When the Money Runs Out: The End of Western Affluenceby Stephen D. King
The Western world has experienced extraordinary economic progress throughout the last six decades, a prosperous period so extended that continuous economic growth has come to seem normal. But such an era of continuously rising living standards is a historical anomaly, economist Stephen D. King warns, and the current stagnation of Western economies threatens to reach crisis proportions in the not-so-distant future. Praised for the “dose of realism” he provided in his book Losing Control, King follows up in this volume with a plain-spoken assessment of where the West stands today. It’s not just the end of an age of affluence, he shows. We have made promises to ourselves that are achievable only through ongoing economic expansion. The future benefits we expect—pensions, healthcare, and social security, for example—may be larger than tomorrow’s resources. And if we reach that point, which promises will be broken and who will lose out? The lessons of history offer compelling evidence that political and social upheaval are often born of economic stagnation. King addresses these lessons with a multifaceted plan that involves painful—but necessary—steps toward a stable and just economic future.
"For many, the financial crisis is a temporary interruption in the rise of western prosperity that is due to easily remedied policy mistakes. The Keynesians believe this, as do anti-Keynesians on the free-market right. King argues, instead, that the future is not what it used to be. We have made promises to ourselves we cannot afford to keep. The argument is important, even if, like me, you are not persuaded." —Martin Wolf, Financial Times.
"A 'powerful' and 'convincing' book. Overall, as Charles Moore notes in The Daily Telegraph, 'it’s alarmingly difficult to disagree' with this book."—Matthew Partridge, Money Week.
"The book is jammed full of history [...] and is highly readable - being rich in the economic history that he argues was lacking in pre-crisis economic analysis. It is accompanied by some wonderful anecdotes and provides a good mix of economics and politics in addition to its historical detail."—George Buckley, Financial World
“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 whodunit, 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 . . . 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, Management Today
“[King] is dabbling in the financial equivalent of the horror genre. Perhaps even scarier, his is the stuff of nonfiction.”—Michael J. Casey, The Wall Street Journal
“A welcome reminder of the role [literature] has played in our lives, and of its indubitable destiny to continue to do so.” —Jon Morris, PopMatters
“When the Money Runs Out sets out well the problems facing advanced economies.” —David Smith, The Sunday Times
“Stephen King, chief economist at HSBC, has just published an interesting and well-written book When the Money Runs Out.”—Paul Ormerod, City AM
“A thoughtful and convincing assessment of what happens when the rich world becomes over-accustomed to rising standards of living but cannot afford the benefits its governments have promised, by the chief-economist at HSBC. Serious scaremongering; worthy of Stephen King’s horror-writing namesake.”—The Economist, (named a 2013 Book of the Year)
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WHEN THE MONEY RUNS OUT
THE END OF WESTERN AFFLUENCE
By STEPHEN D. KING
Yale UNIVERSITY PRESSCopyright © 2013 Stephen D. King
All rights reserved.
TAKING PROGRESS FOR GRANTED
One of my earliest childhood memories was waking up at some ridiculously early hour of the morning to watch the late Neil Armstrong step out of the Eagle – Apollo 11's lunar module – and utter his now famous 'one small step' mini-speech. In the years that followed – alongside millions of other young boys – I became obsessed with space travel. I read articles and books which predicted – with considerable confidence, I might add – that lunar colonies would soon be established and that humans would be heading to Mars before the end of the twentieth century. I hoped to become the next Captain Kirk.
As it turned out, this was all wishful thinking: more science fantasy than science fiction. Mankind may since have travelled remotely to the outer reaches of the solar system and beyond but man himself has, of course, still got no further than our nearest celestial neighbour. The Apollo missions were scrapped in the light of the financial and economic upheavals of the mid-1970s. Since then, we've had the Shuttle and Soyuz, the International Space Station and the Hubble Space Telescope, but nothing has quite grabbed the imagination like the first moon landings. Even those momentous events are now fading from our collective memories: for younger generations, Buzz Lightyear is more familiar than Buzz Aldrin. Meanwhile, the next man on the lunar surface, if Beijing has its way, is likely to be Chinese, not American.
Yet the sentiments that led to overly optimistic expectations about space travel have proved to be correct in so many other ways. Back in 1969, the year in which Neil Armstrong's boot first touched the dusty lunar surface, my parents' television was a small black and white device hiding in the corner. There were only two channels (BBC1 and ITV; newfangled TVs offered BBC2 but we couldn't afford the upgrade). Our television used valve technology – which meant the set took around five minutes to warm up – and the valves frequently broke, leaving us all-too-often without television altogether. The images were grainy at best. To change channels – or to alter the volume – we used human, rather than remote, control.
