11:46 PM
In his 1841 work Extraordinary Popular Delusions and the Madness of
Crowds, Charles Mackay (1814-89) identified a common thread of
individual and collective idiocy running through such follies of the
past. These included alchemy, witchhunts, and crusades.
A clear implication of Mackay’s work was that all of these follies had been consigned to the past by intelligence, experience and enlightenment. But one folly remains alive and well. Financial bubbles. The past thirty years has given us the growth and bursting of the greatest financial bubble in history. This bubble confirmed the idiocy identified by Mackay. This 'money for nothing' lunacy has mired much of the world in debt from which there is no escape.
Perhaps the most truly remarkable feature of this "super-cycle" was that it endured for so long in defiance of all logic or common sense. Individuals in their millions believed that property prices could only ever increase, such that either borrowing against equity (by taking on invariably-expensive credit) or spending it (through equity release) was a safe, rational and even normal way to behave. Former Federal Reserve boss Alan Greenspan has been ridiculed for believing that banks would always act in the best interests of their shareholders, and that the market would sort everything out in a benign way. But regulators more generally bent over backwards to ignore the most obvious warning signs, such as escalating property price-to-incomes ratios, soaring levels of debt-to-GDP, and such obviously-abusive practices as sub-prime mortgages. Debt escalation was making it self-evident that the apparent expansion in the economy was neither more nor less than the simple spending of borrowed money.
No other major economy got it quite as wrong as Britain under Gordon Brown, but much the same was happening across the Western world, most notably in those countries which followed the disastrous Anglo-American philosophy of “light-touch” financial regulation.
Where the Western countries were concerned, was that they reduced their production without making corresponding reductions in their consumption. Corporations’ outsourcing of production to emerging economies boosted their earnings (and, consequently, the incomes of the minority at the very top) whilst hollowing out their domestic economies through the export of skilled jobs.
At constant (2011) values, consumption by Americans increased by $6,500bn between 1981 and 2011, whilst consumption on their behalf by the government rose by a further $1,700bn, but the combined output of the manufacturing, construction, agricultural and extractive industries grew by barely $600bn. At less than $200bn in 2011, net exports of services did almost nothing to bridge the chasm between consumption and production. Between 1981 and 2011, and again expressed at constant values, American indebtedness soared from $11 trillion to almost $54 trillion. Fundamentally, what had happened here was that skilled, well-paid jobs had been exported, consumption had increased, and ever-greater quantities of debt had been used to fill the gap. This was, by any definition, unsustainable.
At the same time, there is no real evidence that the economy is recovering from what is already a more prolonged slump than the Great Depression of the 1930s. We are now more than four years on from the banking crisis and, under anything approaching normal conditions, there should have been a return to economic expansion by now. Governments have tried almost everything, from prolonged near-zero interest rates and stimulus expenditures to the creation of money on a gigantic scale. These tools have worked in the past, and the fact that, this time, they manifestly are not working should tell us that something profoundly different is going on.
Beyond visibility and culpability, the two big questions which need to be addressed are ‘how bad can it get?’ and ‘is there anything that we can do about it?’ Of these, the first question hardly needs an answer, since the implications seem self-evident. In terms of solutions, the first imperative is surely a cultural change away from instant gratification, a change which, if it is not adopted willingly, will be enforced upon society anyway by the reversal of economic growth.
A clear implication of Mackay’s work was that all of these follies had been consigned to the past by intelligence, experience and enlightenment. But one folly remains alive and well. Financial bubbles. The past thirty years has given us the growth and bursting of the greatest financial bubble in history. This bubble confirmed the idiocy identified by Mackay. This 'money for nothing' lunacy has mired much of the world in debt from which there is no escape.
Perhaps the most truly remarkable feature of this "super-cycle" was that it endured for so long in defiance of all logic or common sense. Individuals in their millions believed that property prices could only ever increase, such that either borrowing against equity (by taking on invariably-expensive credit) or spending it (through equity release) was a safe, rational and even normal way to behave. Former Federal Reserve boss Alan Greenspan has been ridiculed for believing that banks would always act in the best interests of their shareholders, and that the market would sort everything out in a benign way. But regulators more generally bent over backwards to ignore the most obvious warning signs, such as escalating property price-to-incomes ratios, soaring levels of debt-to-GDP, and such obviously-abusive practices as sub-prime mortgages. Debt escalation was making it self-evident that the apparent expansion in the economy was neither more nor less than the simple spending of borrowed money.
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No other major economy got it quite as wrong as Britain under Gordon Brown, but much the same was happening across the Western world, most notably in those countries which followed the disastrous Anglo-American philosophy of “light-touch” financial regulation.
Where the Western countries were concerned, was that they reduced their production without making corresponding reductions in their consumption. Corporations’ outsourcing of production to emerging economies boosted their earnings (and, consequently, the incomes of the minority at the very top) whilst hollowing out their domestic economies through the export of skilled jobs.
At constant (2011) values, consumption by Americans increased by $6,500bn between 1981 and 2011, whilst consumption on their behalf by the government rose by a further $1,700bn, but the combined output of the manufacturing, construction, agricultural and extractive industries grew by barely $600bn. At less than $200bn in 2011, net exports of services did almost nothing to bridge the chasm between consumption and production. Between 1981 and 2011, and again expressed at constant values, American indebtedness soared from $11 trillion to almost $54 trillion. Fundamentally, what had happened here was that skilled, well-paid jobs had been exported, consumption had increased, and ever-greater quantities of debt had been used to fill the gap. This was, by any definition, unsustainable.
At the same time, there is no real evidence that the economy is recovering from what is already a more prolonged slump than the Great Depression of the 1930s. We are now more than four years on from the banking crisis and, under anything approaching normal conditions, there should have been a return to economic expansion by now. Governments have tried almost everything, from prolonged near-zero interest rates and stimulus expenditures to the creation of money on a gigantic scale. These tools have worked in the past, and the fact that, this time, they manifestly are not working should tell us that something profoundly different is going on.
Beyond visibility and culpability, the two big questions which need to be addressed are ‘how bad can it get?’ and ‘is there anything that we can do about it?’ Of these, the first question hardly needs an answer, since the implications seem self-evident. In terms of solutions, the first imperative is surely a cultural change away from instant gratification, a change which, if it is not adopted willingly, will be enforced upon society anyway by the reversal of economic growth.