As the great Warren Buffett famously put it, “when the tide goes out you can see who’s bathing nude”. By now it’s clear that the West’s relative wealth, accumulated over the past 10 years, is largely illusory. Created essentially by debt, it has been bolstered by artificially low exchange rates against stronger economies.
As European and American governments flounder in the shallows, each tries to cover its nakedness with the handiest garb, no matter how ill fitting. Despite the need for a global solution to a global problem, cross-border economic relations have become increasingly fractious. Two years ago, in the depth of the post-Lehman crisis, common interest dictated that major economies had to pull together to save the system, the alternative being too dreadful to countenance.
But now that a hesitant recovery beckons, each nation follows its own priorities. The USA, for example, has its long-running altercation with China over the undervalued yuan which, the Americans say, must be allowed to appreciate if their trade deficit is to be rebalanced.
But the common issue for all countries is debt – and how to manage it without being thrown out of office. Although policies diverge strikingly, the thing about debt is that it must ultimately be repaid, inflated away or defaulted on – which is hardly a policy!
The US national debt now exceeds $13 trillion. That is not a misprint
America is the most dramatic case in point. As President Obama waits in vain for his $800 billion stimulus to bite, it becomes clear that governments cannot borrow their way to recovery unless serious private sector job creation takes hold. The US national debt now exceeds $13 trillion. That is not a misprint. If you had spent $1 million every single day since the birth of Christ you would still not have spent $1 trillion, let alone thirteen. When you reflect that only 20 years ago the US was a creditor nation, these numbers defy belief.
France – compounding the difficulty
Similarly in France, where the State accounts for over half the economy, the government is compounding its headaches by borrowing to acquire even larger government stakes in its major corporations. As the old saying goes, what a way to run a railroad. (Although in France right now it might not have a train on it!)
We’ve just returned from shutting our Languedoc house for the Winter, witnessing at first hand the militant determination with which French transport workers, garbage collectors, lorry drivers, oil refinery workers, rail workers and air traffic controllers refuse to face up to the arithmetic: the generosity of pension provision in France is simply beyond the State’s capacity to afford it.
Raising retirement age from 60 to 62 would expand both employment and pension contributions, and would signal a move in the right direction. Higher life expectancy is reflected in an aging population, but with more pensioners and fewer workers to pay for pension costs, accumulating deficits must follow. The injustice to future generations is obvious, yet schools closed and youngsters marched in the streets!
As for pruning “non-jobs” in the State sector, mere mention of this would bring citizens to the barricades. We arrived at Ryanair’s little airport at Beziers to find that all UK flights had been cancelled. The place was deserted apart from three shuffling yellow-jacketed council “workers” outside the concourse, muttering disconsolately as only the French know how. One, with a broom, went through the motions of sweeping up leaves; the second, with black sack, stooped to gather them, but they scattered in the high wind; the third, clearly the supervisor, handed out cigarettes for break time.
This Jacques Tati cameo encapsulated more than the state of the nation. It exemplified justice in action, and it applies to us all.
When seemingly solid prosperity turns out to be transient, as ephemeral as smoke in the wind, even the dimmest consciousness must recognise that every folly has its consequences and that payback time is upon us.