For the past two centuries and more, life in Britain has been
governed by a simple concept: tomorrow will be better than today. Black
August has given us a glimpse of a dystopia, one in which the financial
markets buckle and the cities burn. Like Scrooge, we have been shown
what might be to come unless we change our ways.
glimmers of hope amid last week’s despair. Neighbourhoods rallied round
in the face of the looting. The Muslim community in Birmingham showed
incredible dignity after three young men were mown down by a car and
killed during the riots. It was chastening to see consumerism laid bare.
We have seen the future and we know it sucks. All of which is cause for
cautious optimism provided the right lessons are drawn.
number one is that the financial and social causes are linked. Lesson
number two is that what links the City banker and the looter is the lack
of restraint, the absence of boundaries to bad behaviour. Lesson number
three is that we ignore this at our peril.
To understand the mess we are in, it’s important to know how we got here. Today marks the 40th
anniversary of Richard Nixon’s announcement that America was suspending
the convertibility of the dollar
into gold at $35 an ounce. Speculative attacks on the dollar had begun
in the late 1960s as concerns mounted over America’s rising trade
deficit and the cost of the Vietnam war. Other countries were
increasingly reluctant to take dollars in payment and demanded gold
instead. Nixon called time on the Bretton Woods system of fixed but
adjustable exchange rates, under which countries could use capital
controls in order to stimulate their economies without fear of a run on
their currency. It was also an era in which protectionist measures were
used quite liberally: Nixon announced on 15 August 1971 that he was
imposing a 10% tax on all imports into the US.
Four decades on, it
is hard not to feel nostalgia for the Bretton Woods system. Imperfect
though it was, it acted as an anchor for the global economy
for more than a quarter of a century, and allowed individual countries
to pursue full employment policies. It was a period devoid of systemic
been big structural changes in the way the global economy has been
managed since 1971, none of them especially beneficial. The fixed
exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the euro
floats against the dollar, the pound and the Swiss franc. The Hong Kong
dollar is tied to the US dollar, while Beijing has operated a system
under which the yuan is allowed to appreciate against the greenback but
at a rate much slower than economic fundamentals would suggest.
system is an utter mess, particularly since almost every country in the
world is now seeking to manipulate its currency downwards in order to
make exports cheaper and imports dearer. This is clearly not possible.
Sir Mervyn King noted last week that the solution to the crisis involved
China and Germany reflating their economies so that debtor nations like
the US and Britain could export more. Progress on that front has been
painfully slow, and will remain so while the global currency system
remains so dysfunctional. The solution is either a fully floating system
under which countries stop manipulating their currencies or an attempt
to recreate a new fixed exchange rate system using a basket of world
currencies as its anchor.
The break-up of the Bretton Woods system
paved the way for the liberalisation of financial markets. This began
in the 1970s and picked up speed in the 1980s. Exchange controls were
lifted and formal restrictions on credit abandoned. Policymakers were
left with only one blunt instrument to control the availability of
credit: interest rates.
For a while in the late 1980s, the easy
availability of money provided the illusion of wealth but there was a
shift from a debt-averse world where financial crises were virtually
unknown to a debt-sodden world constantly teetering on the brink of
Currency markets lost their anchor in 1971
when the US suspended dollar convertibility. Over the years, financial
markets have lost their moral anchor, engaging not just in reckless but
fraudulent behaviour. According to the US economist James Galbraith,
increased complexity was the cover for blatant and widespread
Looking back at the sub-prime mortgage scandal, in
which millions of Americans were mis-sold home loans, Galbraith says
there has been a complete breakdown in trust that is impairing the hopes
of economic recovery.
“There was a private vocabulary, well-known
in the industry, covering these loans and related financial products:
liars’ loans, Ninja loans (the borrowers had no income, no job or
assets), neutron loans (loans that would explode, destroying the people
but leaving the buildings intact), toxic waste (the residue of the
securitisation process). I suggest that this tells you that those who
sold these products knew or suspected that their line of work was not
100% honest. Think of the restaurant where the staff refers to the food
as scum, sludge and sewage.”
Finally, there has been a big change
in the way that the spoils of economic success have been divvied up.
Back when Nixon was berating the speculators attacking the dollar peg,
there was an implicit social contract under which the individual was
guaranteed a job and a decent wage that rose as the economy grew. The
fruits of growth were shared with employers, and taxes were recycled
into schools, health care and pensions. In return, individuals obeyed
the law and encouraged their children to do the same. The assumption was
that each generation would have a better life than the last.
implicit social contract has broken down. Growth is less rapid than it
was 40 years ago, and the gains have disproportionately gone to
companies and the very rich. In the UK, the professional middle classes,
particularly in the southeast, are doing fine, but below them in the
income scale are people who have become more dependent on debt as their
real incomes have stagnated. Next are the people on minimum wage jobs,
which have to be topped up by tax credits so they can make ends meet. At
the very bottom of the pile are those who are without work, many of
them second and third generation unemployed.
crisis that has been four decades in the making will not be solved
overnight. It will be difficult to recast the global monetary system to
ensure that the next few years see gradual recovery rather than
depression. Wall Street and the City will resist all attempts at
clipping their wings. There is strong ideological resistance to the
policies that make decent wages in a full employment economy feasible:
capital controls, allowing strong trade unions, wage subsidies, and
But this is a fork in the road. History suggests
there is no iron law of progress and there have been periods when things
have got worse not better. Together, the global imbalances, the
manic-depressive behaviour of stock markets,
the venality of the financial sector, the growing gulf between rich and
poor, the high levels of unemployment, the naked consumerism and the
riots are telling us something.
This is a system in deep trouble and it is waiting to blow.
Source: The Guardian
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