Coming soon: the new poor
You have heard of the third-world debt crisis: now for the one in the first world. Ordinary people,
British and American consumers are obedient and compliant. When the central bank chiefs of America and Britain, Alan Greenspan and Eddie George, sidled up to them in the 1980s and 1990s, nodded and winked, they took the hint, and dutifully embarked on a binge of borrowing and spending. The nod and the wink were never explicit, but the easy money policies that deregulated lending, boosted credit card companies and lowered interest rates have provided the incentives for consumers (on declining incomes) to borrow like there's no tomorrow. That, consumers rightly calculate, is just what the powers that be want them to do.
And so debt has spiralled. By borrowing and spending, the middle-class consumers of the US and the UK, heroically and almost single-handedly, are holding up damaged economies, scarred by the bursting of asset bubbles such as stocks, telecoms and dotcoms. These bubbles, in turn, had their origins in the credit bubble created by central bankers and other deregulators.
But one group of people has stayed away from the party: the rich. According to the new annual report on the global econ- omy from the New Economics Foundation (NEF), the rich have declined to become heavily indebted, both in the US and the UK. They have sat idly by and watched as central bankers helped inflate a credit bubble, which then flowed into and fortuitously pumped up the value of assets, including property.
The rich can't believe their luck. The economic policies responsible are the kind they could only dream of for most of the postwar period. In all OECD economies over the past three decades, central bankers and finance ministers have clamped down on wage and price inflation, lowering labour and commodity costs. At the same time, they have recklessly let asset-price inflation rip, as we now see most notably in the stratospheric price of housing.
These double standards hurt the poor, and enriched the rich. Most poor people do not have assets; they live off incomes from wages or pensions. Poor countries rely on commodities for income. Most very rich people do not have incomes; they live off assets. They have benefited enormously from, among other things, lower coffee, copper and cocoa prices, from lower labour costs and from rising asset prices.
Under the economic policies that define "globalisation", the poor and the middle classes in the major western economies have had their real incomes cut, and now enjoy a smaller share of their national GDPs. The build-up of debt is not their fault. They (and their children at university) have been forced to borrow to compensate for the fall in their incomes. The rich, enjoying their inflated assets, have not needed to borrow, and therefore have low levels of debt. Unlike their middle-class neighbours, they are not boosting the economy by spending; they are just sitting on the rising value of assets.
This is the dirty secret of financial liberalisation - or "globalisation". When you hear bankers and other financial authorities express concern at rising debt levels, take it with a pinch of salt. It was they who helped create the vast "credit bubble" that now burdens ordinary people with debt while it enriches those with assets. And anyway, their concern is ambiguous. While Eddie George's successor as governor of the Bank of England, Mervyn King, worries about the debt built up under his predecessors, he is also concerned about what will happen when average consumers stop spending and start saving.
And so should we all be concerned. In Britain, we now owe, on average, 120 per cent of our disposable income, at a time when real take-home pay is falling. In each of the past three months, the Bank of England has reported record rises in mortgage and other borrowing. Most borrowers, economists and politicians remain complacent. After all, assets (such as property) have rocketed so much in value that they dwarf the debt.
But most people don't expect to repay their debts by selling their main asset: the family home. They expect to repay from disposable income. And for now, as unemployment remains low, they are confident that they will continue to have such an income. In the US, however, where households are even more deeply mired in debt than we are, unemployment is rising: 2.6 million Americans have lost their jobs since George W Bush took office, more than at any time since the Great Depression. If unemployment were to rise here in the UK, many borrowers would have to sell assets to help pay off unpayable debts. And if too many consumers began to sell off assets, that could lead to a downward spiral in, for example, house prices, making it even harder to pay off debts. To top it all, we live in a deflationary environment: prices are falling. This is a good thing if you're a consumer, bad if you're a producer. If profits can't be made from pricing, and if debts are high, then costs must be lowered - by laying off workers and cancelling contracts, or closing factories, restaurants and football clubs.
Deflation is also a good thing if you are a lender, because in a deflationary environment the cost of debt rises - unlike an inflationary environment, which erodes the value of a debt. Deflation is good for lenders, often catastrophic for debtors. If the economy succumbs to a debt-deflationary spiral, this will lead to immense personal suffering, compounded by substantial losses for the very borrowers and consumers who now heroically hold up the economy.
This threat is very real. But few economists, politicians and consumers appear to understand the nature of the risk.
The crisis of debt and deflation in rich countries, the NEF report argues, is the legacy of "globalisation" - the liberalisation of finance and the inflation of credit. Revolutionary decisions to open up capital markets - which were taken by elected politicians, not by "corporates" or impersonal "new technology" - have brought us to this pass. Led by Presidents Nixon and Reagan in the US and Margaret Thatcher in the UK, and then by their successors - and implemented by respected central bankers - these changes empowered the financial markets. Politicians and central bankers abrogated their roles as guardians of national finances and handed over crucial powers to the invisible and unaccountable finance sector.
Today, the global economy is the servant of these financial masters. The money-changers have taken over the temple. In doing so, they have generated a vast credit bubble of "easy money" whose counter-part is debt.
Central to the deregulation of capital was the release of the savings of millions of workers and employees. In the early days of deregulation, as governments lifted capital controls and deregulated lending, ordinary people were persuaded (by trusted politicians) to detach themselves from state pension provisions. They gave up their hard-earned savings to speculators disguised as merchant bankers, insurance companies, pension funds and other financial institutions. This abrogation of responsibility by government for the welfare of the elderly led to today's pensions crisis.
In controlling our precious savings, the finance sector has become dominant in the global economy, while democratic governments such as our own have become weaker. In effect, the deregulation of capital meant that elected politicians and governments abandoned their responsibility for managing finance, for preventing crises, for managing the exchange rate - and for protecting the weak, the elderly, the unemployed and the infirm.
What can be done now? Governments should take back the responsibilities they have given up. First, they should again regulate capital flows between nations, as happened in 1944, when the last "globalisation" experiment was still fresh in the public mind. That had created the great credit bubble that led to the crash of 1929 and the Great Depression.
Second, they should rein in "easy money" through increased regulation of savings, lending and borrowing. Finally, governments and central bankers should not pass on to heroic if gullible borrowers and consumers the huge costs of the crisis they have created. In other words, they should make provision for losses and bankruptcies resulting from their policies, and must bail out the consumers, pensioners and corporate bodies that will be the victims. Yes, this will increase public spending. But the burden should not fall on middle-income taxpayers. The rich should be made to share some of the extraordinary wealth they have acquired over these past two decades.
In short, finance should once again be made the servant of the global economy, and removed from its role as master - a role it has abused. It is time for the money-changers to be driven from the temple, and for democratic decision-makers to take their place.
Ann Pettifor is director of Jubilee Research at the New Economics Foundation and editor of Real World Economic Outlook, published on 1 September by Palgrave Macmillan