The Waiting Game

The headlines have now largely disappeared, and the financial crisis sits quietly humming away in the background. The sense of collapse, the immediacy of the crisis seems to have dissolved and economics has been returned to the finance pages, for the interest of the economics 'nerds' only. The New York Times headlines with a story about Myanmar, and the Times headlines a story about curbing bonuses in the UK. The obsession with banking bonuses continues, but the state of the British economy barely gets a mention.

It also appears that those that follow the crisis have now settled into two distinct camps. On the one side there are those (like myself) who believe that the government pouring of borrowed money into the economy and printing of ever more money is a catastrophe, and those who believe that the action has 'saved' us from a far worse fate. Some, like Krugman, worry that the spending and printing are insufficient, and advocate more government intervention. How much 'enough' might be is never clear, and the source of the flood of money to be used is not discussed.

Occasionally a story still breaks into the headline news, for example the relentless rise in the numbers of the unemployed. However, most of the important stories fail to gain any traction, such as the ongoing bank failures in the US, or the melt down in commercial property. In the meanwhile organisations like the IMF are predicting economic growth (albeit sluggish) for the coming year. This is the same organisation that has just approved $250 billion in Special Drawing Rights to provide 'liquidity' to the world economy.

It seems that the headline writers believe that we have indeed turned the corner, and that all will eventually end well.

Part of the problem is the ongoing belief that what has taken place is rooted in irresponsible bankers creating dangerous financial instruments. It is the belief that the crisis was simply a matter of poor banking practices, rather than an underlying economic crisis with the financial crisis as a symptom. For those of you who are new to this blog, you may wish to read my article on the underlying causes of the economic crisis here (a link to an article on Huliq). The simple fact is that the world changed in the last ten years, and many 'developed' economies have failed to adapt to a more competitive world. The full entry into the world economy of countries like China and India changed the game, but the rich world is playing according to an out of date rule book.

The problem is that the excess borrowing of recent times simply hid the underlying change in the world economy, and the process of more borrowing by governments seeks to do the same. The borrowing does not alter the competitive position of the developed world (see note 1), but simply hides the lack of ability to compete, and does so at the cost of hobbling the economies in the future. The one thing that needs to be changed, the reform of economies such that they can return to being competitive, is nowhere to be seen in government policy. Instead of government action to make the developed economies leaner, they seek to maintain the fat in the economy.

In my last post I reviewed the fundamentals of the UK economy, and looked for any source of real and sustainable growth in the economy, and found none. There is no productivity miracle taking place, we are still seeing unemployment climbing, and we are still consuming more than we produce. All this is taking place while the economy sinks ever deeper into debt.

The question that is rarely (if ever) asked is this; where is the real and sustainable growth going to come from? Which industry, which sector, is going to return the economies to surplus - such that the money borrowed from overseas might be paid back. For those, like Krugman, who advocate more borrowing and spending, this small detail eludes them. I have yet to see any of the advocates of borrow and spend identify how the economies might return to a current account surplus, an absolute necessity if an economy is to repay overseas borrowing. Instead, they simply advocate more borrowing, and an ongoing deficit as that borrowing translates into more imports, more interest repayments, and a greater charge on the future output of the economies.

So now we are in the waiting game. There is no prospect of return to surplus, ever more borrowing, ever more printing of money. There is no explanation of how economies such as the UK or US might ever repay the money, no reform, just more spending, more consumed than produced. In the end, only time will tell which side of the argument is right. The argument boils down to this; how long can an economy consume more than it produces?



Note 1: There are, of course, 'developed' countries such as Germany who run current account surpluses and which are still competitive.