When people begin to doubt their nations' debts then the end game is much nearer than one supposes. If polls are to be believed, this is the disturbing, unfolding scenario that could face all industrial and trading nations. A recent Financial Times/Harris poll of over 6,000 respondents found that Europeans and Americans see a plausible chance of their countries defaulting over the next decade. The French are the gloomiest, 53% of whom believe it is likely that their government would be unable to meet their financial commitments within the next 10 years. At 46%, the Americans were not far behind. German pessimism over the future of the welfare state was acute and lent support by their Chancellor, Angela Merkel, who proclaimed: "We cannot live beyond our means forever." Jean-Claude Trichet, European Bank President, lent solemnity to the issue when he told the German magazine, Spiegel, that doubts being cast over Governments' credit worthiness "is a problem for all industrialized countries."
There is, of course, no one simple cause of the global fall from financial grace if, indeed, there was any such grace in the first place, and nor is there any one simple solution. But just as bad governance, both of the people and by the people, is the root cause of the angst, so, too, good governance could still win the day and avert catastrophe.
Politics and economics are inextricably entwined, and in any struggle between the two it is the former that will castrate the latter and so render it ineffective. Yet, ultimately it is economics that will humble nations over the full economic cycle, leaving a desolate trail of unimaginable misery, and all because there was no good governance by all.
So why is there inadequate governance? In a word, greed, at any and every level. But stupidity is also involved. This writer began to warn in print* four years ago of the dangerous build up of debt and in particular the deep exposure of Britain's banks and building societies to commercial property lending. Of America I warned that the negative domestic savings for a straight 21 months, adopted so that people could pursue their have-it-all-now culture, often based on taking out second mortgages and liar loans, meant that "much higher interest rates than three years ago (2004) now means many borrowers have reached the end of their rope." Then, on January 12, 2007, eight months before Britain's first major bank failure in over 100 years, I wrote: "The Bank of England's rate policy since being spooked by the dot com crash six years ago, aided by overly eager banks to lend irresponsibly, is a major cause of dangerously high national indebtedness. The banks and credit card companies may well pay a high price for their rapacious stupidity through record numbers of strapped consumers seeking voluntary insolvency deals."
If a mere hack journalist can foresee these developments unfolding then readers can be utterly assured that Governments and their financial regulatory bodies also saw it, but to their great indelible shame did nothing to avoid the gathering storm. In this the ratings agencies must also take some of the blame. Their deferential ratings of suspect corporate debt, which were financially motivated rather than by good governance, is a stigma and stench that will linger long. Many investors bought bonds and shares based on such deceptive ratings and are now ruing the day.
It is natural and right for people to seek a meaningful real return on their post-tax savings but governments and their central banks should not encourage people to seek riskier alternative investments owing to ludicrously low interest rates on traditional forms of saving. This is precisely what happened after 9/11 and the dot com bust when the Fed dropped its interest rate to 1%. This unleashed a spending binge, which in Britain most notably led to alternative investments in buy-to-let housing and commercial property, creating a bubble which could only burst, leaving banks and building societies nursing huge write offs and investors' dreams shattered.
Cheap, lax credit also spawned other serious problems, which ultimately led to the American sub prime housing bust, and so ushered in the world's most serious credit implosion since the 1930s. This involved the creation of new financial instruments like collateralized debt obligations (CDOs) packaged by investment banks for fat fees and sold to unsuspecting banks and other financial institutions around the world who relied on suspect ratings by debt rating agencies.
Beware Greeks bearing debts
In Europe, nowhere is the lack of universal good governance more obvious than in Greece. A country in which more than half the middle class reportedly think it their God-given right to evade taxes, Greece is the epitome of lousy governance, both of the people and by the people. Since joining the EU gravy train, Greece has lived far beyond its means, with other countries paying the bills. This has allowed civil servants to draw full pensions at 45 and others in their fifties, which can amount to more than 90% of their retiring salary.
Despite the Greek Government's robust start in moving towards good governance, there remains international scepticism over the Euro 750 billion EU bail out plan to save Greece and any of the other PIIGS nations#. But bad governance is ubiquitous and it ill befits President Sarkozy, of France, to browbeat Germany's Angela Merkel over her reluctance to have Germany remain the paymaster for profligate and corrupt nations like Greece. After all, is the Greek bail out so different from the billions of Euros paid every year to subsidise hopelessly inefficient small French farmers? Hardly. The Common Agricultural Policy is, perhaps, the supreme EU example of lousy governance in economics. Germans are rightly incensed at paying for the sins of others and have shown their displeasure over Merkel's reluctant decision to help the bail out by voting out her party's control of the upper house in recent elections. Other profligate nations should take note.
"Banking establishments are more dangerous than standing armies," declared Thomas Jefferson. Clearly, part of any good governance exercise must now include much stricter controls of banks, be they retail or investment, but not so much that is stifles acceptable enterprise. But there is another issue of global economic importance which denies peoples' aspirations for a better life -- staggering military expenditure. As Sun Tzu remarked in 400 B.C., "Where the army is, prices are high, when prices rise the wealth of the people is exhausted." Perhaps the most striking recent example to support this sage's acumen of costly military spending is the price tag for America's latest destroyers, $2 billion each, of which up to 60 may be ordered. Meanwhile, America's spending on the Iraq war and its aftermath alone has long since exceeded $1.5 trillion, and Britain's former labour government was too ashamed to reveal its costs of the Afghanistan involvement. Such huge transfer payments from taxpayers yields no significant tangible benefit -- only the feeling that it may provide protection from malcontents. Such is the price of people's suspicions of their neighbours, but as a famous general warned at the dawn of the Atomic Age: "It must be of the spirit if the flesh is to survive."
*Warehouse & Logistics News, London
#Portugal, Ireland, Italy, Greece, Spain
"If you are wise, you will dread a prosperity which only loads you with more." Ralph Waldo Emerson