Thursday, April 21, 2011

The Situation is Hopeless, But Not Serious

Johan Norberg, the Swedish writer who has written the highly recommended Financial Fiasco: How America's Infatuation with Home Ownership and Easy Money Created the Economic Crisis, wrote this in The Spectator:

“Nothing is more dangerous than an idea when it's the only one you have. There is a broad consensus that the financial crisis of 2007 was at least in part a result of record-low interest rates, huge deficits and large-scale credit-financed consumption. Today, governments across the world are trying to solve the crisis — by means of record-low interest rates, huge deficits and large-scale credit-financed consumption. This time, they are also using more novel means of creating easy money: bank bailouts, stimulus packages and quantitative easing.”

And so we now have the spectacle of a US government owing $14.5 trillion to its bond holders, most US States being significantly in debt and the Canadian government, so widely praised for its response to the financial crisis, also facing significant debts which we will take some time (and some pain) to recover from.

Debt is not necessarily a bad thing, if its planned for, manageable within the available overall financial picture and there is a plan to deal with it. But in the case of the US the situation was not planned for, is not manageable and there is no viable plan to deal with it. Given this, we are all in trouble.

For all the talk of austerity, governments everywhere plan to get through 2011 and beyond by borrowing like crazy. The world's rich countries have increased their debt by some 50 per cent over the past three years, according to the IMF. As we saw from S&P’s comments on their credit rating for the US, at some point the bond market determines that it can no longer accept the situation and action has then to be taken. Sovereign bond markets panicked when Angela Merkel, the German Chancellor, suggested that investors might one day have to bear some of their own losses. Bond holders don’t like to speculate – especially those holding Sovereign bonds (bonds issued by a Government) – but that is exactly what they are doing. While the bond is underwritten, bond issuers sometimes default – ask those holding Iceland’s bonds.

On this matter, Norberg writes:

“The problem with socialism,' Lady Thatcher once said, 'is that eventually you run out of other people's money.' This time, it is worse: we are running out of our children's money, and our grandchildren's money. We are assuming we will have a never-ending supply of borrowed money, and we have no backup plan if this supply chokes up.”

So it is time for realism. It is time to bite the bullet and start to deal tough with debt and get it down to a reasonable level in the US, each of the US States and Canada. If we adopt the Golden Rule (ironically developed by Gordon Brown) that that the Government will only borrow to invest over the economic cycle and cannot borrow to fund current operations, then we will see draconian cuts to programs and increased taxes. As a grandparent, this is what we need to do to protect my granddaughters future.

The US needs to get its debt down by two thirds (a spending cut of $9.6 trillion) by 2015 and each of the US states should have debt within 4% of their GDP. Canada should rid itself entirely of debt by 2015. While this will impact employment, wealth and the economy, such a price is necessary to restore economic sanity and give confidence back to people. Its ironic that in order to restore confidence, we may first have to shake it. But shake it we must.

Just as almost everyone I know supports the law, but breaks it every time they get behind a steering wheel or supports “green thinking” and “action on climate change”, but does nothing about it (and generally make matters worse), so we must accept that a part of the problem is ourselves. Our assumption that the government will be there “no matter what” and that we have rights to such services as health care and wonderful services that we refuse to pay the real costs of. Its time for a one time tax hike to pay down debt and restore sanity. Its time for us to get serious about our future and rethink all of our public services in the light of known demographics and technology changes that could make things more expensive. Its time to get serious about our future.

So once the Canadian election is over, let the Government (and it really doesn’t matter which one it is – “the government always gets in”) do some straight talk to its citizens and tell us what we have to do to eliminate debt by 2015 and live within our means after that. Having started this journey, we should then all turn our attention to the US and use whatever networks and influence we have to persuade the people to get engaged in a campaign during the 2012 election cycle to eliminate two thirds of US debt and to live within its means.

When I was training as a counselling psychologist, I was always impressed by Paul Watzlawick’s book The Situation is Hopeless, But Not Serious – The Pursuit of Unhappiness (available free for downloading – just Google the title). The idea is simple. We may feel hopeless in the face of such challenges, but when we put our minds to it, we can cope and deal with the situation. It may take courage, determination and some harsh facing up to reality, but few situations are beyond redemption. What makes us unhappy and sick is the sense that “we’re stuck and there’s nothing we can do about it”. We’re not and we can.

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