Niall Ferguson: The GREAT Degeneration.

INTRODUCTION

Niall Ferguson is a highly regarded and entertaining historian and his latest book is "The GREAT Degeneration: How Institutions Decay and Economies Die." The book encompasses his Radio 4 Reith lectures of 2012 and our editor received the book for Christmas from a confidant of some standing.

We found it immediately relevant to our deliberations for calendar 2013 as it fitted observations that we had made over the past decade or so and scattered amongst our Ecinya Insights.

This book is highly recommended reading for students of history and of economics and stock-markets.

For our part we have referenced various parts of his treatise but that is no substitute for reading the entire manuscript to gain a total perspective and a more complete understanding.

 

FERGUSON’S PRIMARY FOCUS

…is the long prophesised decline of the West.

Jonathon Pain, a close Ecinya confidant, has long talked about the west as ‘Submerging’ and the East as ‘Emerging’. Pain also includes Brazil, other South American states and parts of Africa in his view of the ’emerging’ nations. Pain also regards the emergence of the Chinese middle class as the great phenomenon of his time. In relation to China we respectfully point out that in purchasing power parity terms China’s GDP per capita runs at about US$10,410 with America at US$51,525, Australia US$44,390 and poor old Greece at US$25,030. (Figures courtesy of The Economist) Message: China still has a long way to go.

Ferguson maintains that symptoms of decline are all around us: slowing growth, crushing debts, ageing populations, anti-social behaviour. He attributes this decline to degenerating institutions. In his words ‘Our democracies have broken the contract between the generations by heaping IOUs on our children and grandchildren. Our markets are distorted by over-complex regulations. The rule of law has metamorphosed into the rule of lawyers. And civil society has become uncivil society.’

Ferguson is not saying that this recognisable decline is irreversible. It is merely difficult and will take heroic leadership and radical reform. In major countries he sees no signs of leadership or reform, and in particular is negative on the United States. In the words of Robert Friedland of Ivanhoe Mines "The situation is hopeless, but it’s not serious."

 

Ecinya Observations

Longer term Ecinya opines that America will both survive and thrive BUT short term Ferguson is talking clearly about problems that are not clearly recognised and largely not understood by politicians intent on misleading the public voter. Ecinya believe that the markets have to fall if only to spark a crisis along Ferguson lines such that Congress and the White House have to develop viable plans for a US renaissance via a return to sustainable fiscal and monetary stability. Fiscal policy is currently off the agenda and monetary policy is proceeding on the basis of money printing in perpetuity with bogus targets on employment as the new catch-cry.

Writing America off has been a European academic preoccupation since the end of The War of Independence (1783) and yet it is Europe that has lost its relative and absolute place in the world.  If only stem cell research were more advanced we could bring back Queen Victoria and/or Winston Churchill and perhaps even Charles De Gaulle.

Europe seems a more intractable problem, but Europe does really need America to lead by example. Ecinya has never been fond of the Euro block nor the elites that have grown and prospered into corporate dynasties since the end of World War II. If America were to recover we can, we believe, tolerate European inertia and the world can visit the compelling sights of Europe as tourists and look elsewhere for material items to consume and throw away. The peaceful growth of Asia, some material advances in Africa, and continuing growth in modern South America will also assist. European arrogance is not much different than American exceptionalism…. "we are the greatest". Australia was once modest and succesful, but governments since 2007 have been pregnant with bluster, bravado, short-sightedness and a shallow bag of inflated statistics.

 

DEGENERATE … meaning of

"Degenerate" in our Collins Dictionary means ‘to become less specialised or functionally useless, having declined or deteriorated to a lower mental, moral or physical level; degraded, corrupt’.

 

AN EDITED EXTRACT OF FERGUSON’S CONCLUSIONS:

Countries arrive at the stationary state, as Adam Smith argued, when their ‘laws and institutions’ degenerate to the point that elite rent-seeking dominates the economic and political landscape. I have tried to suggest this is the case in important parts of the Western world today. Public debt – stated and implicit – has become a way for the older generation to live at the expense of the young and the unborn. Regulation has become dysfunctional to the point of increasing the fragility of the system. Lawyers who can be revolutionaries in a dynamic society become parasites in a stationary one. And civil society withers into a mere no man’s land between corporate interests and big government. Taken together, these are the things I refer to as the Great Degeneration.

