even worse situation. They bet, and they lost, but still managed to keep alive that Lombard Street saying, "heads I win, tails you lose". But the market in this case did work - it demolished their castle in the clouds - even if it would've been nice to have it done a bit sooner, and with a lot less collateral damage.
A more fundamental cause to this catastrophe - also the reason why our politicians had to bail the banks out - can, however, be highlighted with the crash of the sub-prime mortgage market in the US, usually identified as the spark that set off the Credit Crunch. The crash of this market was foreseeable and a logical result of a US government policy, begun under Clinton and continued by the Bush administration, of trying to ensure that every US family can have a home of their own. Toward this end, Fannie May, Freddie Mac and the rest of the US mortgage providers were told by politicians in Washington D.C. to make sure that this would be made into a reality. An admirable thought, to be sure, but idealism tends to make bad policy.
And, lo, mortgages were awarded to families who had no chance of paying them back. This risk was then supposedly offset by splicing up all these bad loans and disguising them in bundles with AAA quality debt. But when these new home owners couldn't keep up with their payments, there began a tidal wave of defaults, and that initial good intention began to metastasize into toxic debt that would poison the whole financial system.Likewise, it was also the light touch regulation, so much promoted by New Labour and the Bush administration in particular, which allowed the bankers free reign to attempt their unique brand of alchemy - making money from thin air - while these governments were all too happy to let them, the UK in particular, having become hypnotized by the incessant sound of the Treasury coffers going ka-ching, ka-ching, ka-ching, as a result of all that tax income from all those bonuses.
And yet, no-one was forced to take on those mortgages - which is why bashing bankers is facile. It ignores the fact that everyone who overextended on a loan was all too willing to believe that they deserved something they couldn't afford. In the TV series Northern Exposure, the indefatigably stoic Holling Vincour has a dictum that "a man shouldn't own what he can't afford" - and this surely has some truth in it. So everyone who is still in the red (Yours Truly included), government and citizen alike, is at fault here - just as junkies are responsible for getting themselves hooked on the drugs they buy.
Après moi, le déluge
A good friend observed the other week - and it makes a lot of sense, I think - that what's actually transpired is that our politicians have been selling us out to the bankers, in order to offer us higher living standards than we could otherwise afford and thus get re-elected by keeping us comfortable and satiated.
The last decades have indeed seen America, the UK, PIIGS - most Western countries in fact - binging on public debt like there was no tomorrow. The US has already raised its debt cap 79 times since 1960 - a good indication as any that America's problem of living beyond its means is no recent development, nor is their predicament the result of the Credit Crunch alone.
Greece, Portugal, Italy, the UK too; the common denominator in all these scenarios was a government spending not just the money they had - our taxes - but consistently splurging much, much more for our so called benefit. All those new roads, nice parks, improved public services; that fancy new town hall and generous public sector pensions, welfare benefits and the lot. They would all of course need to be paid for at some point, but that didn't bother the people making these commitments on our behalf because the "investment" sound bite proved more powerful an incentive than prudence. To be seen doing great things would be useful now and good for re-election, they rationalized, while paying for it would only follow after the next election, possibly not even being their party's problem anymore. (An admittedly extreme example of this mindset came when Alistair Darling signed the UK into the European Stability Fund a week after his government had been voted out of office, forcing upon the UK taxpayer yet another €15 billion liability.)
Growth or bust
There was and still is, however, a basic error in their strategy. Our so called leaders assume that we can consistently borrow more today than is coming in because a growing economy will make up for it in the future. For a long time this had seemed to be the case, but, actually, most if not all of this wonderstuff called growth had been fuelled by fossils. For the last two hundred years our industry, economy, society - our civilization, basically - has become based on deriving more and more "wealth" from scarce and finite natural resources. Refining extraction methods, finding new deposits and using those more effectively in novel ways, this created the economic system that underpins the society we live in today.
But now that the fuel deposits have begun to dry up, while manufacturing and huge chunks of the truly useful parts of our Western economies have been outsourced to developing countries, who's citizens also happen to understand the meaning of living within one's means, and who are not subsidized by their governments should they prefer a life of idleness to working for their daily bread; well, now the metaphorical fat woman has indeed begun her song, and all this expected growth required to drive and sustain our system is disappearing faster than we can say yeah but, no but.
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| 17th century big spender |
The arrival of representative government changed all that. Ever since, the liability for a state's debt no longer rested with one person however powerful, but with a population, a nation - a thing that's usually not at sudden risk of being stabbed in the back or of expiring unexpectedly after falling off a horse that had been frightened by a mole. As a result, bankers became ever more liberal in how much credit they could give, knowing that if it's not this government that pays it back, it'll be the one after that, or the one after that...
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| 21st century big spender |
The mother of all hangovers
Now that the music has stopped and the tab's run out, however, if we were able to look around us with a clear head, we would realise that our politicians got us rip-roaringly drunk on cheap credit to further their own careers, and they, along with the bankers who made huge personal fortunes from this ruse, have now left the building in the comfort of their limos and helicopters. Meanwhile, we, for our part, became so enamored by our by pensions, welfare benefits and luxury holidays, that we spurred them on, demanding more and more. But in the process we became addicts: our high being a standard of living far outstripping that which we contribute to society; our drug of choice being living on credit.
Indeed, when talking about this "recession", people tend to forget that they are comparing today's economy - "bad" - to the life that preceded, when we were in a bubble unlike any other - "which was good". Politicians and people alike seem to expect that we should somehow get back to where we were in 2007, before things went sour, but since when, though, has the top of a gigantic credit bubble been the marker for what an economy should be like, or for how much wealth there should be? To hanker after life as we lived it prior to the financial meltdown is as crazy as if the Dutch had just substituted tulips for roses in the 17th century, in the hope that it would somehow bring back the good days. They didn't - they learnt from their great mistake even if it cost them dearly. Back to 2011, with interest rates at 0.5% - rewarding debtors at the expense of savers - and our politicians telling us to go out and spend, spend, spend - well, we, today, seem to bordering on the insane, wanting to do the same thing twice but expecting different results.
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