No spoonful of sugar available…

by Steve Downes, managing director of Juice Digital

Something different this week. No social media or digital marketing. Just a view on the current world economic situation.

Not from me, I don’t claim to be an expert. No, this was a note from a mate of mine (who doesn’t want to be credited) which has made me think. Here it is:

“For many years the developed world’s politicians have been driven by short termism driven by the desire to gain re-election. This has resulted in very expensive short term fixes to longer term problems and more damagingly they have consistently shown a lack of political will to address unpalatable truths about the nation’s finances.

Issues have been ‘kicked down the road’ time and time again and of course each time this is done the size of the problem gets bigger and therefore more difficult to eventually deal with.

We have now reached the moment of truth for many economies, starting with what is referred to as Peripheral Europe and now including Italy. These nations like many others, including the UK and the USA, run deficits virtually each and every year. That is to say that they spend more money than they take in. This way of life is now being questioned by their lenders, i.e. the people that provide the money to meet this shortfall. They are now questioning whether they will ever get their money back. And of course it is now not just a question of raising the money to pay for this years’ deficits that has to be financed it is also a matter of persuading these lenders to ‘roll over’ previous years loans as the borrowers are simply not in a position to repay any of the outstanding capital.

For many years these maturities have been automatically rolled over into fresh Government Debt without pre-conditions. But no more. Lenders are demanding higher interest rates on new and re-financed debt to reflect the perceived increased risks and further they are demanding action with the national economies to try, at the very least, to balance the books and halt the inexorable rise in the totals of the borrowing nations debt pile.

This drive to meet the conditions imposed by lenders has triggered the deficit reduction programmes in many economies. Notwithstanding that the initial measures being implemented are often inadequate the populations of these countries do not like the taste of the medicine prescribed, but they will have to get used to it as there will be more to follow.

Once again the weak willed politicians look to be more interested in points scoring and posturing rather than looking for an acceptable, robust resolution to the problems. They are clearly frightful of explaining the true extent and depth of the several problems and the inevitable consequences of a resolution. This fear is of course occasioned by the fact that it was them or their ilk that led us to the situation in which we now find ourselves.

If you take Greece as a (poor) example, you have an economy that has run a budget deficit in every year since the end of WW2. That is now 65 years of spending more than you earn. Latterly, since joining the EEC, the size of the deficits have been growing exponentially and have allowed the country to implement ‘social policies’ that would be the envy of 99% of the nations of the world. How the politicians of the time envisaged maintaining these policies in the future defies belief and one seriously has to wonder to as to how these politicians were able to sleep at night knowing that they were mortgaging the nations children’s and grandchildren’s futures for unjustifiable benefits to today’s generation will forever be a mystery.

In my view a further failing of the politicians has been to avoid or play down the seriousness of the situation. As the UK has not been embroiled in the current Euro crisis the impression exists that we have escaped relatively unscathed. This is definitely not the case. If nations begin to default on their obligations it will mean that future lenders will demand more interest on future debt to reflect the increased risk thus adding to the government’s costs of servicing our existing debt thus making our current deficit worse and thus necessitating further cost cutting measures.

I believe the population will only start to really “get it” when they see some of the current sacred cows being slaughtered (a possible cut in NHS spending would be the most telling example).

To try to give you something of the scale of the issues I would like you to imagine your household budget. Your income, your expenditure, your indebtedness and how you manage the situation to hopefully get to a future point when the bills are covered and the debt is all gone. Now if we take the world’s most successful economy, the USA, what do the numbers look like? (To get this to work I have removed eight zeros from the numbers. Yes, eight!:

Annual Income $21,700
Annual Expenditure $38,200
Net NEW debt to be financed $16,500
Total debt now outstanding $142,710
Recent budget cuts agreed $385

You probably do not need me to comment on the unsustainability of this model.”

So, what do you think about that? My, layman’s view is that we’re going to have to take our medicine. If we don’t it will be an incredibly selfish act, because it will simply mean we’ll be making our kids and grandkids take it for us. And they aren’t the ones who got us in this mess.

We need to earn less, retire later, pay more taxes and not expect improvements in our public services. Work harder for less money. Ouch. But, not only that, we need to do it with a smile on our face. Because confidence is crucial to recovery. So, while you’ve got less you need to keep spending.

None of that is very palatable. But if we don’t we’ll be, purposefully, decimating the living standards of the next generation so we can cling on to ours by our fingernails for a few more years.