Broke by David Boyle and When the Money Runs Out by Stephen D King: The broken mirror of money

Finance, like fiction, needs a narrative. Money being a belief system - it is always possible to believe our way out of a crisis.

A house on a new estate.
Safe as houses? Though the west expects a swift return to growth, it is far from inevitable. Image: Daniel Stier Title: "The Frontier House".
Broke: Who Killed the Middle Classes?
by David Boyle
Fourth Estate, £14.99, 352pp 
 
When the Money Runs Out: the End of Western Affluence 
by Stephen D King
Yale University Press, £20,  304pp

Money is a mirror. When we are happy, it dances, sings and races round the world. When we are frightened, it flees, trembling, seeking a place to hide. When we are sad, it sinks into dark, melancholy pools of mistrust. We are, according to Stephen D King, now sad and money lies inert, indolent.

Those who once gazed most confidently in the mirror of money, the middle classes, dare not look. Their pensions have shrunk; their children cannot afford a home; their hard work, their talents and their qualifications earn them next to nothing compared to the City shysters, while their small businesses pay taxes that are gleefully evaded by foreign multinationals. They are, according to David Boyle, dying.

These two very different books, as their titles suggest, say the same thing – that the financial crash did not just happen in 2007- 2008, that it is an ongoing cataclysm, a melancholy pool in which the west is drowning, that we are broke, that there is no more money. Worse still, there are, as King writes in When the Money Runs Out, no solutions on offer. Since the crash, we have been locked in a sterile political confrontation between two recovery strategies, neither of which can be expected to work. Austerity chokes off growth; increased government spending threatens to plunge us into a Greek-like crisis. The odd thing is that both of these strategies have worked in the past but neither can work now. King’s book explains why.

Boyle is in his mid-fifties. He looks back to the warm, value-laden, functioning middleclass world in which he was brought up from the perspective of the cold, dysfunctional present. Perhaps even then people were standing on a cliff edge but at least they did not know it. Now, they all know it and, indeed, they may already have fallen.

Are these grim diagnoses correct? First, we have to allow for the specialist perspectives of the authors. King is the group chief economist at HSBC and, throughout the book, he understates, occasionally wildly, the role of banking delinquency in creating the appalling collapse of trust that is intrinsic to our current economic stagnation. Boyle is a business writer and policy adviser; he is very middle class and – he admits to this – somewhat too nostalgic to be entirely objective. Neither of these problems is serious but readers should be aware of them.

Both books argue that we have reached the climax of a process that was, until now, largely benign. For Boyle, the middle classes provided enterprise and sound, if occasionally suffocating, values. King writes that the postwar period generated wealth on an unprecedented scale. Unfortunately, failures were implicit in these successes. The middle classes mortgaged their futures and fell for transparent scams, while the new wealth inspired a growth-dependent entitlement culture that was unsustainable in the face of an economic reversal in which growth appears to have stalled.

Boyle’s approach is brisk and somewhat arch. The question in his subtitle – “Who killed the middle classes?” – marks the start of “a detective story” on which we embark with our “deerstalkers and magnifying glasses”. Happily, this heavy conceit is not sustained and safely ignored. What follow are six “clues” – house prices, banks, the financialisation of the economy, pensions, education and the declining role and status of the professions.

He tells these stories, on the whole, persuasively and with some startling asides. Victorian economists, for example, worked out that the average peasant in 1495 needed to work 15 weeks a year to sustain his way of life. By 1564, it was 40 weeks and, now, it is common for both husband and wife to have to work flat out for almost the entire year to keep themselves afloat. Yet we are so much richer, or so we are told.

Perhaps more pointedly, Boyle does some convincing unpicking of policy decisions made over the past few decades. I, for one, had entirely forgotten about the “corset”, a system that existed until the 1980s for restricting bank lending and that, therefore, kept the banks out of the mortgage market. It was dispensed with in the Thatcher years and this, combined with the new money pouring in after the “Big Bang” opened the City to the world, led to a flood of new money for mortgages. House prices soared. If, Boyle observes, houses prices had stayed steady since he was born in 1958, the average price would now be £43,000. It is, in reality, closer to £250,000.

Boyle also reminds me of the Lloyd’s insurance market scandal of the 1980s and 1990s. A few middle-class types had been persuaded to become “names” – investors – in Lloyd’s on the basis that it was a rather grand and very secure home for one’s savings. Unfortunately, being a name meant that you accepted unlimited liability, so when incompetent underwriters steered the business into a series of appalling losses, the middle-class investors were wiped out, homes and all.

