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The Economist January 2nd 2010 Finance and economics 53
2 banks and businesses. Banks found themselves
loaded down with non-performing
loans. Belatedly they faced up to many of
their losses, restructured and consolidated.
But according to Takuji Aida, an economist
at UBS in Japan, long-term yields remained
very low because of deationary
expectations, thereby attening the yield
curve (the dierence between short- and
long-term interest rates). That prevented
banks from earning their way out of crisis,
so lending remains weak.
Companies, meanwhile, have been focused
on paying down debt, as well as coping
with deation in the domestic econ-
Buttonwood
Choosing between workers and creditors
THE air of immediate crisis is over. The
monetary and scal doctors wheeled
out the crash trolley and applied an electric
shock to the global economy’s chest.
The patient is recovering but is still rather
too dependent on the drug of government
support. The coming year will be
dominated by a debate about how quickly
that support can be taken away.
Two shocks have reduced the standard
of living of Western economies. One is a
terms-of-trade shift. Thanks mainly to
China, the prices of the manufactured
goods that rich countries sell have fallen;
those of the commodities they buy have
risen. The other is a leverage shock, in
which the credit crisis has stopped people
from borrowing to nance consumption.
In response to this second shock, governments
have deliberately taken on the
debts of the private sector. In most cases it
has been assumed that governments
have almost limitless capacity to assume
such burdens. But you can see welfare
states as national Ponzi schemes in which
governments grant benets and take on
spending responsibilities, condent in
the expectation that the next generation
of citizens will pick up the bill.
Such promises have worked so far because
of continued economic growth and
rising populations. But with populations
starting to fall in some countries, and the
tax base shrinking in others, the strain is
starting to show. The nancial crisis has
piled on further stress. Iceland, a tiny island
state, was overwhelmed by the
debts of its banks. Dubai has shown that
the distinction between government debt
and the debt of government-controlled
entities can be a fuzzy one. Greece has
been downgraded by two rating agencies,
Fitch and Standard & Poor’s.
All this may lead to a turbulent year in
the currency markets. The idea of the
omy and competition from cut-price
imports. Large exporters were forced to restructure
and enjoyed a long boom from
2002 to 2007. But rms in more protected
areas of the domestic economy have fared
badly: protability, wages and investment
have declined in the past decade.
This has fed back to households. As
rms cut back, the proportion of full-time
contract jobs has fallen from almost 80% of
the labour force in 1990 to 66% in 2007, according
to the OECD. The proportion of
lower-paid non-regular jobs has risen correspondingly.
This is partly down to the increasing
role of women in the workforce,
Paying the price
law of volatility is that you can control
risks in some parts of the system but not in
them all. A zero-interest-rate policy has
supported risky assets, particularly equities,
while quantitative easing, by allowing
central banks to buy government bonds,
has prevented massive scal decits from
pushing up bond yields.
But having taken those two steps the
authorities cannot also prop up their currencies,
even if they had the desire to do so.
In the absence of inationary pressure, a
depreciating currency seems a painless
way of boosting the prospects of a country’s
exporters. So the American and British
authorities have been happy to let the
dollar and sterling slide.
Of course, not all currencies can depreciate.
Some must rise. By rights this should
be those of the emerging Asian economies.
But China in particular is unwilling to let
the yuan appreciate as fast as the markets,
or its trading partners, would like. That
puts even more pressure on the losers in
this game of deationary pass-the-parcel.
Brazil has reimposed a levy on capital imports
to weaken the real. Japan’s new government
has been pressuring the central
as declining wages and benets force families
to rely on two incomes. But there are
long-term social costs to this extended income
drought. The slow wear-and-tear of
the recession has made people much less
condent of their ability to nance children,
Mr Tasker says.
A weak culture of consumer borrowing
means that people have been forced to rely
even more on their savingsor those of
their parents. But as society ages, growth in
the stock of savings has dwindled. Savings
are bound to fall as more people retire. For
the younger generation the next decade
may be even tougher than the past two. 7
bank to ease monetary policy further in
the face of the strengthening yen.
In Europe the single currency has removed
the old escape route of devaluation.
Countries that have seen fasterthan-average
cost growth must accordingly
face years of austerity if their
manufacturing sectors are to remain competitive
against Germany, let alone Asia.
But will electorates be willing to swallow
such unpleasant medicine? The
temptation, as in Britain, is to attempt to
solve the crisis by raising taxes, rather
than cutting spending, especially if those
taxes can be aimed at an unpopular
group like bankers. However, a high-tax
strategy in a world of highly mobile labour
and capital seems doomed to failure
in the long run. The pain is likely to fall on
the broad mass of the population.
The battle then is between taxpayers
and public-sector workers, with the former
broadly represented by right-wing
parties (the Republicans in America, the
Conservatives in Britain) and the latter by
left-wing ones (the Democrats and Labour).
Even if the right-wing parties win
the argument in the legislature, they
could still lose on the streets, if strike action
forces governments to back down.
The gold standard broke down in the
1930s because countries would not pay
the political price, in the form of austerity,
to maintain the link. They chose domestic
workers over foreign creditors. The Bretton
Woods system broke down because
America was unwilling to bear the burden
of being the linchpin of the system.
Now, the system that prevailed in the
1980s, 1990s and 2000s, in which creditors
trusted central banks to maintain the
value of debtor countries’ currencies, is
breaking down as well.
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