Clem Sunter

The Icarus Scenario

2010-01-20 08:46

One of the best scenario planning exercises ever to be undertaken happened in the early 1990s, at a conference centre called Mont Fleur near Stellenbosch. Under the guidance of Pieter le Roux of the University of the Western Cape and using the expertise of Adam Kahane as facilitator, a group of prominent South Africans - which included Trevor Manuel and Tito Mboweni - put together a suite of economic scenarios that could play out in the new South Africa.

The one most relevant today, not so much for South Africa but for America and Britain, was called "Icarus". It involved populist economics leading to a short-term boom but a long-term economic bust. Icarus, if you recall classic Greek mythology, was the young man who flew too close to the sun, thus melting the wax which his father had used to glue each of his wings. He plunged to his death in the Aegean Sea.

Not for one moment am I criticising the measures taken by the American and British governments to bail out the banks. They had to do so in order to avoid an even greater catastrophe, namely most citizens in both countries losing their entire bank deposits.

However, it is the aftermath that is cause for concern. You have a situation where interest rates for depositors are virtually zero, which means that many pensioners who saved up for their old age are earning a pittance. They have to either live off their capital or invest in more risky income - earning assets just when the markets could be heading for another fall.

Meanwhile, the central banks are indulging in the dubious practice of printing money that is euphemistically named quantitative easing or QE for short. This can have inflationary consequences down the line as demonstrated historically in Germany, Brazil and Zimbabwe.

Then there is the question of both governments racking up enormous debts by running huge budget deficits. We all know that the only solution is to raise taxes or cut government expenditure or both. None of these measures will win you the votes to be re-elected if you are President Obama in America or Prime Minister Brown in Britain. Imagine what would happen to the discipline in a school if the principal were elected every five years by the pupils! Democracy seldom produces tough leaders, the net result being the passing of the problem to future administrations. They in turn are saddled with the increased interest burden of the extra debt they have inherited as well as the challenge of rolling it over and paying it off.

The last step in economic populism is to protect your own economy by slapping tariffs and quotas on imports. Thank heavens neither government has been tempted to indulge in these tactics on a wide scale or it would spell disaster. Tit-for-tat trade wars precipitated the depression of the 1930s.

The Icarus scenario has already occurred once this century on account of the easy monetary policies in place after the dotcom bubble burst at the beginning of it. The plunge into the ocean took place in March last year as a direct result of these policies which also featured the granting of subprime mortgages to people who could not possibly repay them when interest rates were hiked. The practice was encouraged on the grounds that extending home ownership to everybody was a perfectly honourable objective. It is, but the way it was implemented was financially unsound.

Normally humanity only repeats mistakes once every generation because the next one does not have the collective memory and experience of the previous one. This time an Icarus-like fall could repeat itself - within 10 years. The irony is that South Africa has not fallen into the trap of America and Britain. We were one of the first countries in the world to introduce a National Credit Act. None of our banks had to be bailed out. Perhaps it has something to do with the fact that two of the leading players in our financial universe, for most of the period since 1994, actually foresaw the consequences of an Icarus scenario. After all, they helped formulate it.

So take a bow - all you who were involved in the Mont Fleur initiative. You may have changed our history at a critical juncture in the fortunes of the world. As the Australians would say, good on you.

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