Economic Disaster Stories

Slightly edited version of something I first wrote last summer:

The economic requirements for the United States and for Europe are different and demand different solutions, just as the economic systems of the two continents remain inherently different - a factor not always understood by the inhabitants in both these parts of the world, and for that matter not always understood by advocates of the global economy, or sometimes even by the World Bank and other similar bodies.

There is also a perception problem.

In the US, the government is seen as part of the problem – its role has almost become that of a perennial whipping-boy, damned when it does, damned when it doesn’t. So, for instance, in the Gulf of Mexico, it is regarded as the government’s place not to interfere (a business company has a problem which it must resolve itself), while at the same time Obama is condemned for not acting decisively enough.

In Europe, on the other hand, governments are expected to provide solutions. There is also a bit of the damned when they do, damned when they don’t though. If they succeed, it is by luck and anyway that is what they are there for, if they fail, it is only as expected. Governments in Europe though are expected to be there when the people need them, during a period of illness, during economic bad times, when it is impossible to get from place to place, and even occasionally when bills need paying.

Bureaucracy always looks bad in the US, but that is mainly because people probably only notice when it is not working. Bureaucracy in Europe, on the other hand, can look good, bad or indifferent all at the same time, depending where you are. If you work in an unemployment office in England, you invariably seem flustered, rushed off your feet, and of course unloved. If you work in an employment (the "un" is deliberately omitted – the difference in mentality is indicated by the choice of word) office in Germany on the other hand, you are expected to be polite, efficient, and purposeful – if not particularly loved either.

Where the difference in cultures is really emphasised though is the directions in which the two continents are heading. The US has a natural population curve, and is beset with all the consequent problems. Job creation has to be maintained at a level consummate with the ever-increasing demand of a new workforce coming through, while taking care of the retiring population at the other end.

The extreme dependence upon debt (both public and private), which has become a singularly disturbing feature of the American economic picture, has complicated this considerably. Student debt is becoming a millstone like never before, while many retirees have debt levels that they will never eradicate in their life-times. Meanwhile interest on government debt is responsible every year for over 5% of all tax income, and is growing almost uncontrollably. Eventually government programmes will have to be cut, with the most likely victims being the people who can least afford the cuts (particularly true when the Republicans, with their unreal accounting methods and unreal attitudes to tax collection, take power, but also threatened by an increasing number of Democrats who have to answer for their former profligacy). Cutting defence spending, the real elephant in the room,  hardly ever gets a mention of course – for further reference go and check out Robert Scheer’s works on the subject.

Compare the situation in Europe though. There you will find a rising line on the population demographic graph. The population is aging, there is a smaller percentage of young people than ever before, social costs have risen way beyond anything known in the past (required to meet the ever increasing requirements of the elderly), while revenues have been sharply hit (and let us not consider that the economic crisis is merely a result of the cowboy gamblers on Wall Street – the European banks played along, invested huge amounts on ridiculous gambles in the American property market and lost heavily, and governments reacted far too late to stop them).

You then hear laughably that Europe should have followed the American model. Some European countries, notably Germany and Switzerland, are known for their saving habits, a very un-American phenomenon. The UK, which has perhaps the most Americanised of all the European economies, also has one of the largest debt piles, one of the lowest saving rates (given the average wage in the UK that is hardly surprising), and is in one of the worst messes of any country out there. Expecting the Tories to fix things is like whistling for the moon, as it was their policies originally (borrowed eventually by Labour) which created the circumstances in which the economic crash was almost certainly inevitable.

Among the solutions being offered though by the UK government is one similar to that being offered elsewhere (see Angela Merkel in Germany). That is to cut government spending to reduce debt. One of the lessons of history is that which FDR encountered when fiscal conservatives in the American Treasury encouraged him to do the same thing in 1938. The economy, which was slowly recovering, went back sharply into recession.

At this time, cutting debt sounds sensible. On the other hand if there is no growth, the economy will not recover. So revenues will actually fall, causing a need to further reduce government expenditure, deepening the recession in the process. Go too far down this deflationary road, and you end up with a permanent depressive cycle. It is also to be borne in mind that the extent of the debt is the result of the economic crisis. Bank bailouts may have been an unsatisfactory solution, but would there have been benefits in letting the entire financial system collapse, which was pretty much the alternative?

Committed Marxists might have laughed and uttered the phrase: "I told you so". Conservative believers would have gone on believing, even as the number of business bankruptcies tripled or quadrupled – with all the consequent ensuing layoffs. History suggests that unemployment might well have surpassed 20%, and recovery would have taken decades – without solvent banks, there would be no credit available in the system.

Among the curiosities that you encounter is the fact that the financial solutions offered to the crash of 2008 are criticised by American conservatives like Newt Gingrich and Ron Paul, and American liberals like Michael Moore and Robert Scheer. Unusual playmates to say the least!

