When the Money Runs Out: The End of Western Affluence
Stephen D King
Yale University Press, £20.00
Stephen D King should not be confused with the horror writer. In this book, HSBC's chief economist describes a real-life economic horror story, picking over the bones of the global financial crisis with the professional detachment of a forensic scientist examining the scene of a crime.
The conclusions are clear and compelling. By the end, we know whodunnit, how it was done and why, without resort to economic jargon - there are few acronyms, no equations and no charts. Instead, we are offered policy prescriptions that ring true - uncomfortably so.
I am a professional economist specialising in exactly the areas covered by this book, but I still learned a lot reading it. I was struck in particular by a line of argument that is both plausible and - to me at least - novel.
The flow of credit into developed economies from China, magnified by central and private bankers and finance ministries, and globalised through diversified financial instruments, is now a reasonably well-understood narrative, cogently rehearsed in this book. But why is the recovery proving so elusive?
Many explanations have been offered, some of which are efficiently dispatched here - calls for more fiscal stimulus are given short shrift, and the temptations of protectionism and increasing home bias in capital allocation are firmly rejected (correctly, in my view). King also identifies and thoroughly discredits the fashion for scapegoating bankers.
They played their part, but there were many other actors in this particular crime drama. So what is the explanation?
King points the finger at the breakdown of trust - closely related, as he reminds us, to the word 'credit'. But he does not mean financial credit alone - it goes deeper than that. Trust is the glue that makes possible all the higher functions of society. Without it, nothing works. And trust, he argues, is undermined by three current 'schisms' in society: between the rich and the poor; between the old and the young; and between lenders and borrowers.
All three are closely related. To paraphrase Clint Eastwood: there are two kinds of people in this world, my friend - those who have savings and those who work. Savers provide the capital to make wealth creation possible, and are rewarded with a share of that wealth. Savers tend to be (relatively) rich and old; borrowers (relatively) poor and young.
Nothing new here. But King's argument is that increasing discrepancies between savers and borrowers, in terms of the relative standards of living they can expect to enjoy, lead to a breakdown of trust, without which savings cannot be allocated efficiently. Everybody loses, growth suffers, and the strains between borrowers and lenders become ever more pronounced.
How do we cut this vicious circle? In part, by shedding the sense of moral superiority we attach to saving that stands in the way of a benign redistribution from savers to borrowers and which would heal the schisms in society and create the scope for renewed growth.
The Greeks should not have borrowed so much, certainly, and should not have been so profligate with the money they borrowed. But, by the same token (literally), the Germans should not have lent them so much nor so cheaply. Who has the moral high ground? Neither a borrower nor a lender be, said Polonius, and he was right.
There are echoes of the work of the left-wing philosopher Antonio Gramsci: the institutions of civil society are built on trust, and trust is undermined by inequality.
But there are also more fashionable echoes of the Austrian school - Friedrich Hayek and others: the above-trend growth that we enjoyed before the recession, fuelled by credit, was illusory. We are now living with the consequences - unavoidable unless the debt that was accumulated can be forgiven (or defaulted on). One way or another, we are all less wealthy than we thought we were.
There is far more in this book than I can do justice to here. A few minor quibbles: I do not agree with his assessment of the New Deal in 1930s USA and, in general, he lets central bankers off the hook too much.
He is too sanguine about the prospects for China and other emerging economies, but he underestimates the potential strength of the US economy. But it would be churlish to dwell on these. The broad thrust of his argument is both accurate and timely.
The book should appeal to a wider audience than economists. The author is a newspaper columnist as well as a professional economist, and it shows in the crisp and easy style of his prose. I recommend it heartily.
- Erik Britton is a director of Fathom Consulting