September 21, 2011
Did you know 47 million Americans live under the poverty line and that figure has risen every year for the past four years? There are more Americans in poverty than at any other time during the past 52 years.
What about the fact there are the same amount of jobs in total in the US economy today as there were in 2000, and yet the population is 38 million larger? These are significant figures because the US economy is not creating jobs and, without jobs, these figures get worse. If they get worse, something will give.
Maybe the rise in US poverty is the reason why extremely rich Americans like Warren Buffett are imploring US President Barack Obama to tax the rich more. Maybe Mr Buffet reckons it is better to give away a bit of wealth now, than all of it in a massive political change later. We see the same thing in France, where the very rich are arguing to be taxed more.
This is unprecedented. For the past three decades, the major ideology in much of the world has been “greed is good” and income disparities are the result of superior talent and effort. Now even the rich are calling for more redistribution.
But it’s not just in the area of rich/poor politics that we are seeing changes to the status quo and establishment thinking. Take the Arab Spring or the Tea Party in the US, these are all reflections of great social changes that are ripping apart old certainties.
This sense that we are moving into a much less certain, much less predictable era is manifesting itself all over the financial markets, where fear has replaced swaggering self-confidence. For example, JP Morgan reported that in a survey last week of the world’s major money managers, 85pc said they were “neutral” as to where the world’s financial markets were going. “Neutral” is shorthand for “I haven’t a clue”.
When people have no idea what is going to happen next, they seek a safe haven. That safe haven is gold. Gold futures, the price where people expect gold to go in the next few months smashed through $1,900 (â‚¬1,380) an ounce last week. That is a rise of 55pc in the past year.
The establishment worldwide is on the defensive, old certainties are being assailed and no one is too sure what comes next.
In Europe, Siemens has just taken â‚¬6bn out of the major French banks and deposited this with the ECB against the background of the US Federal Reserve lending dollars to the ECB, to lend on to European banks who can’t find anyone to lend to them. When large companies lose faith in large banks and the Fed lends emergency dollars to the ECB, you know something is going badly wrong.
But why would European banks not lend to each other? Because, presumably, they are afraid that one will go bust and will not be able to pay the money back. Why would that be? Because they are afraid that banks haven’t been exactly honest in revealing what is on their balance sheets and therefore they don’t trust each other. When trust is gone, the system breaks down.
All the while, investors — as well as Siemens — are taking their money out. Investors are selling shares. It is only a matter of time before the ordinary Joe takes deposits out, as happened and is still happening in Ireland. If you doubt this is still happening here, just look at the deposit rates the banks are offering. They are offering almost as much on deposits as they are charging to lend out. This means they are petrified.
Of course, the reason European investors are fleeing the banks is that they believe that the banks will take huge losses, not just on their Greek portfolio but on their holding of bonds of all the peripheral countries.
For sure, Ireland has benefitted in recent weeks from traders following a bond arbitrage trade of selling Italian bonds and buying Irish bonds, but this too will unwind because the coming default in Greece changes everything.
When you take all the various piece of data and information together, from the poverty in the US and the anxiety of the very rich, from the lack of any real direction in financial markets to the lust for gold, we can see the world is at the edge. Add to this recent events in the Arab world where regimes that ruled for generations have been swept away; it’s clear something seismic is afoot. The old establishment is not credible.
Come back to Europe, where we see such a paucity of leadership and options on offer, where only a fool can believe that Greece will not default and only a fool can believe that once Greece goes, the contagion can be stemmed. So Europe and the euro are in a bind. It is clear that “austerity” imposed so that taxpayers pay for banks’ mistakes can’t work economically or politically. Yet this is all the establishment is offering.
The way out of this is that Greece defaults within the euro or Greece defaults and then leaves the currency and re-issues the drachma. European banks take a massive hit in this case and, to insure that Greece has a financial system after the default/ejection option, all former euro debt in Greece will be converted into drachma. This is what happened in Argentina and it is likely to happen again in Greece. Once you are down the road this far, this type of move is unavoidable. The question then is what happens to us. It is clear that Ireland needs to make a significant choice now. The options are not brilliant; they never are in a crisis. However, a return to the punt is now moving from the inconceivable to the entirely possible.
If there is one thing this crisis has told us, it is that “serious people” — the establishment figures rolled out to defend the status quo — have no idea what they are talking about. They were wrong in the boom and they are wrong again in the bust. The pattern over the past few years is with every new crisis, what was extreme becomes consensus and what was consensus becomes redundant. It is time to think the unthinkable.
When the very rich in the US are saying “tax me more”, it is not unrelated to the 47 million people who are below the poverty line. When the price of gold is sky high, it is not unrelated to the poverty of EU leaders’ ambitions or vision. And when the interest rate on Greek two-year bonds is above 50pc, it is not unrelated to the fact that the country is bust.
We are at a global tipping point.
David McWilliams has devised and will teach a new economics diploma, Economics Without Boundaries, from October 11. More details: www.independentcolleges.ie.