In Europe, where people are more used to government intervention, there was less open criticism, as the banking system is seen here as the key to the capitalism. The view was "what other choice did we have?". Two years down the road, however, and the situation in Greece became almost untenable, doubts set in - in a big way.

The problem left, frankly, and I see it in both the conservative American model, and its more liberal European counterpart, is that there is no solution that will provide for the needs of the necessarily unproductive elderly.

European governments are trying to delay the process by suddenly pushing for delaying the age of retirement up two or three years (from 65 to 68 for men in the UK, from 65 to 67 in Germany, from 60 to 62 in France). Sensible enough if you see that, to this point at least, people live longer than before.

Unfortunately a reality check will suggest that there is a certain futility in the exercise – the vast majority of employers simply do not want to take on people who have passed the age of 50 (I have one friend in the UK who has worked for five months in the last five years – that period commenced three days after he turned 50).

Try to persuade an employer to take on board a 66-year-old, no matter how gifted or talented? Do you really expect this to happen? Be real! The job will more likely be winging its way to China or India like millions of others already have done. All that this will mean is that the person remains on the government handout list, whether you call the payment a pension right or an unemployment cheque!

In good times, you might, through taxation on companies and the still-working population, be able to keep revenues up to a sufficient level to meet the necessary payments (although given the increasing imbalance in numbers between payers and payees, there will be an increasingly large number of complaints about the level of taxation).

I will also avoid the questionable logic of the "supply side" believers, who claim that revenues increase when you lower taxation – my research into that logic suggests that, while there are short-term benefits, the long-term results are not positive, and usually result in massively increased deficits upon the public account.

In bad times, though, the revenues will simply be inadequate to meet the current payment requirements. Which essentially means that payments will have to be reduced to what can be afforded. And ask yourself for a moment what would be the impact of reducing payments to the elderly? How do you handle a situation where a person cannot afford to survive and has no other potential source of income, and the government can no longer maintain the necessary payments. Letting them die off as quickly as possible – often in very miserable circumstances? Encouraging mass suicide maybe? OK the latter is not going to happen, but it would help government revenue crises if the demands upon the public purse were less! We can, of course, at this point start berating people for not saving for their old age, but frankly I think, personally, that we are reaping the whirlwind for the policies adopted in the 1980s, when unemployment was allowed to rise to ludicrously high levels, and insufficient action was taken to fix the problem. And where the problem was attacked (as in the UK), this was by encouraging a low-pay, high debt solution which entailed much by way of risk, and did not allow for a great deal by way of savings.

Curiously given the proverbial howls of anguish coming out of the United States, the picture there is more mixed. The negative factors there though should not be ignored. From 2011 starts the surge in the number of retirees, and this will not level off for a number of years. There will be a record number of individuals dependant upon the public purse to meet their needs, and the stress on the resultant programmes will be enormous, for all the reassuring noises that the politicians have been making about their viability for the last few years. Savings levels are reputedly at a record low, individual debt levels are already frighteningly high, and the economy is in the doldrums. For those who have invested in stock accounts, the markets have fluctuated in recent years, but essentially the values are approximately the same as they were ten years ago. The amount of growth in value has not, though, even kept pace with the allegedly modest rise in inflation. The outlook, given the nature of the markets, is mixed. If you had a preponderance of your investment in GM, Chrysler and Amoco (who were acquired by BP a few years ago), the outlook is grim.

Of course investment houses do not make that sort of mistake, do they?

Well, folks, be prepared to learn a horrible lesson ….

And then there are those who placed their investment in the property market. This might not always be the horror story that it sounds, but the percentage chance is that some people have seen the value of their original investment lose heavily over the past couple of years. Taking out a re-mortgage on a property (or selling one) with negative equity is simply not an option, of course, while for those with "positive equity", there may be insufficient gain to make the exercise worthwhile.

The likelihood of the existence of a generation of senior citizens who are heavily dependant upon debt, and may have difficulty sustaining their debt levels, should not be underestimated.

And when more debt is required by an individual whose asset values have expired, and the government can no more than barely sustain, can you imagine a lending institution lending them money that is very likely to be written off as "bad debt"? In my experience banks do not work like that – profit is the motive behind their existence, not charity.

So apart from allowing the elderly to die off in increasingly miserable conditions or under a pile of unsustainable debt, what is the solution? As the world gets more and more overpopulated, frankly I do not see one. Creating alternative income streams for them, maybe (apart from charitable handouts)? Let me know, I am interested.

We have though reached a point in history where much effort for little reward has become the norm, and we have not learned how to contain inflationary price growth in important sectors such as property (eventually everyone needs a roof over their head), and energy costs. And the dependence upon debt (both private and public) is something that should neither be forgotten nor forgiven by future generations. Every war has its unfortunate victims. Unfortunately the inevitable war on the preponderant debt pile could well require the mass die-off of many elderly people in conditions that would have been unacceptable for more than a generation.