23rd
July 2009
For
a glimpse of what awaits Britain, Europe, and America as
budget deficits spiral to war-time levels, look at what
is happening to the Irish welfare state.
Events have already
forced Premier Brian Cowen to carry out the harshest
assault yet seen on the public services of a modern
Western state. He has passed two emergency budgets to
stop the deficit soaring to 15pc of GDP. They have not
been enough. The expert An Bord Snip report said last
week that Dublin must cut deeper, or risk a disastrous
debt compound trap.
A further 17,000 state
jobs must go (equal to 1.25m in the US), though
unemployment is already 12pc and heading for 16pc next
year.
Education must be cut
8pc. Scores of rural schools must close, and 6,900
teachers must go. "The attacks outlined in this report
would represent an education disaster and light a short
fuse on a social timebomb", said the Teachers Union of
Ireland.
Nobody is spared. Social
welfare payments must be cut 5pc, child benefit by 20pc.
The Garda (police), already smarting from a 7pc pay cut,
may have to buy their own uniforms. Hospital visits
could cost £107 a day, etc, etc.
"Something has to give,"
said Professor Colm McCarthy, the report's author.
"We're borrowing €400m (£345m) a week at a penalty
interest."
No doubt Ireland has been
the victim of a savagely tight monetary policy - given
its specific needs. But the deeper truth is that
Britain, Spain, France, Germany, Italy, the US, and
Japan are in varying states of fiscal ruin, and those
tipping into demographic decline (unlike young Ireland)
have an underlying cancer that is even more deadly. The
West cannot support its gold-plated state structures
from an aging workforce and depleted tax base.
As the International
Monetary Fund made clear last week, Britain is lucky
that markets have not yet imposed a "penalty interest"
on British Gilts, given the trajectory of UK national
debt – now vaulting towards 100pc of GDP – and the
scandalous refusal of this Government to map out any
path back to solvency.
"The UK has been getting
the benefit of the doubt, both in the Government bond
market and also the foreign exchange market. This
benefit of the doubt is not going to last forever," said
the Fund.
France and Italy have
been less abject, but they began with higher borrowing
needs. Italy's debt is expected to reach the danger
level of 120pc next year, according to leaked Treasury
documents. France's debt will near 90pc next year if
President Nicolas Sarkozy goes ahead with his "Grand
Emprunt", a fiscal blitz masquerading as investment.
There was a case for an
emergency boost last winter to cushion the blow as
global industry crashed. That moment has passed. While I
agree with Nomura's Richard Koo that the US, Britain,
and Europe risk a deflationary slump along the lines of
Japan's Lost Decade (two decades really), I am ever more
wary of his calls for Keynesian spending a l'outrance.
Such policies have
crippled Japan. A string of make-work stimulus plans -
famously building bridges to nowhere in Hokkaido - has
ensured that the day of reckoning will be worse, when it
comes. The IMF says Japan's gross public debt will reach
240pc of GDP by 2014 - beyond the point of recovery for
a nation with a contracting workforce. Sooner or later,
Japan's bond market will blow up.
Error One was to permit a
bubble in the 1980s. Error Two was to wait a decade
before opting for monetary "shock and awe" through
quantitative easing.
The US Federal Reserve
has moved faster but already seems to think the job is
done. "Quantitative tightening" has begun. Its balance
sheet has contracted by almost $200bn (£122bn) from the
peak. The M2 money supply has stagnated since January.
The Fed is talking of "exit strategies".
Is this a replay of
mid-2008 when the Fed lost its nerve, bristling over
criticism that it had cut rates too low (then 2pc)?
Remember what happened. Fed hawks in Dallas, St Louis,
and Atlanta talked of rate rises. That had consequences.
Markets tightened in anticipation, and arguably
triggered the collapse of Lehman Brothers, AIG, Fannie
and Freddie that Autumn.
The Fed's doctrine – New
Keynesian Synthesis – has let it down time and again in
this long saga, and there is scant evidence that Fed
officials recognise the fact. As for the European
Central Bank, it has let private loan growth contract
this summer.
The imperative for the
debt-bloated West is to cut spending systematically for
year after year, off-setting the deflationary effect
with monetary stimulus. This is the only mix that can
save us.
My awful fear is that we
will do exactly the opposite, incubating yet another
crisis this autumn, to which we will respond with yet
further spending. This is the road to ruin.
