The debt problems currently plaguing the US government are showing that country's politicians at their angst-ridden and undignified worst. The world's largest democracy, and one which holds itself up as a model for other countries, is proving to be less than worthy. Were it possible it would be an invitation to bring many high-profile US politicians to account for bringing democracy into disrepute.
The cause of this undignified mess is, of course, the debt problems facing the Federal government. Unseemly arguments between the President, the Senate and the House of Representatives are doing little to deal with this financial time-bomb, likely to go off before the week is out. If ever there was a time to put partisan politics to one side and do right by the ordinary people the politicians are supposed to represent, this is it. However, US politics is not driven by rights and wrongs, but by fierce brand loyalty down the generations to one party or another. On that score we could perhaps blame the electorate: in a democracy you get the politicians you deserve! However, one would hope that politicians would show some evidence of leadership, to go beyond simple representation of the citizenship. A forlorn hope indeed.
So what is the cause of this political in-fighting? In simple terms the US Federal government has borrowed beyond its means. For ordinary people, firms, and smaller countries, borrowing beyond one's ability to repay can be fatal, both financially and otherwise. However, as the late J Paul Getty once noted, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." The US Federal government debt is of the order of $14 trillion. Whether or not that is a large amount is entirely dependent on the ability of the borrower to repay.
It is often the case that the amounts borrowed during "good" times are apparently easily serviceable. However, the problem arises when the times are no longer "good", and it becomes more difficult to repay the interest, let alone any capital repayments. This is something which has affected almost every government on the planet, most noticeably Greece and Eire. Now it is the turn of the US to deal with what is seemingly a no-longer serviceable debt. And the politicians are unable to agree on the details of how best to deal with the situation. The simple solutions amount to a few elements: (1) reduce government spending making more funds available to reduce the burden of debt over the next few years; (2) increase the taxation levels to help fund the debt; (3) some combination of both. The Republicans favour 1, the Democrats 2, and the President is arguing for 3. The closeness of the deadline suggest that only 3 will serve, yet the two main parties continue to quibble over the details. It is the modern equivalent of fiddling while Rome (in this case Washington DC) burns.
If Greece defaulted on its debt then it would find it more difficult to borrow in future. It would be regarded as a risky proposition. Its bond ratings would plummet, leading to higher interest rates on any future loans it might be able to organise. Modern history has shown this with Mexico and Argentina. However, the USA is on a different scale. Any default could be seen as possibly temporary—the result of the immaturity of bickering US politicians—or it could be seen as much more dangerous. A default by the US Federal government could lead to an implosion of the world's financial markets. The collapse which was narrowly avoided when Lehman Brothers went bankrupt could once again become a reality, a reality which no rational person wishes to contemplate. Financial economists refer to this as systemic risk: the possibility of the collapse of the financial system. For ordinary people it means the end of the world as we know it. No credit, a failed banking system, markets which seize up, etc etc.
All we can do is hope the US politicians will come to their sense before the eleventh hour. Only time will tell if sense will prevail, or if we really do stand on the edge of a financial precipice.
Tuesday, July 26, 2011
Monday, July 11, 2011
Summertime blues?
Summer in England is inconstant. One day the weather will be warm and sunny, the next cool and rainy. In fact, replace "one day" with "one hour" and the same applies. The predictable thing about the weather in England is its unpredictability. For some this is a cause for complaint; for others, myself included, it is one of the key attractions of living in a temperate climate on one of a series of islands off the north-east coast of continental Europe.
Now matter how unpredictable the weather in England, it is virtually guaranteed to remain within given limits. The possibility of snow is zero, although there can be the occasional day or two of tropical heat. It is this limited range of possibilities which makes the unpredictability attractive.
The same can also be said for English politics. In many ways it is even more predictable than the weather. I would argue that this is characteristic of a modern, stable democracy. There is no chance of an English version of the Arab Spring. The same is true of most of England's national neighbours. The main source of volatility is from second-generation migrants who are torn between their cultural roots and the culture of their adopted homeland. Experience shows that by the third generation most incoming families have become assimilated, even when they maintain connections to their roots. After all, isn't the stability why such migrant families moved in the first place?
Even where finance and the economy is concerned, there is a limited range of unpredictable volatility. For the individual or individual family the volatility may seem much more of a concern, although even then it is typically a relatively short time before they return to a more acceptable state of affairs than exist during an economic downturn (I speak from experience).
For those living in less developed countries the situation is much more parlous. The Horn of Africa is one location where unpredictability is also within a limited range, but the norm within that range is less than attractive. Famine due to severe weather conditions is much more commonplace than anyone with a conscience would regard as acceptable. When accompanied by war, or internal conflict, the situation on the ground is exacerbated for ordinary families. Warlords and others will accumulate whatever produce exists, making the famine all the worse by excluding most people from access to it.