Today, we can tune in to hundreds of channels. We watch programmes on our televisions, our computers, our iPads and all sorts of other devices. Thanks to HD, the pictures are crystal clear and, thanks to 3D, the images can seemingly come to life. The sound is impressive (sometimes overly impressive: viewers at home can now actually hear the chants sung at soccer matches). We can record programmes for later viewing, enabling us to skip the ad breaks. Or we can download programmes from the internet thanks to iPlayer and other equivalent systems. Our ability to observe the world around us – and to act upon those observations, for good or bad – is simply extraordinary.
We may not have progressed beyond the moon but here on earth – at least within the Western industrialized world – progress is hard-wired into our collective psyche. We have come to expect continuous technological advance. And, by inference, we hope to become ever richer. We may no longer have the enthusiasm to put a man on the moon – or send a manned mission to Mars – but we nevertheless believe that technological progress will deliver a pace of economic expansion that will steadily and – for the most part – predictably make us better off over time.
These beliefs are ultimately rooted in the eighteenth-century Enlightenment. Back then, the outpouring of ideas that subsequently became mainstream Western thinking – the persistence of scientific progress, the benefits of pure reason, the rights of man – helped capture the underlying idea of inevitable human advance.
Even Enlightenment thinkers, however, would surely have been amazed by the West's progress in the second half of the twentieth century, a period during which living standards in Western Europe quadrupled and in the US went up threefold. Scientific advance in the eighteenth and nineteenth centuries was certainly remarkable but only in the second half of the twentieth century did technological progress translate into such extraordinary increases in living standards. And this wasn't just about money. Life expectancy rose, diseases were eradicated and quality of life went up.
Yet while technological progress was important, it wasn't the only factor driving Western economies onwards. After half a century of on-and-off conflict, the outbreak of peace in 1945 re-established cross-border business relationships that had been trampled under the jackboots of war. With world trade and international financial relationships nurtured by newly created international institutions, the protectionism and isolationism of the interwar years became but a distant memory: economic activity in the industrialized world thus began to flourish thanks to the unleashing of huge trade multipliers, with exports from Japan to the US, for example, rising at an annual rate of approaching 20 per cent throughout the 1950s and 1960s. Financial innovations that had first appeared in the 1920s – most obviously, the arrival of consumer credit – began to spread far and wide, allowing consumers to spend today and pay tomorrow. US household debt rose from less than 40 per cent of household income at the beginning of the 1950s to almost 140 per cent of household income before the onset of the financial crisis. The resulting increase in consumer demand encouraged industry to deliver substantial economies of scale, with mass production becoming ever more commonplace. Social security systems designed to prevent a repeat of the terrible impoverishment of the 1930s became increasingly widespread, reducing the need for households to stuff cash under the mattress for unforeseen emergencies: they could thus spend more freely. With the reforms initiated by Deng Xiaoping at the end of the 1970s and the fall of the Berlin Wall in 1989, countries that had been trapped in the economic equivalent of a deep-freeze were able to come in from the cold, creating new opportunities for trade and investment: trade between China and the US, for example, expanded massively. Women, sorely underrepresented in the workforce through lack of opportunity and lack of pay, suddenly found themselves in gainful employment thanks to sex discrimination legislation. In the early 1960s, fewer than 40 per cent of US women of working age were either in work or actively looking for work: by the end of the twentieth century, approaching 70 per cent were involved. The quality of education improved, with more and more school leavers going to university before venturing into the real world: in 1950, only 15 per cent of American men and 4 per cent of American women between the ages of 20 and 24 were enrolled in college: at the beginning of the twenty-first century, the numbers for both sexes had risen to over 30 per cent. And back-breaking housework, once the preserve of servants and housewives, headed off into the sunset. Westerners instead began to rely on washing machines, tumble driers, dishwashers, takeaways and heat-up meals, freeing up time for more productive endeavours and, for many, greater investment in health and fitness.
DON'T CRY FOR ME ...
