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A Grievous Evil

"I have seen a grievous evil under the sun; wealth hoarded to the harm of its owners."

~ Ecclesiastes 5:13

Most people still get it. Hardly anyone dares guess where it leads.

"Part of the austerity mindset," says an Oxford professor, "is the belief that transfers from creditors to debtors are unfair, because they result from the feckless behaviour of the debtor. There is a clear parallel with the attitude to benefit recipients within a society."

"We're told more often than not," agrees a US think-tanker, "that the reason peripheral countries like Spain are in trouble is that their governments engaged in an irresponsible spending binge and are now reaping the consequences. [But instead,] the imposition of austerity and the waste of human potential this view is generating begs for moral judgement."

The solution? "Savings today aren't scarce," says another would-be policymaker - getting yet closer to the true spoke in the wheel - and "this glut of savings relative to desired investment has put relentless downward pressure on interest rates."

So governments should add more debt of course, creating more jobs by borrowing more of the savings glut to finance new spending and get everything spinning again. Yet already the savers are spooked.

"In Greece," say two financial economists at VoxEU, "it is the insolvency of the government that has sunk the banks. In Spain, the banks are sinking the government. What is common in both countries is that savers are running away when they see the banks and the sovereign propping each other up.

Upshot? "[This] might turn quickly into a classic run," they warn, "the consequences of which are hard to imagine." But still it's worth trying to picture it. Because the odds have rarely been higher in the last half-century and more.

"How realistic is this fear?" asks another tenured pundit, this time in the Financial Times. "Quite realistic. One reason for this is that so many fear it. In a panic, fear has its own power. To assuage it one needs a lender of last resort willing and able to act on an unlimited scale."

But "even if an unlimited European-wide bank guarantee deposit scheme were politically feasible, it would probably lack credibility," says another academic economist. "Total Eurozone deposits amount to roughly €15 trillion. The European bailout funds - the EFSF and the ESM - together total €0.5 trillion...The only way this gap could be filled is if the European Central Bank were willing to print a wall of money to plug the hole. [But] it is extremely unlikely the ECB will fire up the printing presses in an unlimited fashion.

"More importantly, depositors are withdrawing their money from peripheral Eurozone banks because they are concerned about their savings being redenominated and devalued away should their country exit the Eurozone."

Which brings us back to printing more money, to backstop more debt, to try and stem any further panic amongst bank depositors. Who in the end are owed money by the debtors who cannot repay their debts.

"Rich people," says yet another pundit (very nearly our last!) "don't actually worry much about unemployment: it doesn't really hurt them, even if they lose their jobs. What they do worry about is inflation, since that erodes the value of their dollars."

"[So] the austerity consensus is in large part a closing of ranks - one of the few areas where left and right can agree, at least at the upper end ofthe income spectrum."

This know-it-all could do with meeting some rich people. Or even just a regular saver, now watching this sun-and-sangria replay of what skirted the UK...and then the US...starting a little less than 5 years ago. Retained savings do indeed hate inflation, but they don't fear it anywhere near as much as default. And whatever proportion of national wealth is held by the top 1%, the soft middle holds the vast bulk. Very nearly all of it sits on bank balance-sheets - no more real to the touch than the full market cap of every listed stock on the exchange - where assets match obligations, deposits match debts, digits match digits as photons match photons and all exists is the promise to pay. The borrowers owe the savers by way of the middlemen taking in money and lendingit out - if anyone wants it - for a return if they can.

"Ever since the Crash of 2008," says one last critic - George Soros, no less, speaking at this month's stupidly-named Festival of Economics in Trento, Italy - " there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensuson the causes and the extent of that failure."

Soros is wrong. Both the causes and consensus are plain. Too much money was lent to too many people who have too little prospect of ever paying it back. Right now this problem belongs to the debtors, most especially those unable to raise fresh funds either to finance repayments or spend on current consumption today. It's also the problem of the debtors' children, struggling to find work - or giving up entirely - across Europe's western and southern fringes.

"Well, they hired the money, didn't they?" US president Calvin Coolidge reputedly said when asked in 1925 to accept a cut in the sums owed by a previous generation of Europeans. But so what? The creditors lent it, and then, as now, there's no last-mover advantage in watching a bank run. Inflation is not default byanother name. Immediate and absolute loss of value is very singular fear.

 

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