Campbell Macpherson: One flew over the Eagle’s nest


Wasn’t it Einstein who defined insanity as doing the same thing over and over again and yet expecting different results? By that definition, surely Uncle Sam needs some serious psychiatric assistance.

The US is indebted to the rest of the world to the tune of $17,000,000,000,000. That’s a shed-full of noughts.

Every month it borrows a further $70,000,000,000 (actually in August 2013, it borrowed more than double that – $150bn). It pays $35bn in interest to its creditors every month.

It is the world’s largest economy, with the most sophisticated scientific and medical sectors on the planet, yet more than 30 million of its citizens cannot afford healthcare. Any sensible system of government would work to genuinely and simultaneously address the annual deficit, the burgeoning debt and the appalling absence of affordable healthcare. It would raise taxes and lower government spending across the board (especially in the perennial black hole that is defence) while reforming the entire healthcare system to make sure it is far cheaper and available to all. And yet the US’ sclerotic version of democracy is incapable of doing any of this in any sort of controlled manner.

Worse, it manufactures its own artificial financial crises, which only serve to make the situation even more problematic. Every year, US politicians have to do something no other government seems to feel the need to do in such a devastating and melodramatic fashion – raise its own artificial debt ceiling. Yet Washington’s polarised, combative system of government isn’t even able to do that properly. And because the world still relies on US consumption and (for the time being at least) still clings to the US dollar as its default reserve currency, the annual farce on Capitol Hill destabilises the economic fortunes of the rest of us.

Perhaps the IMF or World Bank should launch a mission to the US to help them sort out their econo-political system. But in doing so, to whom would they turn for guidance?

The UK? Its debts are not as high as the US in relation to GDP at ‘only’ 90 per cent of GDP, but it still has £1,200,000,000 of government borrowings; four times what it was a decade ago. The current Government has made a lot of noise about reducing the deficit and yet almost £10,000,000,000 is still being added to the debt mountain every month. But let’s be fair, the UK government has cut spending and is supposedly en route to a break-even budget sometime before 2020, perhaps. It may be far from perfect, but at least the UK system of government isn’t permanently frozen into inaction. However, the UK economy remains dominated by financial services and while steps have been made to ensure its banks are at least better capitalised for the future, there is a lot of talk about changing the culture in its so-called “casino banks” but I question whether there is a great deal of genuine action. To its credit, the UK has paused the well-intentioned but arguably misguided manufacturing-money-out-of-thin-air scheme known as quantitative easing (unlike the US which remains addicted to this clumsy monetary drug. Goodness knows what will happen when we have to come down from this economic ‘legal high’.) Yes, Britain is making some in-roads into expanding its manufacturing sector, aided by the fact that it is part of the EU, but the worst recession in a century has significantly lowered standards of living and the country will take a long while to genuinely recover.

Europe? Goodness me, no. This continent has managed to get itself half-pregnant which until now, medical science had always thought to have been impossible. It is stuck half-way between a ‘United States of Europe’ and a loose trade collective, yet it manages to combine the bureaucracy and costs of the former with the ineffectiveness of the latter. Europe can be more than a match for the US when it comes to denial and indecision; there is no financial crisis too grave that Europe cannot ignore or kick into the long grass.

Is Germany the model the US should adopt? Not unless the US could force most of Latin America to adopt the US dollar and create an artificially low currency. There is a great deal about Germany to admire. The way its citizens have scrimped and saved and gone-without to pay for the unification of East and West Germany; the way the powerhouse of their economy is mid-sized manufacturing businesses supported by public-owned regional banks; their work ethic; the way they have increased productivity year-on-year to remain competitive with the emerging Asian manufacturing giants; the way they continue to invest in manufacturing and technology. But they simply could not have achieved such global success without a weak euro – for which, ironically, they have many of their smaller European partners to thank. Without Greece, Portugal, Ireland, Spain, Italy (and France if we were to be honest) dragging down the value of the euro, the only people on the rest of the planet who could afford to buy anything from Mercedes, Porsche, Audi, VW, BMW, Siemens or Bosch would be a handful of Australian mining magnates, the directors of a few dozen US arms manufacturers and a few million of the Chinese elite.

Australia? Close, but no bananas. The Australian economy remains fundamentally based on commodities – with a dollop of financial services thanks largely to the compulsory superannuation laws introduced by Prime Minister Hawke and Treasurer Keating almost thirty years ago. ‘The Lucky Country’ has been China’s favourite quarry for the last decade which has saved its economic bacon on one hand whilst dramatically inflating its currency on the other.

