RSA: 0861 378881
International: +27 (0)21 701 4063

Living In Interesting Times

The old adage of living in interesting times seems to become more apt every month.
Europe. I continue to watch with horrified fascination as the unfolding train-crash takes another month to damage itself. There is, as yet, no resolution, with the problems that are, and have been identified not being decisively dealt with and, ergo, not being fixed. The longer that this wound is allowed to fester, the bigger the mess. It is the considered opinion of Greg Weldon ( that with regards to Europe: “Spain, Portugal and Italy are severely damaged, and sinking fast and the Netherlands, France, Belgium, Finland and Sweden are hurt, and the pain is worsening.”

My own view has always been somewhat more simple than the multiple data pages that he analyses and refers to. If you, as an individual, spend more than you make, you will go bankrupt. If you as a country consume/ purchase more than you produce/ sell, the country will go bankrupt. If your trading partners are going bankrupt, it doesn’t matter how good or strong you are, you have no-one to trade with, ergo you take a smack on the chin. So what we have is Europe in recession (that has big implications for South Africa), America approaching recession (being the biggest market/ consumers on the planet that has implications for South Africa). China is slowing because their two biggest markets are in trouble. [I thought that we used to import everything that China manufactured, but it turns out that they do export to the US and Europe as well]. If Chinese production is going down, their raw material consumption is decreasing – and Australian/ South African mining is in trouble. I thought I was cured of all of the doom and gloom, but (to quote Clem Sunter) “the global probability is hard times for some time.” In my own, more cheerful and succinct prose: “There is trouble coming.”

Once again, don’t take this from me – the following by Cees Bruggemans, Chief Economist FNB 18 April 2012:

It is instructive for a country such as South Africa, with much poverty, rising aspirations, expectations and entitlement and some politicians inclined to populism, to observe the various paths that far richer countries overseas are travelling as they attempt what is becoming called “suicide by crisis” (see The Times 14 April 2012).

This is how many European countries are now described as they pursue ever more intense austerity in the hope of somehow turning their state finances around, and with it their market ratings and consequently their growth prospects in time.

And yet many consider this a forlorn hope, for to them the intensifying austerity makes things only worse, to the point of achieving depression, potentially for years, rather than any early turnaround in fortune. What then follows is described as “suicide by economic crisis” in country after country. But in describing things this way, sight is potentially being lost of what went wrong, really wrong, in the first place and the choice of suicides this ultimately created, by all means unintentionally, even by stealth, but real nonetheless.

For in order to commit crisis suicide in the modern manner as now playing in seemingly country after country, it was necessary to make two big serial blunders first, which then left a choice as to what kind of suicide was to be undertaken, an early one or a late one. “Suicide” here is defined as a massive national welfare loss linked to financial crisis and large increases in bankruptcies and unemployment, with no quick fix to get out of it.

The story starts some 80 years ago and in the same regions that are struggling today. Following a decade of speculative excesses and reckless expansion, a massive financial crisis hit Wall Street in 1929 and drew many other countries after it, as such crises tend to do contagion-like, especially if there are no firewalls. US unemployment shot up to a horrific 25% of the labour force (about two-thirds of what it is today in South Africa), putting the US in deep mourning as the hardship for many was overwhelming.

At about this time, a British Don with the name of Keynes had been brooding about the classic way that people in bygone ages had looked at booms and busts, and still did, and now offered some sage advice.

When all lose their heads, sell financial assets in a heedless manner to the point of fire sales, increase savings panic-stricken, cut inventories, output, employment defensively and fearfully delay paying creditors, income tends to shrivel and private spending (demand) declines precipitously. This sets in motion secondary shrinkage, pulling output down yet further, which idles yet more resources, with even more income loss and now even fewer means to keep spending going, all going down in a fear driven vortex until the panic has spent itself, total uncertainty prevails, few want to take risk, and many resources lie idle and will for long remain so, for seemingly nothing can encourage anyone to become proactive again.

At such a moment, which may come once in a generation, going by history up till then, it would make eminent sense for the government, which is big in resources and steady of mind, and not driven by profit motive which might have otherwise caused it to lose its head as well, to step temporarily into the breach. If a government did that, using its large tax base as collateral and its consequent borrowing powers, and using its spending power wisely, it could bridge the gap left by the private panic and withdrawal, until such time that private wits returned and were ready to start spending and investing again, at which point the government could step back, unwinding its support and borrowing.

So far the useful history lesson.

