November 23, 2011
This cannot go on and it won't - change is comingPosted in Irish Independent · 277 comments ·
While I was dropping the children to school yesterday, the morning radio show on Newstalk highlighted an Ernst & Young report which claimed in its latest forecast on the economy that full employment would not be seen again in this country until 2030 — that’s 19 years away.
What a thing to say with any sense of confidence! In 2030, my children will be 30 and 28. Only a firm that has been totally insulated from reality — which could be the case for E&Y, as it audited Anglo, after all — could think that any society would tolerate a generation of mass unemployment without demanding a significant policy shift.
Whether this shift manifests itself in a new currency, a new tax regime or an economy-wide debt resolution — or something even more dramatic — something will give and it must.
But before we examine how that might happen, consider how long 19 years is. It is over one-third of your working life. Think about the world 19 years ago, in 1993. The newly unified Germany — a country which now lectures Europe on fiscal rectitude — was running a massive budget deficit. More significantly, the German budget deficit was financed by the poor countries of Europe through the medium of sky-high European interest rates as the voracious German demand for funds sucked money into the new Germany. The 1993 currency crisis was the direct result of Germany’s unilateral decision to unify. Now we can’t blame them for doing so, but it is worth reminding ourselves that we have all made sacrifices.
In Ireland in 1993, the IRA was still killing people, there were very few immigrants here and Irish banks were reasonably well-run outfits. Albert Reynolds came back from Brussels with a famous commitment of IRÂ£8bn in regional funding and we thought we were made. (In fact, over the 35 years from 1973 to 2008, we received â‚¬18bn from the EU in regional aid; Anglo lost nearly twice that in 12 months!
Back in 1993, our daily lives were so different from today. There was no internet, few mobile phones, no iPhones or i- anythings for that matter and only a tiny number of laptops. There was no YouTube, Facebook or Google.
Geo-politically, China was still largely a closed economy, as was India. Brazil was a pariah nation in default, rather than the second-fastest-growing country in the world that it is today. And things are changing more rapidly still.
For example, in the past year, 246 million new internet users were registered in China. This means that more people began to use the internet in China last year alone than there are actual internet users in the whole of the US. China added more users in one year than there are users in the US. Imagine what this means.
In the second quarter of this year, when the West was mired in debt problems and the consumer wasn’t spending, 3G mobile subscriptions in China increased by 172pc, reflecting the huge demand for smart-phones. Last month, only 11 quarters after the product was introduced, 160 million Android smart phones had been delivered from factories.
This compares with just 40 million Apple iPhones delivered in the 11 quarters after that product was first introduced to the world market. This trend reveals the extraordinary demand for new forms of technology and shows how, in just a few short years, a market leader can be overtaken.
Such is our new world and, irrespective of the laws of old economics, new economics is going to affect the careers of my children in ways that were unimaginable a few years ago. In fact, it is likely that my children will be working in jobs that haven’t yet been invented.
These observations reveal the problem with long-range forecasting. It is impossible to project with any real accuracy because there are simply too many things going on.
But we know one thing for sure, to use the words of the great US economist Herbert Stein: “If something can’t go on forever, it will stop.” This should be applied to the current crises in Europe and Ireland.
Politics will react to events and what was inconceivable only a few months ago becomes mainstream very quickly.
We know that all periods of high unemployment lead to significant political change. Recent US research reveals that the state of the economy in the year of the election is the single biggest determinant of who wins the presidential election. This is why Obama — no matter how good he is on the hustings — needs the US economy to be creating jobs next year.
At the moment, the indicators are that the US will slip back into recession next year. In Europe, Ireland and the US, the problems are similar — we are experiencing the hangover of far too much borrowing. This is called “deleveraging” in economics. A period of rapid growth and house-price inflation following too much credit availability is followed by too little credit and too much house-price deflation. This leads to low or non-existent inflation and economic stagnation. How long this lasts depends on how long you can put up with it.
If you try to pay all debts and screw the economy in the process — the Ceausescu option — you will get poverty, massive unemployment and, ultimately, revolution. This is exactly why this won’t happen. It isn’t politically feasible.
TAKE any historic episode you like, after a massive credit binge, policy changes dramatically. In 1935, the US defaulted on all its debts by coming off the gold standard. In 1992, Finland shafted its foreign bondholders by devaluing the Marka suddenly. The UK did the same. This is what happens.
A similar realpolitik will determine what happens next in Ireland. Real economics revolves around human capital and demographics. The true economic value of a country is its people. Actually, when seen from an economics perspective, debt is actually accountancy not economics at all.
Debt can be fixed by accountancy and corporate finance tricks, while real economic growth takes more time.
This is why we should expect large-scale debt deals in Europe. European banks are bust and because they are bust, they can’t finance European budget deficits, so realpolitik demands that the old creditors will get burned. Then the banks will sell assets and we start again.
This will happen after the next big credit crisis in Europe, which is coming in the next year.
Ultimately, the deleveraging timeframe in Europe will be shortened, balance sheets will be cleaned up as both creditors and debtors take a hit and then we will start again.
This will take about 19 months, rather than 19 years, and we will enter a new global economic cycle where the global structural changes in technology and demographics and geo-politics dominate.
When someone can’t pay, they won’t pay. Get over it and move on. That is what will happen and the future will offer as many chances to Irish children as any others.
As I watch a bunch of nine-year-olds, bags slung over their shoulders, shirts hanging out, shoes scuffed, I am consoled by the knowledge that their future is not sealed for the next 19 years.
Life — and economics — doesn’t work like that because when something can’t go on forever, it stops.