Reminder: the bankers didn’t actually cause the mess

We enter the New Year with positivity in the air economically more so than in the past five years or so. Unfortunately, this is probably misplaced (at least in the longer term) – both nationally and globally.

It is hard to be certain we have cured the illness when it has still not yet been properly diagnosed. This is not because the diagnosis is complicated (it isn’t), or because it is difficult (it isn’t). It is because it is unpopular!

It remains a widely held view that “the bankers caused the mess and got away with it”. They certainly abused our trust in a way no other group did (and for that they are due the anger cast their way), but only the second of these is true – and even then, probably only when you apply it to a particular minority of bankers in particular institutions in particular locations. To be clear, (some) bankers certainly did come to behave like lunatics and ended up playing the game at a level much higher than their actual expertise should have permitted; others, as noted above, abused people’s trust to sell financial “products” which were in fact not in their interests but beyond anyone’s reasonable expertise. Bankers were indeed outrageously greedy – the unpopular reality is that they were not unique in this (although to some degree they were unique in getting away with it, unlike the rest of us, and that is genuinely unjust and outrageous).

If we are going to turn around the economy properly we are going to have to face the unpopular diagnosis – the “inconvenient truth”. It is this: for decades, “creditor countries” such as China, Japan and Germany, have been producing goods and services for export more than they themselves have imported, while at the same time lending money (at all levels, including government) to “debtor countries”; meanwhile “debtor countries” such as the United States, the United Kingdom and Italy, have been importing more than they have exported, while at the same time borrowing money (households, business, governments, the lot) from the “creditor countries”. One simple statistic should do it – 13% of all US Treasury borrowing is from the People’s Bank of China (i.e. the Central Bank of the People’s Republic of China).

With more than one dollar in every eight that the US Treasury borrows coming directly from China, and that money then being used to inflate a consumer economy through which Americans buy, er, Chinese goods, both “sides” had it good for a while – basically, the United States borrowed money from China to buy Chinese goods, creating a feel-good factor in the former and an economic boom in (parts of) the latter. China gained from this lending not just because Americans used it to buy their exports, but also because it kept down the value of their own currency, making its own exports comparatively cheaper. However, there was always going to come a time when China asked for its money back – in effect, that time was late 2007.

For decades now, the UK has run a trade deficit averaging 2.2% – that is to say we import goods and services to a value of 2.2% more than we export. We do this every year. That can only be paid for in (ever-increasing) credit – in other words, in the form of (ever-increasing) household debt, business debt, banking debt and government (“national”) debt. This total debt now amounts to five times the UK’s GDP – in other words, we have arrived at the stage where we owe five times more than we produce annually. There was always going to come a time when we, er, had to pay it back. The story in the United States is in some ways even worse, with this trade deficit figure now at 3.7% – the United States runs a hefty trade deficit even with the United Kingdom, never mind China or Germany! (The United States has a slight advantage in that it has the world’s dominant reserve currency, but the fundamental problem still exists.)

For all the complexities of derivatives trading and credit default swaps (and we certainly do need to sort our banking and general finance system out), ultimately the problem is that the English-speaking world and Southern Europe, generally, isn’t paying its way. We are paying for nice new cars and holidays; and indeed for a welfare system and a free health services; with money which we haven’t earned and thus isn’t actually our own. Until we start producing goods and services to the value of those we import from elsewhere, we will continue to get ever increasingly poorer (the strains on our health and welfare system funding are already obvious). If we want to increase the next generation’s standard of living and maintain a welfare system and free health service as envisaged by Beveridge, we are going to have to get exporting real goods and services – it’s the economy, stupid.

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4 thoughts on “Reminder: the bankers didn’t actually cause the mess

  1. Rupert Rochdale says:

    In Iceland they put the bankers in jail and that solved their problems

    • In Iceland they put *some* bankers in jail, and did many other things. Their problems aren’t solved by any means. The prime difference between Iceland and Ireland is that Iceland retains control of its own currency (and was a genuinely prosperous place to start with).

  2. Robert says:

    Iceland put its bankers in jail and hasn’t suffered like the countries that go on applauding them.

  3. […] wrote here that the fundamental difficulty with the global economy (the cause of the crisis) is its trade […]

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