Echoing Roosevelt: Matthew Barzun greets President Obama at RAF Fairford in Gloucestershire on the eve of a NATO summit in Wales, 3 September. Photo: Getty
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Matthew Barzun: Despite ebola and Isis, could it be that we are living in the best of times?

Why are we intent on fixing our lens on the chaotic? And why do we insist on trying to weave a grand narrative out of mostly unrelated things? asks the US Ambassador to Britain. 

We live in challenging, complex, even confusing times. Our world is in constant flux. Charles Dickens’s description of the French Revolution seems just as appropriate today: it is the worst of times. Indeed, it may be even more true now, as the changes are global, rather than confined to one or two countries. Newspaper headlines suggest as much. They are littered with demoralising words such as “beheadings”, “aggression”, “hatred” and “fever”. Of course, ISIL is engaged in barbarity in the Middle East that is reminiscent of some of the most grotesque of the 20th century, while the ebola virus poses a global public health threat on a scale as large as anything we’ve seen in recent decades.

At the same time, the number of refugees and internally displaced people presents a great humanitarian challenge. And human rights violations abound in many parts of the world. But here is an equally valid and, I concede, sweeping narrative that suggests this is also the best of times.

It is a time of levelling. The world has reduced extreme poverty by half since 1990. Global primary education for boys and girls is now equal.

It is a time of enduring. The number of deaths among children under five has been cut in half since 1990, meaning about 17,000 fewer children die each day. And mothers are surviving at a nearly equal rate.

It is a time of flourishing. Deaths from malaria dropped by 42 per cent between 2000 and 2012. HIV infections are declining in most regions.

It is a time of strengthening. Africa is above the poverty line for the first time. Tens of millions have been lifted out of poverty in China. The debt burden on developing coun­tries has dropped 75 per cent since 2000.

It is a time of healing. The ozone layer is showing signs of recovery thanks to global action. And all the while, the technological and communications revolution is making more people better informed than at any time in history.

So why are we intent on fixing our lens on the chaotic? And why do we insist on trying to weave a grand narrative out of mostly unrelated things? Do we believe there’s a common unravelling force at work behind the ebola tragedy, Russia’s incursion into Ukraine and the independence campaign in Scotland? My guess is that it might have more to do with how we feel than how things are.

My grandfather Jacques Barzun was a cultural historian who wrote a book called From Dawn to Decadence, in which he argued that western culture had been in decline for many decades. Less crotchety than it sounds. It was his observation that the culture had moved from confidence, to self-consciousness, to a time of “anti-” and “post-” prefixes; but he also believed that something would take its place.

Whether he was exactly right or not, there is a consensus that the world is undergoing a period of extraordinary transformation. We are experiencing a “pre-” that we can’t name yet. Understandably, we feel insecure and have a deep urge for reassurance. One reaction has been to suggest that we are in need of a grand master plan to re-ravel the world, and that President Obama’s lack of it makes him small and inconsequential.

But is a grand master plan what we really want? Vladimir Putin has one. Do we agree with him that it makes him look big? What is the best way to lead and govern in times of remarkable change?

Here’s what Teddy Roosevelt said at the dawn of the progressive era: “Do what you can, with what you have, where you are.” And one of America’s great unsung heroes, John “Gil” Winant, ambassador to Britain during the Second World War, explained in 1946 his approach to leadership in chaotic times as, “Doing the day’s work day by day, doing a little, adding a little, broadening our bases wanting not only for ourselves but for others also, a fairer chance for all people everywhere . . .”

When President Obama articulated our military policy at West Point this spring, he spoke from this same American strain. It’s a policy that has been consistent throughout his presidency. And one of the critical pieces of it is the unprecedented global alliance that the president leads, and the extraordinary results it is getting. Co-ordinated air strikes on ISIL are depleting the terror network’s capabilities, while airdrops are helping to relieve the humanitarian crises it has created. An international sanctions regime is holding Russia to account for its aggressive land-grab in Ukraine, and forcing Iran to come in from the cold over its nuclear ambitions.

Work behind the scenes has also produced some other notable successes, such as the transformation of Myanmar from firm dictatorship to fledgling democracy. In times of uncertainty, this approach of leadership matched with partnership amounts to global earthquake protection against the seismic events that must inevitably come.

It is impossible to plan for every eventuality. And it is hardly fair to accuse the US of not having a highly detailed blueprint but simultaneously warn us that we should be taking into account our allies’ opinions and concerns. We take our responsibilities seriously but cannot be responsible for everything that happens. Other international actors make choices for good and for ill. So even the most far-sighted diplomacy must sometimes be reactive.

President Obama was elected to bring much-needed change and he has delivered on that promise. But he has also proved extremely adept at managing change. His ability to do so, making America more flexible, nimble and creative in response to global threats, has made the US and the world more peaceful, more prosperous and more just. 

Matthew Barzun is the US ambassador to the United Kingdom. @MatthewBarzun

This article first appeared in the 15 October 2014 issue of the New Statesman, Isis can be beaten

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?