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"I have
seen a grievous evil under the sun; wealth hoarded to the harm of its
owners."
~
Ecclesiastes 5:13
Most people
still get it. Hardly anyone dares guess where it leads.
"Part of
the austerity mindset," says an Oxford
professor, "is the belief that transfers from creditors to debtors are unfair, because they result from the feckless behaviour of the debtor. There is a clear parallel with
the attitude to benefit recipients within a society."
"We're
told more often than not," agrees a US think-tanker,
"that the reason peripheral countries like Spain are in trouble is that
their governments engaged in an irresponsible spending binge and are now
reaping the consequences. [But instead,] the imposition of austerity and the
waste of human potential this view is generating begs
for moral judgement."
The solution?
"Savings today aren't scarce," says another would-be
policymaker - getting yet closer to the true spoke in the wheel - and
"this glut of savings relative to desired investment has put relentless
downward pressure on interest rates."
So
governments should add more debt of course, creating more jobs by borrowing
more of the savings glut to finance new spending and get everything spinning
again. Yet already the savers are spooked.
"In
Greece," say two
financial economists at VoxEU, "it is the
insolvency of the government that has sunk the banks. In Spain, the banks are
sinking the government. What is common in both countries is that savers are
running away when they see the banks and the sovereign propping each other
up.
Upshot?
"[This] might turn quickly into a classic run," they warn,
"the consequences of which are hard to imagine." But still it's worth trying to picture it. Because the odds have
rarely been higher in the last half-century and more.
"How
realistic is this fear?" asks another tenured pundit, this time in the Financial
Times. "Quite realistic. One reason for this is that so many
fear it. In a panic, fear has its own power. To assuage it one needs a lender
of last resort willing and able to act on an unlimited scale."
But
"even if an unlimited European-wide bank guarantee deposit scheme were
politically feasible, it would probably lack credibility," says another academic
economist. "Total Eurozone deposits amount to roughly €15
trillion. The European bailout funds - the EFSF and the ESM - together total
€0.5 trillion...The only way this gap could be filled is if the
European Central Bank were willing to print a wall of money to plug the hole.
[But] it is extremely unlikely the ECB will fire up the printing presses in
an unlimited fashion.
"More
importantly, depositors are withdrawing their money from peripheral Eurozone
banks because they are concerned about their savings being redenominated and
devalued away should their country exit the Eurozone."
Which brings
us back to printing more money, to backstop more debt, to try and stem any
further panic amongst bank depositors. Who in the end are owed money by the debtors who
cannot repay their debts.
"Rich
people," says yet
another pundit (very nearly our last!) "don't
actually worry much about unemployment: it doesn't really hurt them, even if
they lose their jobs. What they do worry about is inflation, since that
erodes the value of their dollars."
"[So]
the austerity consensus is in large part a closing of ranks - one of the few
areas where left and right can agree, at least at the upper end of the income
spectrum."
This
know-it-all could do with meeting some rich people. Or even just a regular
saver, now watching this sun-and-sangria replay of what skirted the UK...and then
the US...starting a little less than 5 years ago. Retained savings do indeed
hate inflation, but they don't fear it anywhere near as much as default. And
whatever proportion of national wealth is held by the top 1%, the soft middle
holds the vast bulk. Very nearly all of it sits on bank balance-sheets - no
more real to the touch than the full market cap of every listed stock on the
exchange - where assets match obligations, deposits match debts, digits match
digits as photons match photons and all exists is the promise to pay. The
borrowers owe the savers by way of the middlemen taking in money and lending
it out - if anyone wants it - for a return if they can.
"Ever
since the Crash of 2008," says one last critic - George Soros, no less,
speaking at this month's stupidly-named Festival of Economics in
Trento, Italy - " there has been a widespread recognition, both among
economists and the general public, that economic theory has failed. But there
is no consensus on the causes and the extent of that failure."
Soros is
wrong. Both the causes and consensus are plain. Too much money was lent to
too many people who have too little prospect of ever paying it back. Right
now this problem belongs to the debtors, most especially those unable to
raise fresh funds either to finance repayments or spend on current
consumption today. It's also the problem of the debtors' children, struggling
to find work - or giving up entirely - across Europe's western and southern
fringes.
"Well,
they hired the money, didn't they?" US president Calvin Coolidge
reputedly said when asked in 1925 to accept a cut in the sums owed by a
previous generation of Europeans. But so what? The creditors lent it, and
then, as now, there's no last-mover advantage in watching a bank run.
Inflation is not default by another name. Immediate and absolute loss of
value is very singular fear.
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