Saturday, 17 December 2011

Looking forward to the New Year? Thought not....

Enjoy the holidays. It is the calm before the storm. The New Year will herald the end of Europe as we know it. Next year will be the most traumatic for the continent since the end of the war.

Europe has accumulated an astounding list of problems. It is almost certainly in a recession, and it has not yet   recovered from the last one. Credit downgrades threaten the entire continent. Fitch has warned Italy, France, Ireland, Belgium, Slovenia and Cyprus of a "near-term" downgrade. Moody's has just downgraded Belgium.

The European financial system is on the verge of disintegration. The single currency is close to collapse. European banks are desperately scrambling for cash. The inter-bank market has stopped working. Banks are reducing their exposure to sovereign debt, making it harder, if not impossible for governments to finance their huge fiscal deficits.   In January alone, Eurozone governments need to find €80 billion just a rollover their existing debt and keep the lights on.

Living standards are declining everywhere. Unemployment is rising, and inflation is creeping upwards. European politicians seemed overwhelmed and unable to develop any credible responses to the mounting crisis.  There are ominous signs of unrest across the continent.  Europe feels as if it is ready to explode.


The superficial reason for the crisis is well understood and can be summed up in a single word - debt. Yet the crisis begs a deeper question; why did seemingly rationale people allow their governments to accumulate unsustainable debt stocks?

The temptation is to point the scrawny  finger of blame towards  politicians, who were enticed to take up credits from bankers. It is an explanation that neatly targets two disreputable and discredited groups. Yet, on closer reflection, this explanation seems insufficient.

During the1960s, European governments maintained balanced budgets. Their banking sectors were conservative and managed risk prudently. European economy was growing rapidly and living standards were converging to those in North America. Europe, back then, was a well-run place.

Something happened along the way. The harmony of the the 1950s and 1960s was disrupted. A rough date for the turning point seems to be 1970. Thereafter, governments began to run fiscal deficits, accumulate debt, and use interest rates to engineer asset price bubbles.

This shift was demand driven; it was what the voters wanted. Europeans demanded two inconsistent things. First, they wanted governments to provide a generous social safety net, but they didn't want to pay high taxes to finance it. Second, they wanted to be rich, but they didn't want to work for it.

Politicians found a temporary fix for both problems - debt. Governments bridged the gap between expenditures and revenues by borrowing. Governments liberalised financial markets, allowing private households to accumulate large debt burdens to finance consumption. Financial market liberalisation unleashed huge asset price inflation that gave people the illusion that there were becoming more wealthy.

Nevertheless, the question remains why European attitudes to debt changed so dramatically in the 1970s. My best guess is that the answer lies in demographics. In the early 1970s, fertility rates across Europe collapsed. Many Europeans decided that they wouldn't have children. Those that did decide to have children, had far fewer than their parents.

Childless people have a very different attitude to the future compared to parents. People with children worry about the future in a deeply personal way. They worry about the world that their children will inherit.Leaving an inheritance of debt and financial disorder, for most parents, is anathema.

Childless people also worry about the future but in a more abstract way. Public sector debt, particular kind that matures in the distant future, is a problem for someone else, or to be more precise, the children of someone else. Childless people have no biological investment in the future.

This biological disconnect with the future has created a profound paradox in Europe today. Ask anyone individually how they feel about the future, and you will invariably receive a passionate answer, highlighting the need to protect the environment, to invest in education, and build a better future through investment in public services.

Actions are often a better guide to how people really feel about the future. Over the last 30 years, Europeans have behaved as if the world would end in 2020. Both collectively and individually,Europeans have built up unsustainable debt levels. People have not saved sufficiently to finance their pensions.  Education standards across the continent have disintegrated. Europeans protest loudly about the environment, but continue consuming ever-increasing amounts of energy. They are mawkish and excessively sentimental about children, yet seem unwilling to bear the financial sacrifices of raising a new generation. They want high levels of public expenditure, but will evade taxes as soon as an opportunity presents itself.

In retrospect, the most surprising aspect of the crash was that everyone was surprised when it happened. Looking back ,it seems almost surreal that people believed that governments and households could build up such large debt stocks without consequences.  It was stupid to think that asset prices could consistently outstrip the economic growth.Next year is when accounts are settled.  The disconnect between rhetoric and reality will disappear.  Europe is about to meet the future that it prepared for itself over the last forty years.

23 comments:

davidb said...

Ah,never mind Alice

http://www.youtube.com/watch?v=jHPOzQzk9Qo

Stevie b. said...

In one word, the answer is...

Denial.

Let's say Western wages have been flat in real terms for over 30 years. There is ongoing global levelling of pay. We all wanted to live as we think developed nations should. That standard could not longer be earned, so it was borrowed instead. Now it's payback time. The world as a whole will become "developed", but for the former "haves", this will mean we will all have a bit less, and getting will be a long, painful journey.

Simples?

RichardS said...

In the 1970s I worked for a finance company that insisted the word "Debt" should be changed to "Credit" and carried out a campaign to this end and others followed.

Is it not a coincidence that since that time the banking/finance/credit card industry, (and "Debt") have expanded beyond their wildest dreams with the resultant results.