The grandees – financial, political and legal – took the side of the City against the investors and thus established the precedent that money was more important than people. As a result of that decision, bankers remain free to gamble with our savings with the same dud equations and the same ruthlessness that led to the crash.

Such histories are interspersed with anecdotes that will probably be familiar to us all: a lawyer struggling to survive in London on £100,000 a year, double-income families forced to spend every penny and leave nothing aside for pensions, professions eviscerated by the algorithmic demands of head office, small businesses destroyed by bureaucracy and robotic banks, desperate struggles to land a place at a decent state school – the private schools having, like the fancy design labels, priced themselves out of the reach of even the higher-income earners.

For the middle classes (and that seems to be about 60 per cent of us), Britain is a worse place than it was and, for their children, it is likely to be even worse. What is to be done?

Boyle’s answers begin from the premise that, to a large extent, the middle classes are the architects of their own misfortunes. For example, they scooped up the buyout money that destroyed the building societies and left us with a dishonest and inept banking system to finance our homes. They are guilty of not paying attention, of not doing what they do best: organising their affairs.

And so, like any good self-helper, Boyle ends with a 12-point programme for the middle classes: accepting the reality that the financial economy is not on their side, being entrepreneurial, buying and being local, avoiding debt, retiring later, starting their own schools, and so on. This, he says, is what they did in the past and it usually worked. But can it this time?

“Probably not” will be your answer if you read King’s When the Money Runs Out. Although, as I say, it is broadly about the same subject as Boyle’s book – the persistence of the economic catastrophe – it could not be more different. Apart from letting the banks off too lightly, King is a tough-minded economist and his approach is analytical and brilliantly educational, though you might wish you hadn’t learned some of the stuff in these pages.

Our problem, to simplify matters, is twofold. The west has created “entitlement” economies, which are predicated on continuing growth. We take this growth for granted, while ignoring the lessons of two once-booming economies – Argentina and Japan – which, suddenly and quite unexpectedly, stopped growing. This stagnation is not the same as a crash. It does not inspire terror but rather, as Adam Smith put it, melancholia.

This leads to the second part of the problem. In stagnation, nothing much happens and neither stimulus nor austerity – the twin poles of our current debate – works. There is no Plan C precisely because we have become so convinced that a swift return to growth is always inevitable.

The awful possibility is that the west as a whole has gone ex-growth and, as a result, we may have to change our entire way of life. It shouldn’t be that difficult. Continuous growth has, after all, only been a phenomenon of the past 250 years. But it is a nightmare and King will not, until the very end, let us wake up. He simply knocks down every economic device and every financial trick that, at one time or another, we have been told would save us from poverty. He is particularly withering about quantitative easing, which he describes as “a morally indifferent Robin Hood . . . chaotically redistributing income and wealth using neither rhyme nor reason”.

There are too many entertaining but depressing examples to list here. Instead, I will focus on the book’s greatest strength, which is its clear sense of the role of belief or, if you prefer, psychology in the working of the economy.

“In reality,” King writes, “the financial system prices beliefs – and beliefs about beliefs – not ultimate truth.” This is a particularly important insight during a period of melancholic stagnation. At such times, every game becomes zero-sum, every action produces winners and losers and trust drains away. We end up fighting over the spoils.

Furthermore, melancholia destroys the possibility of united action to save ourselves. Money being a belief system, it is always possible to believe our way out of the crisis. King points to the way people in some Asian countries simply accepted the reality of their crisis in the 1990s and meekly put up with huge cuts in their standard of living. As a result, their economies bounced back. They had a story to tell themselves, of mutual responsibility and concerted action. “For the west,” King observes drily, “there is, as yet, no narrative.”

Like Boyle, he ends with proposals that might work. We should, for example, treat debtors and creditors as equally at fault – Germany is not the virtuous man of Europe for the simple reason that it lent money to the south in the first place. There should also be a “new social contract between the generations”. The baby boomers have lived well off the future earnings of the young; that cannot happen again.

There are many more ideas but the attempt to find a story to justify the sacrifices necessary for recovery is the foundation of them all. It is this that joins these two books. Boyle is attempting first to evoke and then to restructure the old story of the busy, sane, thrifty and inventive middle classes in the melancholy pools of the 21st century; King is attempting to wean us off the tales – or fantasies – of inevitable and unending growth. Neither is certain of success, because the hard truth may be that the crash marked the beginning of the end of the story of western success. We may never look with satisfaction in the mirror of money again.

Bryan Appleyard’s latest book is “Bedford Park: a Novel” (Weidenfeld & Nicolson, ebook, £3.99)