Shortly before I completed this book, the president of the United States gave a speech that neatly illustrated the point:

"If you were successful, somebody along the line gave you some help. there was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have, that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet……. There are some things, just like fighting fires, we didn’t do on our own……. So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam.. That’s how we invented the Internet. That’s how we sent a man to the moon."

This surely is the authentic voice of the stationary state: the chief mandarin addressing distant subjects in the provinces. It is not that the implied interdependence of the private sector and the economy is wrong. It is the over-statement of the case that is disquieting.

 

Bud Conrad, Chief economist of Casey Research (source- financialsense.com) had this to say on 12 January 2013 and endorsed the Ferguson themes:

I had been trying to ignore the massive, blanketed coverage by our media of this political circus. I knew ahead of time what the result would be from this deficit-cliff exercise. When it comes to holding the line against more government deficits, spending, and taxing, our government is dysfunctional. This event is more seminal than the results indicate: we can expect the politicians to repeat this process in a couple of months, and so on until there is a major loss of confidence in the dollar. There will be no return to fiscal responsibility. My point is simply this: we are already beyond the point of ever returning to a sensible, balanced-budget system. We may be distracted by wars, some crazy or false-flag terrorist event, or by even a natural disaster, but the conclusion is already inevitable: The US dollar will be toast; Treasuries are a dangerous investment; interest rates will start rising; and even the massive Federal Reserve manipulation supported by the banking cartels will be unable to overcome that. We will likely start in a slow fashion this year and will escalate out of control in the decade ahead.

 

THE ECINYA SOLUTIONS

In our Ecinya 2008 Overview Insights paper we enunciated our ‘Enduring Obsessional Macro Themes, which seem still relevant today –

  • The world, and stockmarkets, like growth.
  • The world, and stockmarkets, like low real interest rates.
  • Domestic deficits matter very much.
  • Politicians and commentators should forget ‘capitalism’ and ‘socialism’, instead focus on ‘balanced free enterprise’.
  • Similarly, we should forget ‘free’ trade, and focus on ‘beneficial’ trade.
  • The Chinese Communist Party should change its name to something like ‘The China Central People’s Party.
  • Think about what consequences might flow from an outbreak of relative world peace.
  • America should, under a sound President, find a way to talk to moderate Islam.
  • Religion should take a back seat in American politics.
  • The National Rifle Association needs persuading that gun control reform is overdue. America should mitigate its tendency towards encouraging mindless violence.
  • America needs to focus on retirement policy, education, tax reform and relatively affordable health care.
  • American domestic policy should aim to grow and expand the middle class.
  • America should assist the United Nations to become relevant.
  • Australia should move to a 5 year Federal parliamentary term with a minimum of 4 years.
  • Real tax reform is incomplete in Australia and a re-vamp should include extension of the GST to food before changing the capital gains regime and the income tax scales.
  • Auditors should read aloud their annual report at the AGM to shareholders to remind themselves, the board of directors, and shareholders that they are responsible to the shareholders.
  • All public companies with a market capitalisation over say $400 million should report their results annually four times a year. A June balance date would have their statutory reports at that date but also report for the full year ended September, December, March and then June.

 

Addendum to the above

Direct donations to political parties should be banned. It just creates crony capitalism and crony socialism. Politicians then throw largesse at ‘the base’ and give disparate crumbs to narrow interest groups. The result is the chaos and breakdowns that Ferguson has recognised. The alternative is that donations go to an Electoral Bank and the proceeds are distributed on a formula basis to accredited parties and accredited candidates. Independent groups can self-fund and self-promote provided they are subject to audit in monetary terms and accuracy in terms of campaign materials. Any independent can borrow from the Electoral Bank by providing security and then be refunded audited costs if a seat is won or a base level of votes is achieved to provide a partial refund of costs incurred. Crony capitalism gave us "Too BIG to fail" and "Too powerful to perish." It is highly likely that a proper enquiry of CitiBank and Goldman Sachs and perhaps others would result in some likely push for their break-up. Reference –http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104.

