The Problem is the Solution
Three principal fears preying on peoples’ minds are fuel costs, a fading economy and falling house prices. As the blame game begins and newspapers wallow in woe, we may with hindsight discover that the credit crisis was a blessing in disguise.
With the best will in the world, we all want an end to global warming (if only to stop the righteous rhetoric) but are not prepared to pay the price, either monetarily or metaphorically. It is always someone else’s responsibility or the fault of whichever government happens to be in office. Politicians know that attempting to engineer prices and dampen demand would lead to their expulsion and replacement by a more accommodating administration. Like the proverbial invisible hand in economics, rising fuel prices make us cut back, conserve and ultimately evolve. Necessity is the mother of invention such that higher energy costs act as the ultimate financial spur for alternatives. While fertile thinking is catalysed by crisis it must ultimately be fuelled with finance to bring ideas to fruition. Capitalism in its purest form provides the most efficient mechanism for doing so, which is why market forces have a crucial role to play. By allowing prices to find their natural level the unexpected but beneficial consequences will flow. Unfortunately, some who call themselves capitalists keep interfering in the pricing mechanism through regulation, protectionism or misdirected subsidies. It is unlikely that alternative energy will ever replace the sheer calorific force of fossil fuels but that is exactly the point. Without the treadmill of an ever-expanding economy we stand a chance of adapting in time to a lower equilibrium of energy supply and demand.
This leads conveniently onto the next point about economic growth. We have become conditioned into treating any recession as the end of days, whereas as it should be appreciated for what it is; the ebb before the flow. Until recently we believed we had mastered both business and natural cycles to bring jobs and food for all. The credit and crop crises bear witness to the fallacy of this conviction. It is only in the aftermath that we can appreciate how much of the ‘growth’ in the New Millennium was artificial and not organic, leaving us with a legacy of liabilities. Like toxins that accumulate in the soil, debt-derived activity has rendered a barren economic landscape: one that will take decades to cleanse.
It is all too easy and convenient to pigeonhole the credit crisis in the banks and greed category. Rather, it is the end-result of a wider misplaced philosophy which demands permanent summer without the respite of winter. Anyone implying that nature could be a model for our future lifestyles will inevitably be called a hippy. One day we will come to comprehend that cyclicality is both normal and desirable. Synthetic growth through inflation and money creation is a false friend, or cuckoo in the nest. In the Victorian era price stability and prosperity were the natural product the Gold Standard’s guiding hand. If the Federal Reserve had allowed the recession to take its course after the technology bubble we would now be enjoying an equity bull market. Sadly, the events of 9/11 politicised central bank policy such that rates were slashed and financial restraints abandoned. Any form of contraction could not be contemplated, in case it was mistaken for weakness in the face of terror. Permanent economic growth became the new religious mantra and questioning its logic was akin to blasphemy. History may one day judge that America’s downfall was not caused by the terrorist without, but the inflationist within.
Now we come to the final point about housing. Asset prices surged as a result of credit creation by private banks and excess money supply from central banks. It gave credence to the notion of gaining wealth without work, a view promulgated by numerous property programmes. It begs the question of who had most to gain from permanently rising property prices. The cynical answer is the baby boomers who are about to hit retirement en masse; the very people who enjoyed affordable housing, free education and healthcare. Their offspring must now carry the tax burden in the form of bloated pension rights and spiralling medical costs. The next generation also face the prospect of a lifetime of debt to fund university education and to pay for over-priced housing, inflated by the profligacy of their forebears. This is where the credit crisis truly comes into its own in redressing the balance. The housing market must be allowed to deflate and not be distorted by bail-outs. It takes communal pain for both corporations and individuals to understand the folly of financial indiscipline, a lesson learned by those who lived through the Great Depression.
The end of an established financial system is bound to be painful at first, especially one that panders to our selfish desires and casts aside stewardship. Perhaps it is helpful to remember the translation of the word mortgage, which is ‘grip of death’, stemming from the era of Feudalism. In those days it took the Black Death to break what was a lifetime of financial servitude. Paradoxically this crisis could lead to an eventual manumission from the mortgage concept and provide far greater freedom in future from the terrible twins of debt and inflation. While there is good reason to claim that gold offers an alternative to paper-based money there is not enough of it to match the sheer volume of capital created from thin air; unless you add one or two noughts to the price. While bullion may well be act as an antidote to the crisis its role is closer to that of a thermometer rather than a cure for the human condition.
Next time the newspapers carry headlines of doom and gloom, just remember that these crises are happening for a good reason. Few can comprehend this concept because they have never experienced a life free from debt. There are already forms of interest-free finance that have been used in both past and present centuries but it will take a sea-change in thinking before they become palatable. Inevitably we must get used to the idea that banks can only match borrowers with depositors, which will be made easier as the savings ratio rises. While this will hinder ‘growth’ it will eventually engender stability and prosperity. Like any natural cycle, renaissance and reformation are preceded by deformation and destruction. However, we must first adopt the right philosophy for the mechanics of a new system to function. Only then will we stop clinging to the past and create legacies rather than liabilities for future generations.