When the Money Runs Out

Beware the age of entitlement. That's the moral of Stephen D King's book When the Money Runs Out – the end of Western Affluence. The book is a tour de force, clearly explaining much of the world’s recent and past events in economic terms.

Yet it bags economists. As King says: ‘The dismal science has become a dismal failure … Its obsession with precision-engineered mathematical models – partly a consequence of the ability of computers to handle vast reams of often useless data – has made its conclusions both unintelligible to the average policy-maker and hopelessly unable to confront the uncertainties that prevail in the real world'. (p 258)

After attending King’s recent talk in Hong Kong (hosted by the Royal Geographical Society on 23 July 2013) and subsequently reading King’s book, I realise that I was lucky to have benefited from studying economics at the University of Sydney, at a time when economic history was a mandatory part of the course. And I was lucky that, in my twenties, I lived for five years in Papua New Guinea, a country about as far removed from the industrialised West as it was possible to be. Although I was young, I had inadvertently gained the economic perspective which King feels is lacking in today’s crop of economists.

Reading this fascinating book took me further on a trip down memory lane because, in my thirties, back in the late seventies and the eighties, I was in the vanguard of the field of country risk analysis and the setting of 'global limits' by banks. It was very ‘big picture’ stuff because I was required to analyse the creditworthiness of other countries and of international banks and distil this information into Board papers of no more than two pages in length. (Beyond that, the reader’s patience was exhausted!) Using this information, my employer, a major Australian bank, then made decisions on the extent of its willingness to lend money to other countries and other banks. At a time in the 1980s when many countries defaulted and new international banks were mushrooming, this pioneering work paid off and ‘my’ bank stayed out of trouble.

While King’s book also takes a ‘big picture’ view, it reflects the traditional focus of the author’s own nationality and domicile - England. He is essentially concerned with the Eurozone and the US, while Japan and Argentina are used throughout the book as exemplars of the economic consequences of national governments making wrong decisions.

Since he works for HSBC, and travels to Hong Kong, I couldn’t help wondering why King offered so little rationale for Hong Kong’s economic success, with only two mentions of Hong Kong. He describes Hong Kong today as ‘a wealthy, dynamic and fast-growing economy’ albeit one with ‘one of the highest levels of income inequality in the world’ (p 163). Elsewhere he mentions Hong Kong’s willingness to make extraordinary adjustments during the Asian financial meltdown in the late 1990s – ‘in Hong Kong, employees were called into management offices not so much to be let go – even though some redundancies were inevitable – but more commonly to be asked (or, more likely, told) to accept a pay cut of 15 or 20 per cent. The new reality sank in very quickly. International creditors had walked away and, with Asia now in stormy economic and financial waters, it was time to batten down the hatches’. (p 204) Why was this level of acceptance possible in Hong Kong specifically, and Asia generally, but not in the West? The explanation must lie with the attitudes of entitlement which have overtaken the West, but King seems unwilling to canvas this point explicitly.

Nor does he mention Australia, which would have presented King with a very worthwhile case study. In September 2011 its Treasurer, Wayne Swan, was named by the major journal Euromoney as the world’s best treasurer because of his adroitness in handling the Global Financial Crisis of 2008. In 1984 that same award went to another Australian treasurer, Paul Keating. Australia has been adept at making painful changes in direction. When the UK joined the Common Market (European Economic Community) in 1973, Anglophile Australia’s traditional export markets were badly affected. Australia had to face up to linking in with Asia. Treasurer Keating made a number of significant, if painful, structural reforms in the 1980s. A later Treasurer, Peter Costello, took advantage of a mining boom driven by demand from China to repay government debt and strengthen Australia’s budgetary position (although he squandered the golden opportunity to invest in infrastructure and education). Thus, when the Global Financial Crisis hit in 2008, Australia was in a sound budgetary position to take decisive action. Treasurer Swan took his officials’ advice to ‘go early, go hard and go household’, with an in-built exit strategy, and he also guaranteed the banks, with the result that Australia avoided the credit crunch, the recession and the unemployment which has hit hard in other countries. The government in which Swan served as Treasurer also attempted to refocus on education and infrastructure and reduce income inequality, all issues raised by King. What are the underlying reasons for Australia’s demonstrable ability to adapt and take decisive and timely action?

Turning to the actual theme of King’s book, his chapter headings are a good guide -

• Whatever happened to the decades of plenty? King lists the miracle ingredients generating the economic miracle post WW2: the huge expansion in world trade; technological breakthroughs especially in telecommunications; the once-off increase in the labour force generated by women’s participation in the workforce; and financial market innovations, especially the growth in consumer credit. As one of the baby boomers whose entire life spans this period, I can attest to these benefits.

• Taking progress for granted. King describes the industrialised Western economies as operating on the assumption that the past predicts the future, allowing us to count our chickens before they are hatched, without figuring in to the equation any ‘black swan’ (unexpected) events.