 

FOR PEOPLE OF IMMENSE TIME AND PATIENCE WE RE-PRODUCE (with minor editing) OUR ESSAY OF JULY 2011

 

The real GFC – Government Facilitated Chaos

Mon 18 Jul 2011

1) Adam Smith, at least, lived to have high hopes for the new country. He thought it was normal for human beings to want to live in a prosperous society, but that it was also normal for them to live in a broadly just society. Their desire for self-improvement was in many ways mysterious, but in the end it was inherently social, rooted not only in the love of acquiring but in the love of haggling, bargaining, interacting – the whole work of building worlds out of wishes. What then moved men to make markets was ultimately their love of pleasure and happiness, and who Smith wondered, could live happily in a society where all the wealth had been confiscated and kept in a few hands? He believed not that markets make men free but that free men move towards markets. This difference is small but decisive; it is most of what we mean by humanism.

AFR 29 December 2010 – Adam Gepnik of The New Yorker writing on Nicholas Phillipson’s "Adam Smith: An Enlightened Life."

(2) The principal contribution that monetary policy can make to economic well-being is to maintain low and stable inflation. I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have fore-knowledge of only one economic variable, the one you would choose is the path of the world economy. That is not to say that we have no influence over our own destiny – we can make the situation better or worse than it would otherwise be – but we cannot escape the influence of the world business cycle and the other factors that feed off it.

Ian Macfarlane, Governor of the Reserve Bank, 14 June 2005.

(3) All countries which accumulate debt and habitually run big current account deficits are vulnerable. And for many centuries societies have been susceptible to irrational booms, South Sea Bubbles, tulip bulb booms, and dot com busts. But no central bank can offset the cascading effects of bad government policy.

Peter Walsh former Labor Party Finance Minister, Financial Review 10 December 2003.

(4) The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded has led to deficit spending in every fiscal year since 1970, with the exception of the surpluses of 1998 to 2001 generated by the stock-market boom. The shifting of real resources required to perform such functions has imparted a bias toward inflation. In the political arena, the pressure to make low-interest-rate credit available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustment in nominal wages and prices has become nearly impossible to resist. The American people have tolerated the inflation bias as an acceptable cost of the modern welfare state.

Alan Greenspan in "The Age of Turbulence", September 2007.

(5) Treasury was at its most influential during the term of the Hawke government, but I give credit for that to our greatest ever treasurer, Paul Keating, a man with a deep understanding of how to obtain and use political power, and who needed a purpose to fight for. Treasury supplied that purpose, affecting his conversion to economic rationalism. Treasury’s highest institutional objective has long been to dominate the economic advice going to the government, and no secretary has been more successful in this than Ken Henry, thanks to the arrival of the deeply insecure Rudd government, which sought to hide behind the authority of the supposedly independent Treasury.

Ross Gittins, The Sydney Morning Herald, 27 December 2010.

(6) Labor should just stop meddling with the markets: History shows Julia Gillard and Kevin Rudd always can be trusted to do the wrong thing……..Gillard, god bless her, is less inclined to write a treatise on economics during her holidays, but it would be hard to find someone less qualified to understand markets than a union lawyer who was a member of the Socialist Forum for the best part of her adult life. With Australia’s economic growth figures for the September Quarter on a precipice at 0.2 per cent, Gillard wants to introduce a tax on mining, the one thing that kept Australia out of recession these past few years, and then get to work on a carbon price….. and legislate against exit fees in home loans, a measure that non-banks assure us will make them less competitive. The truth is that the Gillard government has the same chronic problem that crippled the Rudd government: neither incarnation seems to have the faintest clue about markets. Watching them blunder through each fresh initiative leaves you with a feeling of helplessness reminiscent of being an audience member at a kid’s puppet show.

Gavin Atkins, www,asiancorrespondents.com, The Australian 28 December 2010.

(7) Global economic recovery more superficial than real: Liquidity injections and bailouts can buy time, but are not the solution for economies in need of structural repairs….. Time is not the answer for economies desperately in need of structural or fiscal consolidation, private sector deleveraging, labour market reforms, or improved competitiveness. Nor does time cushion anaemic post crisis recoveries from the inevitable next shock.

