Clem Sunter

Boom, bloat, bust

2010-03-10 12:45

Clem Sunter

In an article entitled ‘The Global Flags’ that I wrote in May 2009, I said that “one flag to indicate the approach of a ‘Perfect Storm’ scenario is a national bankruptcy of note. We have already had Iceland, but if a European Union member goes down, the event would severely disrupt the international monetary system”.

Well, it hasn’t happened yet but there is plenty of talk about it. Greece has to repay or roll over debt of 20bn Euros by the end of May. The Greek government has announced a whole raft of austerity measures which have prompted rioting on the streets in Athens. Government debt as a percentage of GDP is around 125% when the recommended ceiling for any EU member is 60%. The budget deficit as a percentage of GDP is 12.5% when the recommended ceiling is 3%.

In other words, the public finances of Greece are in a terrible mess but they are not alone. Portugal, Spain, Italy and Ireland are close behind. Britain is mentioned as being in danger of getting into the same state, and the US budget deficit for the current year is estimated at $1.8 trillion. Dividing that by the US GDP figure of $14 trillion gives a percentage of 12.9%.

So it’s no exaggeration to say that much of the world is now suffering from Bloated Government Syndrome (BGS). The financial meltdown in the banks has masked the onset of BGS but both maladies arise from a similar cause.

In the case of the banks, the boom conditions created the flawed belief that property prices would go up forever. It didn’t matter if you lent money to the dodgy borrowers because in the event that they could not repay their loans, you would just repossess their house, sell it at a higher price, extinguish the mortgage and pocket the difference. Of course, house prices fell leading to trillions of dollars of losses for the banks.

In the case of governments, it was the flawed belief that economies would grow forever. Remember Gordon Brown asserting that there would be no more boom and bust? Hence, you could increase the number of civil servants, markedly improve their salaries and pensions, introduce extra welfare programmes for the public at large and reduce tax rates – all at the same time. Why? Simple, said Brown. Growing economies provide a wider tax base, so even if tax rates are reduced, tax revenues would ascend into heaven.

Bailing you, bailing me

That bubble of reasoning has also burst and could precipitate an even bigger catastrophe than the banks. It is one thing for governments to go to taxpayers and argue that their hard-earned cash should be used to bail out the banks, otherwise they will lose their bank deposits. It is quite another thing for governments to start bailing each other out. Do you think that the German Chancellor, Angela Merkel, can tell German taxpayers with a straight face that she is going to use their money to rescue the Greeks? Not a chance! And she has already indicated her extreme reluctance to do so.

BGS means that governments will be forced to do the unthinkable which is to cut back on expenditure and raise taxes in a depressed market – the very opposite of what they are doing now and the very opposite of what John Maynard Keynes, the greatest economist of modern times, would have recommended. However, he probably had never figured on the level of public debt that BGS would create in the first place.

I am sure that some people reading this column will comment that I am being alarmist, as the next boom will automatically correct the situation without emergency measures being needed. My counter-argument is that the current mess may precipitate short-term actions which nip the recovery in the bud.

We’ll see. Meanwhile, Chantell Ilbury and I still give a 40% probability to a ‘Perfect Storm’ or double-dip scenario, despite the recent optimism exhibited by stock markets worldwide. Maybe, one should even consider the possibility of the Euro being disbanded as a result of the stress between the individual nations making up the EU. In fact, this is the first real test of what the union means. Is it all for one and one for all? Will a European Monetary fund get off the ground and prop up the Euro?

For the record, the projected budget deficit of our own government in South Africa is 7.5% of GDP this fiscal year. That’s high, but not in the same league as the others. Nevertheless, wherever you are in the world, the only cure for BGS is smarter government – in other words, more for less!

Send your comments to Clem.

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