The fact that Australia did not enter into recession during the global financial crisis is testament to its financial services governance regime and the innovative actions of Kevin Rudd and Wayne Swan, who were Prime Minister and Treasurer during the crisis. Rather than follow the rest of the world down the path of QE, which mainly serves to enrich bond traders from the very banks that caused the mess in the first place, Australia chose to hand cash directly its citizens instead. In late 2008, every family was given $1,000 per child, single pensioners were sent a cheque for $1,400 and pensioner couples received $2,100. What a brilliant way to get the economy working! And it worked; Australia had one quarter of negative growth but due to this innovatively simple stimulus (repeated a few months later in a smaller fashion, along with the announcement of increased infrastructure investment), the next quarter was positive and he country never looked back.

Australia’s debt-to-GDP ratio is a fraction of most other Western economies and yet the strength of its mining sector masks some genuine structural problems. With high costs of employment, lagging productivity and investment in non-mining industries at a 50-year low, Australia is in dire need of labour market reform and a significant rebalancing of its economy. Its headline figure of non-stop GDP growth over the last decade hides a stark, two-speed economy. Mining has been booming but even investment in this industry has started to wane as China’s growth has stabilised. The investment industry has been doing alright due to the guaranteed inflow of pensions cash every month, but the rest of the Australian economy is struggling due to high costs of living, in part fuelled by high employment costs. In recent months, manufacturing giants such as Ford, GM and Electrolux have all announced that they are pulling out of the country for the simple reason that it is too expensive to make things Downunder. Successive Australian governments have failed to expand the rump of the economy much beyond first-stage primary processing. The country has little to show for the mining boom apart from a small cadre of outrageously wealthy citizens, localised property booms, a depleted tourism sector (due to the high Australian dollar – it’s cheaper to holiday in Bali than Queensland) and an economy that is labouring under an inflated cost of living. But at least it isn’t labouring under a mountain of debt and its budget is more or less in balance.

China? There’s a lot to be said in favour of a benign dictatorship. Just ask the citizens of Singapore, one of the most prosperous and financially stable countries on the planet (with almost no natural resources apart from its geographic position). However, whether China can be described as benign is highly questionable. By raising the living standards of its gigantic domestic market slowly and gradually easing the way for competition within its economy, China has been able to grow to be the world’s second largest economy without borrowing. In fact, China has become the world’s bank and as bankers know too well, the fortunes of the bank and the borrower are inextricably linked.

Like any bank, China needs to believe that its customers will be able to make good on their loans. They may never repay the capital but as long as they can continue to pay the interest, everything is fine. The moment a major creditor is unable to pay the interest on its loans, the whole banking house of cards collapses into a heaped mess of colourful cardboard. By way of example, 20-odd years ago one Australian entrepreneur almost brought down one of that country’s largest bank when it became blatantly obvious that he was unable to repay his debt. “When you owe a bank a million dollars, you have a problem,” said Alan Bond at the height of his fame. “When you owe them a billion dollars, they have a problem.” From memory, ‘Bondy’ owed Westpac almost $2bn and together with bad loans from a host of other 1980s entrepreneurs, brought that country’s oldest bank to the brink of collapse. Could the US do the same to China?

The global economy almost failed to notice when Cyprus defaulted on its debts but we have been doing whatever we can to prevent Greece, Ireland, Portugal and Spain from heading the same way. If the world started to believe that its largest economy may have trouble servicing its debts – then, Houston, we would have a real problem. That may be unthinkable in the short term, even with the annual scare over US debt ceilings. But how high does US debt need to get before default moves from being a theoretical possibility to a predictable probability? US debt is already about the same size as its GDP, and while it has a way to go before it can rival the debt-to-GDP ratios of Greece, Spain or Japan, the US ratio will only continue to worsen. With the US having to endure an annual interest bill larger than the GDP of South Africa plus a debt that is expanding by more than three quarters of a trillion dollars a year … perhaps the question is not if Default Day will come, but when?

Let’s just hope that when that day does eventually arrive, the US is no longer the largest economy in the world, the US dollar is no longer the world’s reserve currency and the collective 3 billion citizens of China, India, Indonesia and Brazil have stepped up to take the place of the 300 million Americans who currently hold the mantel of the world’s largest consumer group.

Otherwise, the whole situation reminds me of the words a Middle East resident recently used to describe his weather in the height of summer: “It isn’t Hell, but you can see it from here.”

Campbell Macpherson is managing director of consultancy Campbell Macpherson & Associates