The second half of the twentieth century was, thus, an unusual period replete with economic bounty. Many of the factors behind this persistent increase in Western living standards appear, however, to have been one-offs: we can only have one reopening of world trade, one substantial increase in consumer credit, one fall in the Berlin Wall. Yet we don't like to think in those terms. Our belief in ever rising prosperity is sacrosanct. It may also, unfortunately, be seriously misguided. We take for granted our future prosperity, counting our economic chickens long before they've hatched. We expect our pensions to be paid in full, even though we save very little. We expect easy access to medical care, no matter how expensive it might prove to be. Our governments make their budgetary arithmetic add up only by having faith in continuous rapid economic expansion. Our banks believe their assets have value only because they assume economic growth will prevent good loans from turning bad. We regard any economic setback as cyclical, not structural. Economies are always assumed to bounce back from adversity.
Yet it hasn't always been so. Economies can suddenly – and unexpectedly – hit a brick wall. The financial, political and social consequences can be immense.
A hundred years ago, the inhabitants of Argentina and Germany were similarly well off: their per capita incomes were more or less the same. Argentina, however, had made by far the more impressive progress in the preceding decades. In 1870, for example, its per capita incomes were only seven-tenths of Germany's. Anyone opting to extrapolate the trends of the late nineteenth century into the twentieth century would surely have concluded that Argentina would have ended up far richer than Germany. And anyone who invested on that basis would presumably have decided that Buenos Aires was a better bet than Berlin.
During the early decades of the twentieth century, the bet would have paid off. Argentine living standards remained mostly higher than those in Germany. Following the First World War and Germany's subsequent hyperinflation-related economic collapse, German living standards fell further behind those of their Argentine counterparts. It wasn't until 1934 that parity was restored. Germany then temporarily moved ahead: the Nazis were a decidedly unpleasant bunch but rearmament, autobahn construction and the arrival of the Volkswagen Beetle provided an economic shot in the arm. In the chaos that followed the Second World War, Germany fell behind again. Only in the early 1950s did (West) Germany finally overtake Argentina. Germany then moved into the economic fast lane. By 2008, German living standards – even with the costs associated with reunification – were double those in Argentina.
Of these two remarkably divergent experiences, it is Argentina's that is distinctly odd. Germany's story should be familiar to anyone brought up in the developed world in the second half of the twentieth century. Other Western European countries, after all, had similar post-war economic renaissances. Japan and, later on, Taiwan and South Korea eventually caught up with Europe. The US went one better: its population enjoyed average per capita incomes by the beginning of the twenty-first century fully 50 per cent higher than those in Germany and three times higher than those in Argentina.
What accounts for Argentina's spectacular fall from grace?
Argentina was a major outperformer between 1870 and the outbreak of the First World War, thanks largely to the free-trade instincts of the late nineteenth-century British Empire, new scientific advances and the mass migration of people in the late nineteenth century. It may have been a long way away from Europe and the US but Argentina was able to take full advantage of the Royal Navy's commitment to keep international sea lanes open. New refrigerator technologies – and faster ships – meant its beef could be exported to destinations many thousands of miles away. Its working age population grew rapidly, a reflection of the Belle Époque mass migration from Europe – particularly from southern Europe – that led to equally dramatic demographic changes in the US, Canada and Australia. The growth of international financial markets, meanwhile, led to huge improvements in Argentina's capital stock.
After the First World War, Argentina, alongside Australia and Canada, lost out. Impoverished Britain could no longer easily keep its empire afloat. War had destroyed the international financial system via inflation and a temporary suspension of the pre-war Gold Standard. And the politics of isolationism and protectionism began to dominate. Argentina, unusually dependent for its economic success on its – distant – connections with the rest of the world, was suddenly vulnerable. Its relatively youthful population didn't help: its young families – with lots of hungry children – inevitably saved little. As a result, growth in capital spending was unusually dependent on access to international capital markets that, post war, no longer had the capacity to supply Argentina with the necessary funds.
Underneath all this were systemic weaknesses. At the end of the nineteenth century, both Buenos Aires and Chicago were both heavily dependent on their agricultural hinterlands. However, while Chicago's citizens were, by that stage, mostly well educated with high levels of literacy, 20 per cent of Buenos Aires' population was illiterate, not helped by the economy's reliance on poorly educated itinerant agricultural workers from southern Europe. Chicago was able to diversify away from the agricultural industries that had been the mainstay of its economic success at the end of the nineteenth century. Buenos Aires, in contrast, was trapped, unable to move on: agriculture alone does not allow a nation to flourish economically.
Worse was to follow. In an attempt to reduce Argentina's high dependency on developments – both good and bad – elsewhere in the world economy, Argentine politicians in the 1930s moved rapidly to push through their version of economic autarky. Rejecting international linkages – which were increasingly blamed for Argentina's woes – Buenos Aires tried to develop its own manufacturing capacity behind closed doors, an approach ruled out by both the Canadians and Australians thanks to their privileged access to the markets of the British Empire and, indeed, to Britain's own influence on their behaviour.