Stephen S Roach, Non-Executive Chairman Morgan Stanley Asia, Financial Times 5 July 2011.

(8) I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket, and trying to lift himself up by the handle.

Winston Churchill

(9)The Way of Heaven is profound and mysterious and the way of mankind is difficult. Only if we make a profound and unified plan to follow the doctrines of the centre, can we rule the country well.

Emperor Qianlong of the Qing dynasty, 1645, outside of the The Hall of Central Harmony in the Forbidden City on signage sponsored by American Express:

 

OUR QUOTES EXPLAINED (90% of the message is in the head-notes).

(1) Adam Smith is most famous as author of "Wealth of Nations" and created the thesis that the ‘invisible hand’ of enlightened self-interest pursued by men of integrity would promote pervasive prosperity.

(2) Australia needs to regularly remind itself that it is about 1% of the global economy and act accordingly. Though we participate above our weight there is a recurring tendency for our political leaders to exaggerate our place in the world and pursue policies that are against the national interest and to squander the proceeds of our recurring cycle of resources booms.

(3) The Hawke-Keating-Walsh Labor trio got the balance about right and in their first term, and a bit of the second, the Hawke government advanced Australian prosperity enormously, overcoming much of the malaise and regression under the Whitlam and Fraser administrations. Mr Walsh from retirement has branded Mr Rudd an ‘economic illiterate’ and there is currently no reason to suppose that Ms Gillard is significantly different than her predecessor. Our current Treasurer Wayne Swan’s mantra is: ‘Because everybody disagrees with me that is proof positive that I’ve got the balance about right".

(4) Alan Greenspan’s memoirs are something of a mea culpa as he was a terrible central banker who failed to realise that bubbles were being created in the American banking system and too often pursued monetary policies to favour the White House President who had appointed him, sometimes out of fear that sacking him would cause stock-market, and re-election donor disruption. He has come to realise that America had become indulgent and profligate under his monetary stewardship, borrowing and printing money to pay for recurring expenditures including defence, war and welfare. It is the essential role of central banking to privately hold the government to account, and if that cannot be done, to do it publicly via interest rates and direct market mechanisms.

(5) Ecinya cannot entirely endorse Mr Gittins’ remarks on Ken Henry but we were interested to reflect on his use of the phrase "deeply insecure Rudd government", an observation which we wholeheartedly agree with. Mr Rudd seems destined to live and travel with his insecurities. However, at this point in time we can also find elements of ‘insecurity’ in both the Liberal alternative (a crazy paid parental leave scheme that missed shadow cabinet scrutiny, Mr Hockey remaining in the Treasury portfolio), and the incumbent Gillard-Rudd-Greens coalition where insecurity is evident in excessive debt loads, waste and extravagance. The Hawke-Keating-Walsh- Howard-Costello budget bonanza has gone. Mr Henry should have refused to undertake his Tax Policy Review without inclusion of the GST and to have protested the government response to the bulk of his recommendations. The obvious candidates for the Shadow Treasury portfolio are Scott Morrison and Malcolm Turnbull, but the latter often appears incapable of separating his ego from the national interest. Sometimes even worthy ambitions have to be put into life’s knapsack.

(6) Ms Gillard, Mr Swan et al are no students of Adam Smith nor, closer to home, of the past success of the Hawke-Keating-Walsh-Howard-Costello years. Government in Australia on a consolidated basis (Federal & States) is now running at close to 30% of the national economy, instead of a more manageable and balanced 20-22%, forcing the Reserve Bank into tightening when it should be able to think about reducing interest rates. Fiscal policy waste could have been channelled into sustainable tax reform, and structural initiatives. ‘Poor-girl-of- Welsh-origin-done-good’ is not a basis to run the nation; the job is bigger than that.

(7) Wishful thinking is the enemy of hard work, and Stephen Roach’s opinions are always worth a visit, though he is often prematurely prescient.

(8) and (9) need no explanation. The current Greek solution will fail and if it forms a template for other distressed nations then chaos will prevail.

