Bankers, immigrants, the rich, the poor… it’s easy to single out a group to which we don’t belong and blame it for our economic ills. How about, instead, we deal with what has actually happened? Of course, what has actually happened is complex, but it is worth trying to simplify it…
The average Western household now contains six times as much “stuff” as it did in the 1950s.
The West has been on a consumer binge, starting in the late 1950s. As of then, most Western countries have run at a loss – both in terms of Balance of Payments (importing goods and services to a value greater than they are exporting) and in terms of National/Government Deficit (spending more on public services than they are raising in tax revenues). Of the three big Western Allies – the United States, the United Kingdom and France – not a single one has managed a balanced budget since 1962 and not a single one has managed a trade surplus since 1975. How can this be?
13% of US Federal Reserve borrowing comes directly from the People’s Bank of China.
The victorious allies after World War II went on this binge while the defeated powers ran surpluses and became economic superpowers. The standard of living, regardless of how measured, rose in West Germany, Japan and even Italy to exceed that of the United Kingdom or France by 1990. After the Fall of the Wall, while Germany and Japan stuttered and Italy’s economic fortunes went into reverse, they were replaced by China.
Then something arguably unprecedented in the history of the global economy happened. The rich world not only began to run a trade deficit with the poorer but growing economic powers (as the United States, United Kingdom and France had done with West Germany and Japan effectively in post-War trade), but it actually began to borrow money from them directly to fund public services and welfare provision. For a decade or so from the mid-1990s this option was beguiling for all concerned – China lent the United States money, and that fuelled a consumer boom with which Americans and those who traded with them most frequently (above all the British and other Europeans) bought Chinese goods.
In the Far East, you save up for your own Healthcare and Welfare provision.
With the money thus borrowed – not just by governments but also by corporations and households – the West (except Germany) went on a consumer boom and paid for welfare and health provision none of which it could actually afford on the basis of goods/services traded or (thus) tax revenue raised. The difference was made up from money borrowed both to raise tax revenue from consumer booms and directly by governments – largely, as noted above, from countries (notably in the Far East) with no heritage of government-funded health or welfare provision. Those countries could afford to lend because their people were starting from a much lower wage level and were grateful merely for the increased wages that exporting to the consumer boom gave them. In the Far East, it is typical for people to make their own savings for Healthcare and retirement, and for Social Care to be provided by the family unit.
Health and Welfare typically account for two thirds of public spending in the West. Therefore countries which do not fund this from public spending – like China – only need to raise at least a third of tax revenue per capita in order to have money over to lend to countries which do. The bizarre outcome of this is that far poorer countries (per capita) end up subsidising services in far richer countries which they do not themselves provide – but we need to understand that this is only temporary, because the money comes in the form of loans and they themselves will soon come under pressure to provide those services.
Property prices in the English-speaking world have more than doubled in real terms in the past 35 years, but have remained stable in German-speaking Europe.
The consumer boom in the West, meanwhile, hailed a property boom, particularly in the English-speaking world and Spain, where property ownership is culturally the norm. Pressure on banks to fund ever increasing property prices while expanding property ownership to the masses (as “ownership” came to be seen almost as a “right”) led to ever more complex financial “products” where dodgy loans were bundled up with more secure ones and sold on, effectively as an insurance gamble. Globalised banks – even outside the English-speaking world and Iberia – got involved in this high stakes game of musical chairs and in 2007 it was in fact a French bank left standing when the music stopped. Somebody should indeed have noticed that these schemes were becoming vastly and ludicrously complex – but then somebody should also have noticed far earlier on that a single parent in the American South with four children and no education probably shouldn’t be getting or even seeking a mortgage. Most of the people who had funded and insured that mortgage (and countless others like it) didn’t even know they had…
The result was a calamity as a property prices crash meant households could no longer borrow against property, a run on the banks meant businesses could not get credit from them, and thus consumer spending and collapsed just as businesses needed it most. This then saw a knock-on collapse in tax revenues just as governments needed more money to nationalise banks. The central issue was that, in the English-speaking world and Iberia, property was effectively being traded in a different currency – whose value then crashed meaning that anyone who had savings in it (a lot of ordinary people, frankly) got burned and anyone relying on them to pay off debt, invest in businesses or provide vital tax revenue got burned as well. (This applied right across the Western World regardless of where the mortgages were because its banking system is so interconnected.)
