By Satyajit Das, former banker and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and Traders, Guns & Money
Stephen D King (2013) When The Money Runs Out: The End of Western Affluence; Yale University Press
David Roche and Bob McKee (2012) Democrisis: Democracy Caused The Debt Crisis. Will It Survive It? An Independent Strategy Publication
Luuk van Middelaar (2013) The Passage to Europe: How A Continent Became A Union; Yale University Press
Winston Churchill noticed that: “Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened”. Each of these three books, sometimes intentionally or sometimes not, concern truths about our economic, social and political systems.
Stephen D. King (HSBC’s Group Chief Economist) and Messrs. David Roche and Bon McKee (who run Independent Strategy, an economic consultancy) focus on the end of growth. Luuk van Middelaar (a political philosopher) writes about Europe, especially its politics.
Economics Means & Ends
The economic memes underlying When The Money Runs Out and Democrisis are familiar if not universally accepted.
Growth, historically, has been driven by population growth, opening up of new markets and improvements in productivity and innovation. In the later part of the twentieth century, growth was augmented by the use of debt to accelerate consumption directly. In addition, generous entitlement programs for some in many countries that were not fully funded or financed by borrowing boosted consumption indirectly as citizens spent more, assuming their health care and aging needs as well as education expenses of their children would be met by the state or other means.
States too indulged in Ponzi Finance to fund these promises and, in some instances, spending programs. Global imbalances were an integral part of this process.
The Global Financial Crisis exposed the weakness of this model – its Minsky moment, as some termed it.
When The Money Runs Out and Democrisis provide solid if unremarkable narratives of the causes and history of the crisis. Both conclude that the rapid growth and increase in prosperity was probably extraordinary, mistakenly assumed by citizens and policy makers as the new normal rather than an anomaly caused by a favourable confluence of events.
In When The Money Runs Out, Mr. King fails to acknowledge the role of bankers and banking in the problems, preferring to see them as mere “scapegoats” and the crisis as more complicated. Recent disclosures of internal conversations at failed Irish lender Anglo-Irish point to the toxic culture of banks and their insidious part in events, both leading up to and after the start of the crisis. Critics have pointed to Mr. King’s day job as perhaps one reason for the uncharacteristic diffidence in relation to bankers.
The Way Out?
With growth likely to be slow and societies having promised themselves entitlements which are unaffordable, at least without a major reorganisation of the social and economic structure, the question is what comes next.
Mr. King takes the view that there is no real solution and a Japan like stagnation is likely. The cure also is increasingly ineffective, as the major economies have become “stimulus junkies”.
Mr. King argues that the better way of dealing with the problem might have been the course pursued by South Korea and various South-East Asian economies in the Asian monetary crisis of 1997-1998. A Mellon-like cathartic liquidation (massive currency devaluation, bankruptcies, banking failures and (hopefully) short lived collapse in economic activity as well as a large reduction in living standards) may have restored the health of the economies.
This view is simplistic ignoring key differences. These economies were smaller, (in some cases) a lot of the debt foreign and a favourable external environment creating demand for exports. It also underestimates the unbelievable hardship for the less fortunate that resulted.
Talking about the human effects of the Asian crisis, a friend once told me of being in Indonesia during the Asian financial crisis. Fluent in Bahasa Indonesian, he overheard a conversation one night in the streets outside the hotel where he was staying. It was a family, a father, mother and two daughters. The discussion was about who was going to prostitute themselves that night to feed the family.
Mr. King does not address the social or political dimensions of the economic problems other than superficially.
Curiously, given his view that there is no real solution and his doubts about the effectiveness of policy tools, Mr. King ends his book with a serious of luke-warm and unpromising proposals – free labour movement, European fiscal union and central bank targeting of economic growth and higher inflation. The political issues, especially redistribution of wealth and resources, and the acute differences between different countries are ignored.
The title and subtitle of Mr. King’s book are puzzling. The money clearly cannot run out as central banks and policy makers can and have resorted to the electronic version of the ancient printing presses.
The end of Western affluence assumes that non-Western nations will be unaffected. Given that Western markets and investment are important drivers of emerging markets, it is difficult to see how collateral damage can be avoided. Given that emerging nations have large investments in Western economics through their central banking reserves or sovereign fund portfolios which are now at risk, it is difficult to see how contagion is avoidable.
Democrisis’ thesis is that without economic growth, the massive expansion of public and private debt is unsustainable. This instability is economic but ultimately social and political, requiring behavioural changes in both citizens and leaders and re-writing of the social contract. Democrisis discriminates between the position of different economies such as the US, Europe, Japan, China and other emerging nations which face similar but slightly different challenges.
Messrs. David Roche and Bon McKee are refreshingly clear eyed about the effects of current policies, which cannot restore economic growth but also have deleterious side effects, damaging not only to the economy but the foundations of the social and political system, ultimately undermining democracy.
When The Money Runs Out and Democrisis assume that causality runs from the economy to society/ politics. The Passage to Europe suggests that social and political systems may be the cause of the problems, at least in Europe. Dr. van Middelaar, perhaps unintentionally, shows the economic problems of Europe are not really economic problems at all but the inevitable and insoluble outcome of deeply flawed political processes.
