When the Money Runs Out

Economic setback breeds political extremism.

No growth, a loss of trust, a culture of blame, an unequal burden of austerity: it’s hardly the most tempting of cocktails. This is a dystopian world of economic and financial failure. It threatens political instability on the grandest of scales. We may no longer be engaged in twentieth-century debates about the relative benefits of the free market versus central planning. Marxist- Leninist dogma has, thankfully, disappeared from view. But we are in danger of letting a culture of blame and mistrust develop. We cannot understand why we have to make sacrifices so we search, instead, for sacrificial lambs. It’s a convenient approach, absolving ourselves from blame even as we construct a narrative to blame others. Yet if we all follow the same approach, it won’t be long before the politics of hate makes a comeback.

Indeed, it may already be with us. In Greece, it’s called Chrysi Avgi but, to the English- speaking world, it’s known as the Golden Dawn Party. Its emblem is a thinly disguised swastika. Many of its supporters are skinheads. It is setting up a blood bank for Greeks alone. It is on the extreme right of the political spectrum. It is firmly anti-immigrant. In parts of Athens, its vigilantes have replaced the police as the – unofficial – source of law enforcement, if that’s the right term. It vehemently opposes the austerity being imposed on Greece by its foreign creditors. And, in 2012, it enjoyed the support of 14 per cent of Greek voters, a dramatic increase compared with earlier years.

Economic setback breeds political extremism. When the cake isn’t big enough, when there aren’t enough slices to go round, anger quickly takes over. Political movements that normally wouldn’t see the light of day suddenly become mainstream. Think of bloody revolution in eighteenth-century France, anti-Chinese legislation in late nineteenth-century America, anti-Semitism in nineteenth-century Germany and the rise of fascism and Soviet communism in the 1920s and 1930s. Each of these toxic developments was rooted in economic setback. Stagnation not only creates the melancholy state but also serves as an incubator for what might loosely be termed ‘supremacist’ political movements that thrive on the ridiculous idea that their followers are somehow better than others, in the process invoking hatred towards minorities of whatever race, colour or creed. Stagnation may not be as bad, economically, as depression but, by imposing year after year of austerity, the risk of political turmoil only increases.

At the end of the nineteenth century, the rise of nationalism was, in part, a reaction both to the oppression of empire and of financial failure. The re-emergence of nationalism in the twenty-first century would likely be a reaction to the anonymity – and perceived failure – of globalisation. Global capital markets and autonomous nation-states do not sit happily side by side. We may have reached the limits of what globalisation can achieve, partly because we’re not sure we can easily live with its effects. Yet the return of nationalism will only damage our long-term prospects. Short of workers and facing economic stagnation, we are no longer capable of making good the promises we’ve made to ourselves. If we are to have any hope of salvaging something for our economic futures, it must come from our increased engagement with the rest of the world. A retreat back to the nationalist, protectionist and racist world of the first half of the twentieth century, whether driven by rivalries within continents or between continents, would only take us down a path towards economic, financial and political oblivion.

Yet disengagement can be seen everywhere. While mainstream politicians in southern Europe pander to the interests of foreign creditors, political extremism is, behind their backs, on the rise. With the UK recognising that the Eurozone may eventually have to move to a fully integrated fiscal policy, those on the Conservative right spot an opportunity for the UK to escape the EU’s ‘shackles’. As global growth slows, so regional tensions are on the rise: China’s decision not to send a delegation to the IMF/World Bank meetings in Tokyo in 2012 may have been no more than posturing, but it only emphasised the fragility of political relationships within the region, relationships that will only sour if global growth ends up a lot weaker. And, throughout the Western world, the anti- immigration lobby becomes ever more vociferous, even as many Western nations are running out of workers. The lessons from the late nineteenth century cannot be ignored: persistent stagnation, accompanied by the creation of both winners and losers, will only serve to foster the nationalism and racism that, a hundred years ago, took the world into agonising conflict.

How did we get here?

At the end of the twentieth century, it seemed as though markets had emerged triumphant. Whether thanks to Adam Smith with his invisible hand or to Friedrich Hayek with his hatred of central planning, proponents of free markets had won the argument. They knew that a happy and prosperous society depended on the decisions of millions of individuals whose actions were ‘coordinated’ through the miracle that is the price mechanism. Rapid global growth was a direct result of the spread of market forces around the world. Those who resisted this process would ultimately lose out. Deregulation and privatization spread like wildfire, such was our collective faith in the wisdom of markets. The Soviet model had failed. The Asian model, so it seemed, was also in the process of failing.

Yet we became overconfident. We began to extrapolate economic gains into the future. We began to believe that economies free of excessive government interference could happily expand, over the years delivering higher incomes for all. We were so confident in continued economic progress that we could be educated yesterday, consume today, retire tomorrow, have excellent health care the next day and create a better life for our children while, at the same time, saving very little. Capital markets would take care of everything. Returns would always be high enough to allow us to fulfil our whims: sacrifice was unnecessary. We could borrow from others – foreigners, our children – and invest their money wisely for our collective benefit. And, if we were lucky enough to have some savings, we could invest them all over the world, with returns sufficiently high to guarantee both our own financial futures and the financial futures of those who benefited from our generosity. We hadn’t just mastered our economies. We had mastered time itself.

