Save the World from your Kitchen Table
One of the mildly depressing aspects of the Global Financial Crisis, which seems to have entered a new and unpredictable phase is the passion with which ideaologues of all persuasions have interpreted events, and particularly policy responses in terms of austerity vs stimulus along entirely predictable political lines.30 August 2011
One of the mildly depressing aspects of the Global Financial Crisis, which seems to have entered a new and unpredictable phase is the passion with which ideaologues of all persuasions have interpreted events, and particularly policy responses in terms of austerity vs stimulus along entirely predictable political lines.
Hayek vs Keynes have been dusted off and their disciples are slugging it out, whilst various alternative economic models are getting a run out with each pundit interpreting every twist and turn of events, as vindication of their particular theory. The high priests of tax and spend in one corner, small government, low taxes and austerity measures in the other.
Sovereign debt crises, American debt ceilings, bank leverage and capital ratios, declines in consumer spending, falling real estate prices, and stubbornly high unemployment in the developed western world all combining to further undermine confidence. Policy makers and politicians appear trapped in one dimensional solutions. Governments have looked to Central Banks to stimulate economies with a lowering of interest rates. With zero rates now curtailing options printing money has taken over with backers of quantitative easing looking to Ben Bernanke and Jackson Hole for round three. With little evidence that much has been achieved through QE rounds 1 and 2,other than to provide a temporary worry fix to anxious markets, the Fed thus far is keeping its powder dry. World leaders increasingly look to be floundering in a frantic search for answers.
Christine Lagarde outstanding as a law partner in Baker and McKenzie but distinctly underwhelming as French Finance Minister, now looks positively dirigiste at the helm of the IMF, proposing solutions to the wrong problems with a bizarre drive for enforced capitalisation of European Banks. This will likely do nothing to address Europe's sovereign debt, but it might do a fair amount to spook stock markets even further as attempts to knock bank balance sheets into shape by focusing obsessively on capital, it does nothing for the liquidity issues which are their greater challenge. Not too many banks have gone bust because they didn't have enough capital, plenty have got into trouble because they didn’t have enough cash. Government bonds which many have been compelled to hold were considered safe near cash investments. With Greece in deep trouble, Ireland and Portugal still in difficulty and the EU big guns of Spain, Italy and now even France in the frame – we are in fragile territory.
So what is the answer?
Does it lie in interest rate manipulation, currency intervention, quantitative easing, fiscal tightening, or fiscal stimulus? Is the global economy essentially a linear economic model where finely calculated stochastic model responses will cure the malady and return us to the halcyon days of the Goldilocks economy; not too hot, not too cold, just right.
I fear none of the current conventional economic wisdom nor even the wackier ideas on the fringes of the economic universe will help us but there may be some useful measures to be found around the kitchen table!
The kitchen in most homes is a place to gather, to eat and to share. It’s what most of us do as families especially when we have problems. So for a moment imagine the global economy is an ordinary household. We have seen good times, the money was coming in, we had a few good bonuses, we enjoyed great holidays, got a new car, a new TV, improved the house, and we bought that timeshare we always wanted. It was easy, we could buy now and pay later.
But then a few things began to go wrong, the buy now pay later stuff kicked in, things weren't going quite as well at work, our bonuses got pulled. We tried to borrow some more to keep the repayments going but things snowballed. Suddenly we couldn't borrow anymore because the bank said we couldn't pay it all back.
Sounds familiar? It is what most western governments did for years before the crisis came and when it did public finances weren't in any state to cope. We simply lived beyond our means and the finance community found smarter and easier ways to let us keep doing it.
So back to the kitchen table. What should we do?
Common sense dictates that debt is easy to get into but a lot more difficult to get out of. Putting a plan in place to work it down will be an immediate priority. We need to stabilise our situation, so let's get rid of non essentials and pull our horns in a bit. A bit more income wouldn't go amiss so let's look out for additional earning opportunities. We can reschedule some debt from short to long term and get those payments under control. We need to wake up to the fact that we built this debt up over time and it is going to take time to work it down. It will be tough but with a bit of discipline and resolve we can sort it.
Is that different as countries? Lowering interest rates and printing money are options the private individual doesn't have, but may tempt policy makers to avoid confronting the real issues. The UK's Coalition government seems to be making the best fist of it and if they can hold their nerve and the economy doesn’t stall they should see progress. With a £950bn national debt and an annual deficit of £165bn they need to.
America looks a lot shakier with differences between democrats and republicans paralysing decision making on public finances and fiscal matters. A political double KO and a double dip recession could be on the cards.
The EU, for which read 'Merkozy', looks even shakier with no consensus on the correct policy approach. Breaking up the Eurozone (possible but highly unlikely) or some form of closer economic integration seem to be on the cards. The bottom line is Germany and to a lesser extent France will need to bail out the South Europeans either through the much vaunted Eurobond or through the ECB buying more dud sovereign paper to keep yields manageable. Any option is better than doing nothing and hoping it will come right, with moves to address short selling a distracting and irrelevant sideshow.
Let's return to the kitchen table again. Of course if we stop everything and everyone else does we will buy less, firms will sell less, make less money, look to cut costs and we will be even further away from incomes and jobs recovering. Which brings me to the heart of what we learn from the kitchen table. Ordinary rational people act on the signals they see in the world around them, not in response to sophisticated central policy measures which take a long time to work in any event. How we feel affects every individual and corporate investment decision. We won't invest in the future if we have no confidence or clarity as to the shape that future might take. We will simply keep paying debt down and hoarding cash because we are not sure about the future and can't see a way forward.
What people need to see and hear is confident decisive leadership, consistent actions and honesty about the problems we all face. They need to see governments acting responsibly and prudently, living within their means, just as ordinary households have to. We need to see investment, investment in real wealth creating jobs, investment in skills and inovation, in research and development. The kind of innovation and investment that has lifted Apple to become one of the worlds most successful companies globally in the face of the biggest economic slowdown for a century, and mostly achieved during the crisis years. Kitchen Table Economics might be just the recipe we need, let's hope world leaders get around the kitchen table soon!