A note on our quotes

One of our esteemed confidants, Compass, often complains that our head-notes take up so much of his (precious) reading time that he is exhausted by the time he gets to the Ecinya text and the underlying message. We beg to differ and believe the head-notes enhance the message, especially in context of our fulsome explanations. But there is "nothing more beneficial than an argument between persons of goodwill" and Compass remains a favoured and esteemed colleague. We do not seek his endorsement of our every remark, but thrive upon his perceptions and his oft well directed disagreements. Our text follows.

 

GDP BEING DRIVEN BY TOO MUCH ‘G

The thesis for this paper is that Gross Domestic Product (GDP) is being driven by too much "G"…… an excess of Government which is ‘crowding out’ the private sector. Small business resides in the middle class where most of the employment is created so that when you crowd out the private sector you crowd out the aspirational middle class. The result is simple – less velocity in the economy, less income growth, less economic growth, less employment growth.

The simple equation for GDP is

  • GDP= C+I+G+Net Exports

GDP is the total market value of all final goods and services produced in a country in a given year, equal to total consumer (C), total investment (I) and government spending (G), plus the value of exports less the value of imports (Net Exports). GDP is adjusted for inflation using one of several inflation measures. In America it is the Implicit Price Deflator.

Over short periods the GDP numbers can be a bit rubbery, but in the longer-term they are reliable enough and when supported by other anecdotal and hard evidence, we can generally say the GDP is rising or falling at a specified rate. GDP growth is important because it is the source of company profits and company profits play a part in stock-market advances. Healthy growth in GDP usually means healthy profit growth, but if GDP is expected to fall then expectations take over and the forward estimates for profits and GDP influence share market outcomes. Perceptions of sustainable periods of economic growth lead to higher share prices. Such perceptions are called ‘confidence’.

Looking at world economic growth numbers from the IMF we see that world economic growth in the period 1992 to 2001 averaged 3.2%, and in the 8 years from 2002 averaged 3.6% but inclusive of a global recession of 0.6% in 2009. The peak years for growth over the last decade were 2006 and 2007 when GDP growth averaged 5.25%. In broad terms a 1% fall in GDP is akin to taking out of world growth about US$700 billion, about 75% of the entire Australian economy in purchasing power parity terms.

Another way of looking at it is, if the world economy grows at 3% per annum then it doubles about every 24 years, and at 4% per annum it doubles about every 18 years, a sizable difference.

Australia is a Federation of States and numbers are not available to us on a basis that consolidates the states and the Commonwealth, but numbers were given in a Ken Henry speech of 30 November 2009 that indicate that Government has become too large in Australia relative to the sum total of GDP. Because Government is funded by taxation, it is not being over-simplistic to state the following –

  • more taxation = more government
  • more government = less consumption
  • less consumption = less production
  • less production/ consumption = lower GDP growth

 

WHAT DOES THIS MEAN?

One of the great difficulties in the standard GDP formulation is that governments can increase their expenditures not only via increased taxation, but by increasing their debt. However, a couple of things result from this approach. Firstly, you have to pay interest on the debt and secondly at some future time you have to repay the debt. Ultimately, borrowings means that you have to have more income to repay debt and principal.

For government the only source of income is taxation as all of their other services generally lose money. Higher taxation causes big businesses to want to pay less tax or to reduce their costs of production. The easiest way for BIG companies to reduce their costs of production is to produce in lower cost countries. This means lower growth at home and over time can impact on the ability of a country to repay its debts in a timely manner. Then a debt downgrade results and a vicious circle begins. These processes take a long time to evolve and sometimes having evolved, take a long time to become a recognisable problem such as in Greece, Spain, Iceland, Italy, Portugal, Ireland, England, America etc.

A few weeks ago we had this to say in our Weekly Strategy Review –

The ‘approach’ from SAB Miller for Fosters could be a precursor to a number of foreign bids. Australia always has the ‘FOR SALE" sign up when we have bad governments. In today’s press (front page The Australian) David Murray ( ex boss of CBA Bank and now Chairman of The Future Fund) has aggregated federal and state debts to reveal that Australia’s government debts are growing at 7% compound per annum and will reach $550 billion by 2014. This will be the equivalent of about 42% of GDP. Murray’s view seems to be saying that we are on the Greek tragedy treadmill. Debt seems to be growing at about double a real rate of GDP growth of circa 3%, AND even that is built on a mining boom. Australia has a relatively narrow export base and an extremely broad import base.