We double, triple, even quadruple counted the benefits of economic success, safe in the assumption that nothing could go wrong. We knew how to avoid a Japan-style stagnation; Argentina was regarded as a peculiar irrelevance, a genetic mutation that wasn’t relevant for the rest of us. And we had, surely, learnt the lesson from the 1930s. Never again would there be deflation, depression or stagnation.

Yet we have ended up with colossal failure, so much so that no longer do we trust either capital markets or, for that matter, each other. We don’t trust our banks, our politicians, our foreign neighbours, our central banks or even, in at least one case, our comedians. Societies have become increasingly polarised. There are haves and have-nots. There are generational strains. There is growing mistrust between creditors and debtors. These schisms make macroeconomic success all the less likely because, ultimately, they undermine the functioning of markets upon which macroeconomic success ultimately depends.

How can nations escape from the stagnation trap? Asia’s experience following the 1997–8 crisis offers only limited clues. At the time, the options were (1) Take the pain up front; (2) Accept you can’t live beyond your means; (3) Implement orthodox austerity medicine (Korea); (4) Blame others (Malaysia); (5) Protect yourself from speculators (Malaysia); (6) Have a revolution and overthrow the ruling elite (Indonesia). In each case, terrible distress was followed by sustained economic recovery. Yet none of the Asian economies had created a Western ‘entitlement culture’. Nor had their policy-makers claimed, in the style of King Canute, to be able to control the economic tides.

In the West, however, we spend money and create entitlements as if we are in control of all our tomorrows. These are hardly new failings. They have a pedigree extending back over many centuries. Today, the focus is mostly on healthcare, pensions and other social commitments, and we seem unable to move beyond the ‘entitlement culture’ that we have created. However, if the West wants to live beyond its means, it will have to allow foreigners to ‘cherry-pick’ the best Western assets to enable a few more years of extravagance.

The ‘stately home’ effect

Western nations are facing the same economic problems that befell the British nobility in the nineteenth century. Fully expecting to continue living in the manner to which they had become accustomed, they gradually discovered being lords of the manor wasn’t quite so much fun after all. Their ambitions were undone by industrial urbanisation, a process that, in time, led to the emergence of an educated middle class, a widening voter franchise – thanks to the three nineteenth-century Reform Acts that, altogether, increased the voting public from 366,000 in 1831 to 8 million in 1885 – and a significant reduction in available cheap rural labour to run the landed gentry’s stately homes.

Blenheim Palace offers a good example of the difficulties facing the nineteenth- century upper classes. Completed in the 1720s, the Palace was a gift from the nation to John Churchill, the 1st Duke of Marlborough, in recognition of his military achievements. It later became something of a millstone for the Marlboroughs. The financial foolishness of George Spencer-Churchill, the 5th Duke, certainly didn’t help: a one-man Greece, his spendthrift ways put the family on the verge of bankruptcy by the mid-nineteenth century. As their finances became ever more precarious, the Marlboroughs had no choice other than to sell off the family silver. Even this, however, didn’t bring in enough money. The estate’s finances were stabilised only when Charles, the 9th Duke, married Consuelo Vanderbilt, the American railroad heiress. That they hated each other was neither here nor there: he got the Vanderbilts’ money and she could now call herself a Duchess.

The Marlboroughs still live in Blenheim, but their lives aren’t as grand as the ones their nineteenth-century ancestors enjoyed. The house and grounds are open to the public, the Blenheim miniature railway transports visitors through the grounds, the butterfly collection is oddly appealing, people happily lose themselves in the maze and, on occasion, even the 11th Duke’s private apartments are open for inspection by the public (for an extra fee). The Marlboroughs are hardly impoverished but, unlike their eighteenth-century and early nineteenth-century ancestors, they have no choice other than to manage what is, in effect, an extraordinarily up-market theme park, only made possible by the Vanderbilt millions.

Today, Western nations are facing the same dilemmas that confronted the 9th Duke at the end of the nineteenth century. Heading for bankruptcy, what can they do to entice foreign money to their shores? If government bonds are no longer to be treated with confidence, other options will come to the fore. Modern-day Vanderbilts – hailing from China, Russia and Saudi Arabia rather than the US – will buy the best properties in the most cosmopolitan parts of the Western world, forcing up London and Manhattan house prices in particular and, via a trickle-down effect, making it near enough impossible for marginal first-time buyers to gain a foot on the property ladder: major international cities will become the ghettos of the wealthy. Companies, and their bespoke technologies, will slowly fall under foreign ownership, turning the US and the UK into nations of worker bees where the profits of their endeavours head overseas. And, with uncertainty about the implications of continuous money printing, commodity prices will rise even as Western currencies fall in value, reducing real incomes.

Such are the costs of trying to keep a country’s creditors happy. If they no longer trust governments and the myopic taxpayers who vote for those governments, the creditors will ‘asset strip’ Western nations, leaving generations to come without the assets – including real estate and companies – that nurtured and sustained previous generations. It is hardly an appealing prospect. It’s what happens when you continuously try to live beyond your means.


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