To do this, a labyrinthine arrangement of tariffs and capital controls was developed, leading in turn to huge distortions in the allocation of resources. With domestic activity aimed primarily at satisfying immediate demands for higher consumption, Argentina increasingly became a 'hand to mouth' economy. Short of domestic savings and absent a sensible export strategy, Argentina was simply unable to afford the capital goods that might have led to faster long-term growth.
After the Second World War, Argentina's political destiny was shaped by Juan Perón and his wife Eva, the ultimate political populists (how many other political lives have been turned into an internationally successful musical?). In a bid to divert resources to the working classes following Perón's rise to power in 1945, the new government managed to increase the price of capital goods still further relative to consumer goods, again through the copious use of import tariffs. Argentine industry as a result became increasingly uncompetitive. The Argentine economy stagnated, losing ground against all its major industrialized competitors: it had simply failed to meet its late nineteenth-century promise.
Perón modelled himself on Mussolini's brand of fascism (it's not surprising, then, that both Adolf Eichmann and Josef Mengele, two of history's real charmers, chose to hide in Argentina after the Second World War). He gained huge support from the unions (by extending workers' benefits, he successfully wooed the union leaders in the immediate aftermath of the 1943 coup while working at the Department of Labour). Later, he was happy to stamp out dissent where and when necessary.
For a while, the model seemed to work, thanks largely to higher world food prices reflecting tremendous shortages in war-torn Europe. In the early 1950s, however, everything changed. With a return to relative peace, food prices slowly declined and Perón's Argentina was no longer economically viable: a huge welfare state – the ultimate populist expression – could no longer be supported. Ousted in another coup in 1955, Perón eventually fled to General Franco's Spain. The military took over and, as the years went by, life became ever more unpleasant. The generals' job – as they saw it – was to keep populist Peronism at bay for as long as possible.
From Spain, Perón's response was opportunistic in the extreme. He offered support to the Montoneros, a group of Marxist guerrillas who were totally opposed to the Alianza Anticomunista Argentina, which itself now represented the views of far-right enclaves of the Peronist movement. The situation was now both impossible and impossibly violent: Perón's 1973 return prompted the Ezeiza Massacre, where at least 13 people were shot dead and many hundreds of others wounded as gunmen opened fire on left-wing elements within the crowds that had gathered to welcome Perón home. Worse followed. Another military coup took place in 1976, two years after Perón's death, leading to thousands of los desaparecidos (the disappeared). Democracy returned to Argentina in 1983 but, since then, the democratic choice has mostly been between different brands of Peronism. Populism and intolerance of dissent have become central to Argentina's political model.
Given these political upheavals, it's hardly surprising that, over the last century or so, Argentina went from one financial crisis to the next: from 1890 through to the beginning of the twenty-first century, Argentina had to cope with five debt defaults or restructurings and six stock-market crashes that led, in turn, to sustained periods of economic contraction. Argentina ended the twentieth century with one of the worst financial records in history. Claims on future Argentine economic output have often ended up totally worthless.
In hindsight, it is easy to see why, in the interwar period, Argentina went down an ultimately doomed road to autarky: international financiers had seemingly let Argentina down, the crumbling British Empire no longer offered the certainties of old, the Americans preferred to invest at home rather than abroad and the slow march towards another war in Europe persuaded Argentina that self-sufficiency was best. The argument was seductive. It was also, sadly, wrong.
Excerpted from WHEN THE MONEY RUNS OUT by STEPHEN D. KING. Copyright © 2013 by Stephen D. King. Excerpted by permission of Yale UNIVERSITY PRESS.
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Meet the Author
Stephen D. King is Group Chief Economist and Global Head of Economics and Asset Allocation research at HSBC. He lives in London.
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The author builds a reasonable argument providing a historical context, irrespective of the scathing earlier review based on QE, however is unable to conclude with clear recommendations. Minus a final coherent solution, all else equals nothing.
Very disappointing. Author picks a metaphore and then proceeds as if it were fact. Example: QE is an opiate pain killer. Is it really? Could it be viewed as a vitamin? Why is that not a valid metaphore, but opiates are? There is no reasoning or logic, merely unfounded statements on par with the level of discourse one would find at a local truckstop. He then repeatedly mentions how QE has been a failure, but recent events would argue otherwise. At best, this should have been an OpEd in a newspaper, not a book with a sensationalist title.