In time this kind of policy advice came to be seen as a useful way of keeping societies growing much faster with less volatility than before. Even so, in the process two blunders were made. Firstly, as the good times rolled, societies started demanding even more than their economies could provide out of income, creating incentive for governments to borrow increasingly from the future, even in good times, building up huge permanent national debts. Secondly, no real answer had as yet been found to the inherent volatile dynamic of market capitalism, where innovation and risk-taking tends to be driven to extreme by profit-seeking behaviour eventually losing its bearings, with regulatory oversight every generation or so falling so far behind the private creativity and derangement as to miss completely the dangerous risks building up.

By serialising these two blunders it meant that episodic mega crises could no longer be prevented or successfully tamed through government fiscal policies as Keynes originally envisaged. It was like antibiotics, a wonderful medication when new, but something that loses its power if used too often and easily, to the point of ineffectiveness. There is in fact a third blunder, namely thinking that even when already over borrowed government was still powerful and policy could still be effective, and acting accordingly with great conviction, but in effect rushing down a cul-de-sac, possibly worsening the eventual outcome (the reality in a few too many countries today’).

What had been created was a modern choice of suicide by crisis, rather than having the effective means to address crisis and limit its damage. For the idea was still that in the unlikely event of everyone economically misbehaving themselves, in time setting in motion a crisis panic, threatening to pull all down, the state could step into the breach, prevent the worst and assist an early recovery. But whereas that’s easy when the state’s borrowing levels are minimal (say 0%-20% of GDP) it is another matter altogether if the state has already in good times allowed its debt to balloon (well beyond 60% of GDP) AND/OR private interests such as households, companies and/or banks had also accumulated extremely high indebtedness in their own names, taking overall indebtedness way beyond 200% to 500% of GDP.

For if such extremes already exist, it appears that a country apparently has a choice as to when it wants to enter prolonged depression:
– at the first crisis moment, with government unable to be a true spender-of-last-resort as Keynes intended
– or at the second crisis moment, with government initially stepping into the first crisis breach but now completely overreaching itself as spending increases and tax collection collapses, debt spiralling quickly out of control, with markets ere long revolting at the implied rising default risk, and government belatedly having to opt for accelerated austerity to get its own finances back under control, irrespective of what this does to the economy, surrendering the final saviour role to the central bank (which now in turn overreaches).

In many parts of Europe, after preventing depression taking hold at the initial primary crises, many now find themselves in the secondary austerity drive towards recession/depression. With the US finances and politics scary as they are, such a drive might be a real possibility there as well. Only central banks would be left standing, but these can only do so much when interest rates have reached near zero, as we again see today. What is happening here is not one payback, but two.

Firstly, these countries are paying for the blunders that set in motion their Great Crisis (in the US a housing mistake, in Europe a monetary union mistake, in both cases amplified by excessive debt leverage). Secondly, they have to pay dearly for a generation living the high life, irresponsibly creating high government debt levels and thereby giving up its emergency powers.

There wasn’t enough precautionary oversight to prevent the housing excesses or general over leverage in the US, or the political insight to prevent the union shortcomings in the EU, in particular to ensure the existence of a fiscal union backing the monetary union. There was also not enough insight to keep state finances balanced and contained, thus kept in reserve for the day a massive defensive action would be required (as it inevitably would, going by history).

Both these insights were apparently beyond the elites running excessively generous welfare systems in modern societies, conceptually and politically. And thus we now find them fighting serial crises, first the one in which greed, innovation and lacking insight brought the system to its knees, and secondly as the overcommitted state has to desperately right itself when it is most inconvenient to do so. As to breaking up the European monetary union, and using flexible exchange rates to do the heavy lifting, such elegance simply doesn’t take cognizance of the deeper longer term existential challenges facing all these countries and that need to be faced, preferably together. And so pain is imposed, on unprecedented scale reminding of war as government finances are viciously repositioned in order to be able to go on eventually. To claim that there are easier short-term solutions doesn’t take full cognizance of the long-term challenges facing many of these countries (in a micro sense) or the difficulty to complete a full fusion (in a macro sense).

As to rich neighbours bailing out poorer ones in return for promises of future good behaviour, perhaps the credibility for this is to be earned first before it can be relied on. All this makes the whole idea of union a premature one, but a globalising world waits for nobody. And so the near impossible is attempted (monetary union, and in need deflationary austerity drives, with central banks as final bailers) with the greatest of convictions, even élan, for the alternative is death. Or so many apparently believe, too.

So much heroism by so many to such little avail, or so yet others believe, on the Left mainly, and abroad especially. A repeat of the 1920s and 1930s, so far short of war or genocide, though some of the signs are worrying. Take Holland. Or France. Or Norway.

Excerpt ends

Once again, there is too much Europe and not enough USA (Europe being more “explosion critical” at the moment), albeit the USA is charging into the valley of the 600, they just do not acknowledge it yet.

Comments are closed.