The Passage to Europe is really two separate books, untidily stuck together.
The better book describes the development of the European Union and the politics of the project. It usefully and insightfully chronicles the internal battles and curious events that shaped the history of the Union (the early 1960s the European Court of Justice that established the supremacy of European law; the story of de Gaulle’s the veto; the Luxembourg compromise; and the background to the individual institutions such as the European Council of heads of government, the EU Commission and the European Parliament).
The second book is a more academic work of tentative political philosophising, reflecting Dr Van Middelaar background and work for Herman Van Rompuy, president of the European Council and occasional composer of haiku poetry. Dr. Van Middelaar argues that Europe consists of a series of concentric circles of influence: the Brussels and EU institutions; member countries and national governments; and non-EU Europe. He argues that the tension between these layers and the need for complex stratagems to resolve them, unsurprisingly, creates problems.
The following exchange about Europe in the UK TV series Yes Minister argued the same position with more wit:
Sir Humphrey: Minister, Britain has had the same foreign policy objective for at least the last five hundred years: to create a disunited Europe. In that cause we have fought with the Dutch against the Spanish, with the Germans against the French, with the French and Italians against the Germans, and with the French against the Germans and Italians. Divide and rule, you see. Why should we change now, when it’s worked so well?
Hacker: That’s all ancient history, surely?
Sir Humphrey: Yes, and current policy. We ‘had’ to break the whole thing [the EEC] up, so we had to get inside. We tried to break it up from the outside, but that wouldn’t work. Now that we’re inside we can make a complete pig’s breakfast of the whole thing: set the Germans against the French, the French against the Italians, the Italians against the Dutch. The Foreign Office is terribly pleased; it’s just like old times.
Hacker: But surely we’re all committed to the European ideal?
Sir Humphrey: [chuckles] Really, Minister.
Hacker: If not, why are we pushing for an increase in the membership?
Sir Humphrey: Well, for the same reason. It’s just like the United Nations, in fact; the more members it has, the more arguments it can stir up, the more futile and impotent it becomes.
The Passage to Europe provides probably unintended insights into the European problem. Any institution which can produce a 40 page document of how the EU flag and associated insignia should be displayed is of considerable ethnographic interest. In one respect, Dr Van Middelaar is right: Europe is a “word factory”.
But there are deeper revelations. The book reveals that the European project is a solution in search of the right problem to resolve. It reveals a lack of fundamental agreement between the nations, national governments and individual peoples about the basic idea of Europe. It reveals a deep seated desire of handsomely remunerated and largely redundant European politicians, bureaucrats and related acolytes to perpetuate themselves and preserve and expand their power and privileges. It reveals a political, intellectual and academic elite which is completely out of touch with and indifferent to the ordinary man and woman in any member nation. Only in Europe, unlike other polities, these are the core ideas of Europe.
Implicit in The Passage to Europe is the fact that everyone wants Europe a la carte, selecting the choice bits available from the menu and leaving the paying of the bill or the problems of cleaning up to someone else. Europe is what anyone at any time wants it to be and can coerce, convince or cajole other parties to accept.
For most citizens in member nations, Europe and the EU are largely irrelevant to everyday life. The people most interested and engaged are special interest groups seeking to capitalise on its generous endowments and subsidies.
While written before the European debt crisis, the book does not discuss in any detail the EU’s economic underpinnings– free markets, common currency – or its current difficulties. But its inadvertent revelation of the European process and pre-occupations allows an interested reader to extrapolate the likely evolution of the crisis.
Whilst not explicitly stated or implied by Dr Van Middelaar, a non-European reader would reach a depressing conclusion about Europe’s financial and political future. It is best captured by a quintessential European literary work – Dante Alighieri’s 14th-century poem Divine Comedy and the inscription on the gate of Hell: “Lasciate ogne speranza, voi ch’intrate” usually translated as “Abandon all hope, ye who enter here”.
A Matter of Style
Mr. King and Messrs. David Roche and Bon McKee write simply and directly, targeting the ordinary reader. Democrisis has the added benefit of brevity, encompassing around 100 pages.
The Passage to Europe relies on techniques of deconstruction and semiotic analysis, owing much to Jacques Derrida and Roland Barthes. Even allowing for the translation from its original Dutch, the writing often embraces, for at least this reviewer, a European high cultural and intellectual tradition, where comprehensibility must be sacrificed, meaning avoided and clarity feared. Frequently, the reader pines for even one of Herman van Rompuy’s poems, such as the one on Brussels: “Different colours, tongues, towers and gods. I search my way”.
These three books, each in their own very different and sometimes elliptical way, reveal a little of the truth of the matter. A reviewer of When The Money Runs Out noted that the author was an uber pessimist. By implication, the fact and arguments in the book were simply not true. Better to rely on mindless optimism.
But as Winston Churchill once observed: “There are a terrible lot of lies going around the world, and the worst of it is half of them are true.’