THE history of economics is not the history of money, it is the history of society and society can be measured by the wellbeing of the poorest, not the extravagance of the richest – which seems to be today’s mantra. Take the banking crisis, the global recession, the emergence of China as a dominant global economy, the eurozone crisis and the seemingly unstoppable growth in inequality. Add the increasing likelihood that global environmental instability will destroy our current economic and societal models within one or two generations, moving the goal of economics from growth and consumption to wellbeing and sustainability, and you may wonder if we are living in the early days of an economic and social paradigm shift.
I often wonder what it would be like to live through such a period of economic turmoil and its technical and social changes – the many stages of the agricultural age, the emergence of parliamentary democracy and the industrial revolution. Although those changes happened very quickly in historical terms, those who lived through such times were unaware that they lived in times that would be seen as historically exciting. In fact such times often involved massive insecurity and economic pain, widespread poverty and highly stressful lifestyle changes over only a few generations. The UK agricultural revolution led in Scotland to the Highland Clearances and the industrial revolution, creating the emergence of smog-filled inner city slums. To each individual the inability to earn a living, to feed and clothe their families properly probably didn’t seem like the end of an economic model, but more personal – being made redundant due to mechanical harvesting or the demise of their employer. Today, the Greek pensioner sitting on the street in Athens crying, worried not just for himself but for the wellbeing of future generations of his family, may blame past Greek governments for failing to curb spending whilst under-investing in capital infrastructure or the EU, in particular Angela Merkel, maybe Tsipras for over-promising or under-delivering. I doubt if he wonders if he is a member of a generation in transition between consumerism and sustainability.
It is true that great changes also created great opportunity. Once the pain of one or two transitional generations subsided we saw more sustainable economic growth, wider economic involvement and increases in standards of living across the board. The industrial revolution created a new economic class (the middle class) who became the majority and in most countries became the most powerful. Now we have an emerging new class system that spans the old, consisting simply of those who are wealthy and the rapidly growing majority who are over-indebted to the financial institutions. We are approaching a tipping point where personal debt (already slowing growth) will create a new recession. As much as 70 per cent of our economy is based on consumer spending and, with the average UK household predicted to reach £10,000 in short-term debt (such as personal loans, credit cards and overdrafts) by the end of 2016, the entire nation is on the cusp of being in personal debt trouble. Those in debt trouble in Scotland owe on average £12,350 which amounts to, on average, £129 more in arrears to payday loan companies than people from the rest of the UK, whose higher wages make debt to earnings more manageable. It isn’t the amount of debt that matters so much as the interest rates, and with interest rates artificially forced to an all-time low, the mortgage payments of those close to debt trouble are also artificially low. A return to two per cent will put a stopper on economic growth costing each household an extra £1,000 a year and 4-5 per cent interest rates will open the flood gates to mortgage defaults and personal bankruptcy, given that mortgages will eat up all available cash for short-term debt repayment.
Interest rates are low right now due to quantitative easing – the UK Government’s £375 billion money-printing exercise which, I believe saved the UK economy from collapse. However, there is a huge flaw in QE. Using QE to buy gilts meant that government interest payments on debt fell, the banks became more solvent, and stock market prices were forced upwards. Increased asset prices boosted the wealth for private owners of assets and with the top five per cent of households holding 40 per cent of assets, QE increased the gap between rich and poor in the UK. The richest 10 per cent of households in Britain saw the value of their assets increase by up to £322,000 between 2009 and 2012 whilst the rest of us saw wages stagnate; only low inflation kept living standards manageable and low mortgage rates kept household bills sustainable.
Most economists think interest rates need to rise to two per cent and inflation needs to grow to avoid stagflation but with personal debt levels fast approaching breaking point the alarm bells are ringing for another recession, caused by debt-driven slowdown in consumer spending. Just as it was felt we needed to refinance the banks to avoid economic collapse, serious thought must be given to refinancing the public to maintain confidence in consumer spending; debt relief for ordinary people, people who actually paid for the bank bailout. I would implement another round of QE but this time the money goes to the public to repay personal debt prior to the increase in interest rates and inflation, or we risk being back at square one with no plan B.
When you understand that an economy is not the stock exchange, the banking system, nor its big listed PLCs, but that its most important part is people, the system’s living breathing component, then it makes absolute sense to see that if we needed to refinance the banking system, we should also refinance the consumer system. It has been successfully tried before, most notably in Australia in 2009 when every citizen earning under $100,000 received cheques for $900. Consumer spend rose significantly and some paid down personal debts. Gross national income per capita in Australia rose significantly, taking Gross National Income well above the OECD GNI rate while the UK’s fell from $3,000 per head more than in Australia to $22,000 below. Australia has benefited from proximity to China but QE for the people was a significant driver of consumer confidence. Australia also managed to boost its birth rate by 3.2 per cent through offering $5,000 for having babies. So if the age of consumerism and global capitalism is coming to an end we need to think of tomorrow’s economics and consider economic policies that break all of yesterday’s rules, slowly but surely failing us for a generation. We are now in transition to a new economic model based on sustainability and wellbeing, and you can see the early signs of perception shift – it’s just that the rich and those in government are, as always, in denial.
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