• The pain of stagnation. The twenty-first century is not going according to plan and, in a world of illusion and collective delusion, policy-makers seem at a loss for a magic ‘fix’. King blames much of the West’s problems on decades of growth of a culture of entitlement – one’s rights now trump one’s responsibilities.

• Fixing a broken economy. King cites many examples from history.

• Stimulus junkies. King argues we are becoming addicted to policy-making drugs which may be doing more harm than good. He talks about the fiscal trap, the exchange rate trap, the zombie trap and the regulatory trap and the consequences for the world economy arising from governments jumping the queue in world capital markets, cutting off oxygen for the private sector. He laments the fact that central bankers, ‘supposed to stand above the political fray’ are being dragged into making political decisions about the distribution of wealth and have become the unelected power behind the throne.

• The limits to stimulus. Here King uses the sterling crisis in the 1920s and the USA’s New Deal in the 1930s as lessons for today.

• Loss of trust, loss of growth. Macroeconomic policies of either the conventional or unconventional kind are no longer working to rekindle growth because ‘something more fundamental is amiss’. We have lost trust in the underlying economic foundations of our societies – our financial systems, our government officials, our politicians and our fellow citizens.

• Three schisms. King points to income inequality (the haves and have-nots), the rapid ageing of the population (intergenerational conflict) and declining trust between foreign creditors and domestic debtors as the central feature of economic and political life in the twenty-first century. These become much more of a problem at a time of stagnation because, when the economic pie does not grow, every winner creates a loser.

• From economic disappointment to political instability. Such schisms are not new, and King cites many examples from history – the monetary upheavals of the 1870s and the Asian crisis of the late 1990s. Of the latter, King says ‘it is near enough impossible to imagine Western nations so meekly accepting such a sudden loss in living standards’, but Asia has rebounded stronger than ever. Three countries in Asia – Indonesia, Malaysia and Korea – tolerated the losses and adjusted to their new reality in three different ways, being willing to work hard because they were given a coherent narrative.

• Dystopia (a very bad place) – King portrays ‘no growth, a loss of trust, a culture of blame, an unequal burden of austerity’ as the ‘dystopian world of economic and financial failure’. He believes that ‘persistent stagnation, accompanied by the creation of both winners and losers’, will only herald ‘the return of political extremism’ (nationalism and racism); reversal of globalisation and a return to protectionism; governments continuing to engage in wishful thinking, without dealing with the underlying structural problems; a mistrust of money; and more of the stately home effect (to keep living beyond our means, we will have to sell off our most saleable assets to foreigners). What’s more, the Eurozone crisis is ‘as much about the foolishness of the creditors as it is about the stupidity of the debtors’.

• Avoiding dystopia. King says he makes no great claims about his proposals for the future, as there is no magic wand. But he suggests that adjustment can slowly be achieved with the following changes:

• Ratings agencies should judge both borrowers AND lenders.
• To survive as a monetary union, the Eurozone requires fiscal union
• Countries need to commit to a medium-term debt-reduction strategy
• Countries need to avoid policies which will disadvantage the younger generation and should continue to support expenditure on education, infrastructure and children’s health
• Central banks should switch from targeting inflation to targeting nominal GDP
• Less capital mobility will require increased labour mobility, both within and between countries
• Banks as individual entities face a set of inconsistent objectives, so within each jurisdiction banks need better prudential supervision by a central authority
• International banks need a different system of cross-border regulation
• Banks need a much greater level of direct fees-for-service, and much less cross-subsidisation funded by risk-taking activities
• Provision of more financial education for individuals
• Provision of more economic history education for economists

After a fascinating exposition of the world’s economic woes and how we got to this point, an exposition I wish I'd retained the skills to write, I felt that the author had run out of puff by the end of the book. If only he’d ‘rested’ his manuscript for a bit longer and then spent a little more thinking time digesting the implications of his words before rushing to print, more insights for the world of the future might have emerged.

What do I mean? King’s book is premised on the fundamental need for growth in a capitalist system in order to keep people happy. It does not deal with the question of whether it is economically possible, in a resource-hungry and environmentally-stressed world, for the world’s still rapidly-increasing population to aspire even to current levels of Western affluence, let alone the West’s affluence if and when it is restored to an upward path.

It's wishful thinking to imagine that there could have been a final chapter suggesting ways of teaching people to begin to accept ‘steady state’ economics. Or a chapter explaining that the recording of economic growth is entirely dependent upon what we measure as economic activity. An ever-increasing number would result, and presumably make us feel happy, if we followed the example of recent attempts to price carbon pollution by placing a value on other aspects of life, such as the huge amounts of voluntary labour performed every day.

King points to the existence of a believable narrative as a factor in extricating Asia from its crisis. In the West, we too crave a succinct but coherent narrative from our political leaders, to take us forward with confidence. Perhaps King's final four paragraphs do that job, but I would have liked to see him expand these paragraphs a little more, and distribute them widely as his narrative, for free pick-up and delivery by politicians.