It's amazing what a simple change of name will do!

RenterGirl said...

Alice, people want to work but there are not enough jobs to go round. The economic system demands consumers keep the wheels turn by purchasing things they cannot afford, as wages are low. And some of these things are shiny baubles, but modern necessities unknown to our parents: computers, phones etc. Why blame people for buying what they need, when they will be viewed as 'unreachable' by society (and even Jobcentres now almost insist on claimants having a phone number - how to do that without a a landline/mobile?)

dearieme said...

Your proposition that the elctorate is (in large part) to blame seems to me spot on. Your biological point is interesting. Forty years ago I made the same point about Keynes ("in the long run we're all dead" = I am childless)and people chided me for it. But your point is better since the electorate matters more than Maynard.

Alice Cook said...

Davidb, I hate that movie!

Alice

DaveP said...

A lot of the problems you describe are not unique to the EU/UK. The US, and other countries, have similar problems. The US is obsessed with defence spending and the EU is obsessed with an idealist welfare state, but that's were the differences end.

I'll never understand your rants on fertility rates. Population growth is the ultimate bubble. 1% per annum population growth is a doubling of the population in roughly 70 years.

Long term changes in population sizes have negative ramification either way. What the correct population size is not an easy answer, but having long term 0% population growth is arguably the better compromise.

Weekend Yachtsman said...

"The New Year will herald the end of Europe as we know it."

I certainly hope so.

Waiting for this to happen is becoming boring; let's get it over with and start again as free people.

How can it be any worse?

Michael Fowke said...

The future is very dark, but I'm getting ready to go out in a blaze of glory.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

Most mature adults have children. They may not have valued their marriages though.

The real disconnect was the credit card and the 'hole in the wall'.

Rolling over bills - and not being paid in cash - from one month to the next loosened prudent budgeting and the counting of pennies.

'Let's get it now - on tick.'

Then the abolition of Miras and the dual income household in the '80s/90s/00s - the housing bubble which you and I both loathe. That's when children became superfluous.

Clinton's Politically Correct sub-prime disaster. Record low interest rates because of Bin Laden's attack on the WTC.

There have been a few things at work in all of this.

Happy Christmas, Alice.

Elby the Beserk said...

The Slog has much to say on this

http://hat4uk.wordpress.com/2011/12/23/eurobank-liquidity-how-much-more-are-we-going-to-waste/

At the current rate, it’ll cost $9trillion to keep the eurobanks afloat until March 31st 2012.

Happily - so to speak - even when I was earning a good salary (40k pa with over half going to HMRC to be pissed away), we had little left over as a result of having four kids and educating them independently (Steiner schools since you asked). So we learnt very quickly how to live on very little. Kids were all brought up veggie on rice, pulses, beans and veg, and (maybe?) as a result. and touch wood (and a refusal to let them be antibioticed unless clearly necessary), they are all very fit and healthy.

So in effect I downsized years ago. Yes, it will get worse, and I do so wish we could get the allotment we have now been waiting five years to get, and that I could use a shotgun (must get on to that one). Mortgage is paid off, no debts, little income, little outgoing. We will survive. But yes, it could get nasty. Will get nasty, as the politicians are more concerned with politics than economics. Shame that they are shite at both eh?

Merry Christmas to all of you - and look after your own first, and then your neighbours.

Stevie b. said...

Alice - happy holidays!
For 2012, suggest buying physical gold - especially sovereigns if you can find them with a low premium). Obviously the percentage of one's total assets depends on liquidity, comfort levels etc. Dive in now and buy 1/3rd of the intended total, adding an extra 1/3rd each time the price drops around $100 from initial purchase price of near $1600. If all you buy is the 1st third, it'll be better than nothing.

miken said...

@S b, Buying gold is a fools game and I feel it is in very bad taste when people try to promote it. You appear to be a greedy and selfish individual trying to promote gold for your own means. Your comment is probably also quite insulting to Alice. You really think someone who is renting is really going to buy gold with their spare cash?

Stevie b. said...

@miken - you're perfectly entitled to your views of course - and gosh! - come to think of it, so am I!
As it happens, I think Alice is anti-gold, but that's what makes a market...

Alice Cook said...

Gold? I haven't said much about that. I don't feel confident offering explicit investment advice.

Anyway, back in a few days........

Alice

Anonymous said...

Greetings from Ashland, Oregon! Things are challenging here as well, but we must realize that we create our reality by the thoughts we perpetually think, so think positively! We cannot control what others will do, we can only control ourselves. Best wishes to everyone : )

Anonymous said...

Alice owes us nothing but good manners ...

Stevie b. said...

Hi Alice - "a few days" have more than passed and I'm getting peculiar withdrawal pains & feeling rudderless in these uncertain times, so hope everything ok?

Stevie b. said...

Alice - wherefore art thou? Wherever thou art, come back! Now! (please!)

sbo said...

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Mark said...

Is your New Year that bad that you can't even comment on it?

Hortoris said...

Against the Euro gloom we try to remain as positive about the housing market as possible.
let us hope your post this December will have something good to look forward too.