Back in October 1985 Peter Drucker had this to say –

I think, there has been an irrevocable shift in the last ten years. No matter who is in government, he would no longer believe in big government and would preach cutting expenses and would end up doing nothing about it. This is because we, the American people, are at that interesting point where we are all in favor of cutting the deficit – at somebody’s else’s expense. It’s a very typical stage in alcoholism, you know, where you know you have to stop – tomorrow.

It is now apparent that Mr Drucker was an incorrigible optimist because the rhetoric that has come from the Blair, Obama, Rudd-Gillard-Greens governments is not anything about small government at all. The universal mantra is "Markets have failed. When markets fail, governments have to "step in". This is despite that fact that it was government inefficiency, poor policy formulations, and lack of oversight, that caused the markets to fail in the first place.

The failure of governments over the past two or three decades to follow simple economic rules is the structural and systemic problem that needs to be overcome. However, the hole is so deep that only a unified plan will shift the role of government back to the centre. Qianlong is speaking from the grave.

 

LOOKING FOR SOLUTIONS

To find a solution you need to firstly define the problem, then test, re-test, and test again.

The world is in the post-crash period and not enough has been done quickly enough, or constructively enough, to provide a solid foundation for confidence going forward. Confidence is built not upon optimism, but knowing how you will handle the worst if it should come along. Economic vandalism is always wrapped in the cloth of ‘fairness’, ‘compassion’ and ‘reform’. When governments are pretending to be economic pragmatists they add the words ‘tough decisions’ to the ‘reform’ process. We find it rather ironic that financial planners, solicitors, doctors, lawyers, chartered accountants, engineers have to complete ethics courses when politicians do not. They just take an oath of office that they frequently break to stay in power and preserve their various direct and indirect entitlements, in too many cases, but certainly not all.

The Global Financial Crisis came about due entirely to –

  • Structural failure
  • Systemic failure
  • Cyclical factors

A quick summary of all of three points immediately above is ‘Government Failure and Chaos’ at all levels….. parliamentary, cabinet, ministerial, institutional and regulatory. The Zurich axioms say "Chaos is not dangerous, until it begins to look orderly."

In terms of structural and systemic failure we can blame the United Nations, the IMF, various central bankers, the shortcomings of the Euro-zone, Fannie Mae, Freddie Mac, Wall Street, commercial banks, ratings agencies, and history itself. But most of all we can blame GOVERNMENT in all of the developed economies and some of the developing economies.

Cyclical factors result from the ultimate realisation that structures and systems evolve that create the reality of success, but when excess evolves from that success, it is only the commentariat that says ‘enough is enough’. In the long expansion from circa 2000 to 2007 critical commentators were ignored and then summarily dismissed as ‘out of touch’, ‘doomsayers’, ‘bears’, ‘hidden agenda-ists’, ‘hysterical’, ‘myopic’, or ‘merely mad’ etc etc. Now they are often many of those things. The commentariat is frequently prematurely dogmatic, but this is better than being emphatically correct with the benefit of hindsight despite conspicuous silence during the excess growth/ bubble phase.

 

AMERICA

America is important for two main reasons. Firstly, it is world’s largest economy and secondly the US dollar is the world’s reserve currency.

In a recent luncheon meeting with Compass our Ecinya editor mouthed the spontaneous phrase "When the US dollar begins to rise the world will begin to normalise." Compass liked this so much, being a student of currencies, and frequently quotes it. Somebody once said "If you don’t like flattery, it just means you have never been flattered."

After World War II the US began to outsource a large part of its manufacturing to Europe as part of the Marshall plan, and then it managed the economic rehabilitation of Japan which became a major (and cheap) exporter to the USA, then South Korea came into focus after the end of the Korean war, then Taiwan, and now China. America has lost a lot of its will and capacity to manufacture and foreign countries have filled the gap. In a couple of recent visits to America our editor could only find one significant Wal-Mart department that seemed to carry mainly goods made in the USA… it was the toy department.