Overall UK debt is now approaching seven times GDP.
There is a lot of focus on “national debt” – but this applies only to public spending (exactly what that means varies from source to source). The UK’s national debt is indeed atrocious – soon to be more than two whole years’ tax revenue – yet actually by most measurements it is now fairly average in the West. Where the UK is truly awful is in overall debt – add in households debt (say on cars or holidays or new kitchens as well as mortgages) and corporate debt, and the UK’s overall debt is among the worst anywhere in recorded history.
Here is the thing: much of that “national debt” is already borrowed from Chinese interests. Much of the other debt has been accumulated buying Chinese products – from toys to smartphones.
Want a bridge built? Ask the Chinese!
In other words, what has happened over the past 20-40 years is we have been borrowing money from the Chinese (and others) to buy their products. We did this because we thought they were cheap – but having bought them, we are now going to have in effect to buy them again as we pay the debt back.
In the meantime, remember, the Chinese have been subsidising our Health and Welfare systems but they are just reaching the point where they will want those themselves. In effect, this means we will have to subsidise theirs, from now on – after all, we are the debtors and they are the creditors.
There’s worse (from a Western perspective), because the really crucial point is yet to come.
Recently, San Francisco had to rebuild a major traffic bridge. It sought tenders from within the United States for the work, but all involved closing the bridge entirely while reconstruction took place. So they looked globally and, sure enough, a company came forward to build the bridge while maintaining the current one in place for the duration of the work – from China. Remember, the work will be paid for, in part, by money borrowed from China in the first place.
Long story short:
To cut a long story short, what has happened in the past 20 years is the East has lent the West money to maintain a lifestyle – with property, employment rights, taxpayer-funded welfare/pensions and government-funded Health services – that is highly civilised but that it has not actually earned since at least the 1970s Oil Crisis. The East has gone without all these civilising things, but has used the situation to export goods and services of increasing value to the West, thus raising its own wages and (particularly) expertise. As the East’s expertise now exceeds the West’s, it will expect its wages to do the same – creating perhaps 2 billion more “middle-class” people in the next generation or even the next decade. It no longer suits the East to subsidise Western lifestyles which it can now legitimately aspire to for its own population.
The West’s Health and Welfare systems and even its property rights derived essentially from a national profit made through trade by being smarter and more innovative than the rest of the world. This is no longer so; therefore the money to fund those systems (as they are currently delivered) no longer exists – indeed it hasn’t for some time, as it has already been being borrowed for at least a generation (from people who had every motivation to lend a generation ago, but have none now).
Ostriches will become extinct!
Inevitably added to the West’s burden is a democratic meltdown alongside the economic one. The skills required to get elected – basically getting attention – are utterly distinct from those required to govern effectively and realistically. It is much easier to blame bankers, or immigrants, or the poor, or the rich, or some other bogeyman and thus gain attention, than it is to face the very real re-balancing of global trade, power and influence which lies directly before us as explained above. It used to be we would just about be saved by Sir Humphrey, who would at least keep things relatively stable while the West cashed in on its expertise and thus its competitive advantage – not just in terms of technology, but also social order and governing institutions. This will no longer be enough, because not only has the Far East caught up in technological expertise, but it is getting more skilled at social order and government too. It even has the advantage of skipping some of the luxuries – like free elections and state-funded welfare.
We can bury our heads in the sand or we can accept this basic problem: the term “social justice” now only has meaning if it is applied globally. The days of paying pensions or inflating wages on the back of borrowed money in the West on the back of consumer booms for products or materials bought cheaply from the East are over.
What’s the solution? Before we come to that, can we at least accept and agree on the problem?
If we in the West want a welfare system (including pensions) and public services (including Health) which are better than those in China, we will have to work harder than the Chinese.
We don’t. There’s the problem.