The situation is grave. That’s why I don’t say this light-heartedly, but I think it should be said nevertheless.
George Soros made it clear in “The Alchemy of Finance” (1987) that the debt situation had already become quite unsustainable after 1982, and has been sustained only by a symbiosis of governments, central banks and commercial lenders, acting in a balance-of-fear type of environment. The banking system has been on the brink of collapse since then.
Finding this out must make one slightly depressed, looking at the mountain of debt we have managed to amass mostly after the 1980s. PWC measured UK total debt to be 500% of GDP in 2012, no soul has had the courage required to measure it since.
The problem lies mostly with the human tendency to avoid short-term pain. Any top politician, or central banker, who would come out now would most likely cause a crisis. And proving a counter-factual is very hard, as we know, so this person (or institution) would need to take an unbearable amount of blame. Many still blame the Fed for what happened in the 1930s! Sure, mistakes were made, but mistakes will always be made.
Let’s contemplate the detail, when personal debt started growing at a faster rate than personal income, debt gradually replaced income as a source of demand, and so, it has to end in tears. A boom first, followed by a bust later, as the discrepancy between income and debt growth must mean that the debt burden will, sooner or later, become unserviceable. If much of that debt has been used to purchase property, it will cause a banking crisis, as in 2008.
If left to unravel without state intervention, a financial crisis will crash property prices and bring them in line with incomes once again (not incomes + debt). And we can hope to start all over again.
Unfortunately the myth that non intervention would have caused more pain to the poor than the rich was sold to the public in 2008, debt was jiggled around from one sector (financial) to another (state) as though, by magic, that would alter its overall level. Of course it didn’t, it simply meant that the poor were made to take on the losses and asset prices were protected.
Privately owned banks and enterprises are intended to be fallible, otherwise prices would be pointless and the price mechanism wouldn’t work, and the public sector is intended to be infallible, and so imprudence is hidden but the costs are real. The system has been intentionally constructed that way; it’s not some freak outcome or vestige of truth. The bailout of Wall Street was imprudent, the cost far too great, and so the real reason for printing money was hidden.
Unless it is accepted that demand must be tied to income growth, and not extra debt, we’re never getting out of this one. The concept that higher bank lending – in an era of stagnant incomes – was an encouraging sign for the economy was a ridiculous one. More ridiculous still were Western governments trying to bolster the banks in order to get them to do precisely that, lend more. The current disconnect between high asset prices, stagnant incomes and increasing, overall debt levels, is both economically and politically unsustainable. And what is the ultimate result? Brexit politically and economically there is no housing market for our young workers. The first rung of the property ladder only existed when wage inflation was higher than house price inflation. Those days are gone, well and truly.
Why did the state do this? Because it cannot create growth. The root cause is the inability to create growth in the face of demographic changes. As people age they get wiser with their money and the big purchases in life, such as cars and housing, are made when young. So instead the government synthesized growth. The UK has been experiencing a slow imploding collapse for she has been running at a loss – more imports bought than exports sold – for decades and successive governments have sought to shore up money creation by printing through housing. This point is central to an understanding of the crisis and highlights the enormity of what’s about to happen. The superficial mind presumes that money printing began after The Great Financial Crisis.
In actuality, neo-liberal economies such as the US, UK, Ireland, Australia, etc. were printing money for decades by providing an excess of credit money to purchase property. For example, affordability measurements for mortgage applications used to use the primary income as a benchmark (which was typically the income of the man); but this was changed to total household income. This permitted evermore future income – debt is your future income – to be sucked into the present for the purpose of consumption. This was money printing by sleight of hand. Thus, living standards dropped for the young while the elderly who owned property enjoyed a bonanza.
The UK establishment have been loathe to let supply match demand (as it did in Ireland) as it would have meant the collapse of house prices and the UK (and interconnected) banking systems. I therefore posit that they never wanted to remedy the shortage of affordable housing and therefore rejected all suggestions as to how to fix the problem as meaningless. Alas, the dominant class did not envisage Brexit and the possible geopolitical consequences for asset prices in the UK, in particular, the property market.
This tragedy has several stages. It began with hubris, “The masses won’t understand how we’ve shafted them” with the bank bailouts. Then David Cameron sets the stage for stupidity, “Let’s give the peasants a chance to upset our apple cart!” Followed by madness shouting, “We’ll have full access to the single market, outside the jurisdiction of the European Court, no payments to Brussels AND control of immigration!” It appears the mainstream still cling to denial. Let me explain why our beloved political mainstream and it’s shoddy EU project has lost it’s appeal. It’s because the mainstream is not moderate – and most Britons are moderate. There are real extremists in the political mainstream – they have power and they have abused it mightily.
Allowing the bankers to devastate the public accounts with bailouts and thereafter leaving these culprits completely unscathed was an extremist choice. Engineering the financial suffocation of the entire Greek population so as to crush a popular vote was an extremist choice. Removing elected prime ministers in Italy and Greece and replacing them with unelected functionaries was an extremist choice. Allowing over a million migrants in to Europe was an extremist choice. Wage suppression in Ireland was an extremist choice. Permitting Germany’s excessive trade surpluses whilst punishing everyone else’s budget deficits was an extremist choice. Pension cuts were an extremist choice. Mass unemployment was an extremist choice.
The reason these catastrophic choices were made was precisely because mainstream parties have colluded to keep these barbaric policies safe from electoral retribution by making them effectively bi-partisan or sealed off behind a treaty wall. The normal process whereby democracy flushes out bad policy (and bad policymakers) has been terminated. The mainstream deliberately locked the voter out.
“But all of this is just the price of globalisation,” sigh the well shod insiders. The masses were disrobed of agency to combat the ‘manifest destiny’ of the EU and globalisation. Now the insiders stand aside and watch in horror. The populists may have been made by the mainstream – but they clearly have no agency to unmake them now.…
Those hoping for a rational and indifferent divorce must have looked on in horror at the tragedy unfolding in the EU parliament – scenes of gloating and ridicule. There shall be no adolescent stage in this tragedy. Laughter that sounded so childish was baptized by a kiss of death. We have witnessed attitudes harden, “The City, which thanks to the EU, was able to handle clearing operations for the eurozone, will not be able to do them,” the French President said. “It can serve as an example for those who seek the end of Europe . . . It can serve as a lesson.” Ambitious people pursue opportunity rather than a place in the status qou. The talent in The City shall have no qualms in moving if income is elsewhere. You can write a contract under English law in Frankfurt or Paris just as well as in London. The immediate goal, it would seem, is to destroy the UK.
So Boris ‘the dog that caught the car’ scampers away. This is now Eastenders on acid … as project fear becomes project reality. And now, the stage is being prepared for the next act, will prices in the property market slump and crater the UK’s financial systems? The cracks have already begun to appear, two UK real estate funds — Aviva and Standard Life — have just halted redemptions as they were running out of cash due to large withdrawal demands. Perhaps regulators should have wondered how an open-ended fund — whereby retail investors can demand their money back at short notice — could work with assets like property that take much time to sell. And so the tragedy unfolds … though perhaps the politicians on the continent, that lust after revenge should first ask themselves, “Why did Britons vote to leave and can the panic be contained?”
That is very doubtful. Europe is in desperate need of moderate policies right now.