America’s success at exiting WW II as the world’s largest debtor nation appears to have encouraged it to spend rather than save. These expenditures have principally been on welfare, health and defence. America has also fought a number of wars which have gone over time and over-budget – the Korean War, the Cold War, Vietnam, Iraq and now Afghanistan.

As of June 2011, according to The Economist, America has a domestic budget deficit of 9.1% of GDP, a current account deficit of 3.4% of GDP and an unemployment rate of 9.0% (probably higher if properly measured). Now, all number are manageable in a world of fiat money, but they have to be actually managed. They can’t be left to themselves. there is no automatic repair system! The US political system has hit a position of gridlock and so the trend in bad numbers becomes more important than the numbers themselves. American politicians appear to have governed improperly for several decades, doing deals rather than controlling incomes and expenditures in a pragmatic fashion in the national interest.

President Obama replaced an unpopular President in George Bush and inherited the poor economic trends in evidence in Mr Bush’s second term. However, when Mr Obama came to power his mandate was free public health and it was probably unaffordable at the time. Certainly it was time consuming and while Congress blustered the economy burned . It would have been better if he had focused on the economy. However, the cult or myth of ‘American exceptionalism’ was allowed to prevail and jobs and the economy have only just become a priority, but with over-arching rhetoric substituting for an announced and broadly agreeable plan of action. In Mr Obama’s White House words speak much louder than action. Instead the growing, and somewhat encouraged, chorus is that "It is all China’s fault".

No doubt, the structural and systemic problems that Mr Obama inherited were worse than he could have imagined and advisers who pointed this out appear to have been ignored, mainly Paul Volcker. It seems a long time since America had a successful economic manager at the helm . From conversations and readings it seems that Truman, Eisenhower, Nixon in his first term, and Clinton have been the pick of the post WW ll economic managers.

 

THE WEALTHY DO NOT MAKE AN ECONOMY HEALTHY

Putting definitions to one side and ignoring comparisons in, and between, countries the most economically healthy countries are where the middle class exists and is growing. The three phases of a normal life are –

  1. Preparation for a working life…. growing up, education, (say 20 years)
  2. A working life……..skills development, building a small business or earnest vocation, creating a happy family etc (say 45 years)
  3. Exiting a working life i.e retirement (say 20 years)

It is now clear to most of us that the State cannot provide the means whereby Stage 3 will be at a level consistent with the level of comfort and enjoyment you experienced in Stage 2, where relative youth enabled you to work hard and play hard, with holidays and leisure part of your primary pleasures. America has all but destroyed the middle class, and in many places Europe (except for the cash economy) is not far behind. With big business getting excessive subsidies and the poor getting excessive relief the burden of 20th century progress has been borne by the middle class. Show Ecinya a strong middle class, and an aspirational middle class, and it will reveal a healthy economy.

 

SO WHAT ARE SOME OF THE LESSONS FROM ALL OF THIS?

On the systemic side America needs a White House administration with an interest in business and economics which means the election of a President who can tell the difference between dud advice and good advice and the difference between good personnel and mediocre personnel. Most times people agree with the President because he is akin to the Pope. Papal infallibility and Presidential infallibility are close cultural, historical and psychological relatives.

Wall Street has to be brought to heel and get back to its original function of recognising and financing sound business ventures. This means less emphasis on derivatives and speculation generally. Probably a few people need to go to jail for past misdemeanours. American institutions have to be looked at from Freddie and Fannie and all the way to the Federal Reserve.

Structurally the US tax system is a shambles and this needs to change. Warren Buffett has long been an advocate of this.

America probably need to find a way to fight less wars or when it fights, win a just result with significant consensus, more quickly.

If Ecinya had to make just one big US adjustment it would be the banning of political donations and express limits would be placed on the cost and financing of elections.

 

EUROPE

Europe is a mess; get rid of the euro and its spawned organisations, and go back to nation states with their own sovereignty and currencies. Write off portions of the country debts in exchange for meeting austerity and recovery targets. Replace most of the left wing governments; suggest to the Greeks and the Irish that repairing damage from street riots is a misallocation of resources and costs jobs and mitigate recovery efforts.