Such a situation is now current in eastern Africa. Twice we have seen Bob Geldof and others run global charity concerts (Live Aid in 1985 and Live 8 in 2005) to raise funds to stem the tide of poverty in Africa and elsewhere. Despite these huge and laudable efforts, the problems remain. They would appear to be inevitable. Despite the fund-raising and the intellectual efforts of Development Economists, and the goodwill of well-meaning politicians, people continue to die from starvation in Africa. This does not mean that the world should shrug its shoulders and do nothing, or turn a blind eye; rather we need to look at this problem from a different, more radical perspective. That requires some other things which are also afflicted by famine: (i) the will to succeed, (ii) the acceptance of radical, entrepreneurial ideas.
However, the world is a cautious, conservative place, with people everywhere afraid to embrace new ideas and suggestions. Some people, as we have seen, are so fundamental in their beliefs that they would prefer to main and kill rather than even hear new ideas which might possibly come into conflict with their own. To bow to these pressures—the inertia of the status quoⓒ—is to accept what currently is; a form of surrender, which is inimical to human progress. New ideas need to be granted a full hearing, especially where problems exist which have seemed to be intractable for a ling time. Those who decry such inventiveness are themselves modern Luddites who would be happy to see us return to a contemporary dark age. Such people are easy to spot: their favourite word is no; their inability to listen to or make persuasive argument is their obvious characteristic. Such people give me the blues.
Now matter how unpredictable the weather in England, it is virtually guaranteed to remain within given limits. The possibility of snow is zero, although there can be the occasional day or two of tropical heat. It is this limited range of possibilities which makes the unpredictability attractive.
The same can also be said for English politics. In many ways it is even more predictable than the weather. I would argue that this is characteristic of a modern, stable democracy. There is no chance of an English version of the Arab Spring. The same is true of most of England's national neighbours. The main source of volatility is from second-generation migrants who are torn between their cultural roots and the culture of their adopted homeland. Experience shows that by the third generation most incoming families have become assimilated, even when they maintain connections to their roots. After all, isn't the stability why such migrant families moved in the first place?
Even where finance and the economy is concerned, there is a limited range of unpredictable volatility. For the individual or individual family the volatility may seem much more of a concern, although even then it is typically a relatively short time before they return to a more acceptable state of affairs than exist during an economic downturn (I speak from experience).
For those living in less developed countries the situation is much more parlous. The Horn of Africa is one location where unpredictability is also within a limited range, but the norm within that range is less than attractive. Famine due to severe weather conditions is much more commonplace than anyone with a conscience would regard as acceptable. When accompanied by war, or internal conflict, the situation on the ground is exacerbated for ordinary families. Warlords and others will accumulate whatever produce exists, making the famine all the worse by excluding most people from access to it.
Such a situation is now current in eastern Africa. Twice we have seen Bob Geldof and others run global charity concerts (Live Aid in 1985 and Live 8 in 2005) to raise funds to stem the tide of poverty in Africa and elsewhere. Despite these huge and laudable efforts, the problems remain. They would appear to be inevitable. Despite the fund-raising and the intellectual efforts of Development Economists, and the goodwill of well-meaning politicians, people continue to die from starvation in Africa. This does not mean that the world should shrug its shoulders and do nothing, or turn a blind eye; rather we need to look at this problem from a different, more radical perspective. That requires some other things which are also afflicted by famine: (i) the will to succeed, (ii) the acceptance of radical, entrepreneurial ideas.
However, the world is a cautious, conservative place, with people everywhere afraid to embrace new ideas and suggestions. Some people, as we have seen, are so fundamental in their beliefs that they would prefer to main and kill rather than even hear new ideas which might possibly come into conflict with their own. To bow to these pressures—the inertia of the status quoⓒ—is to accept what currently is; a form of surrender, which is inimical to human progress. New ideas need to be granted a full hearing, especially where problems exist which have seemed to be intractable for a ling time. Those who decry such inventiveness are themselves modern Luddites who would be happy to see us return to a contemporary dark age. Such people are easy to spot: their favourite word is no; their inability to listen to or make persuasive argument is their obvious characteristic. Such people give me the blues.
Wednesday, July 06, 2011
Avoiding death and needing taxis
In the wee small hours of Friday night/Saturday morning we had a fire at our home. Already asleep, we were alerted to the fire by the fire detectors. My wife's presence of mind enabled her to grab our foam fire extinguisher and put out the fire while I got the kids out of their bedrooms to safety. As luck would have it, we got away lightly, with the only major damage being to to hot water and heating system. There is soot all over the upstairs floor of our house, smoke in the walls and carpets, and some flooding in the living room below, but compared to what might have been without smoke detectors doesn't bear too much thinking about.
So now we await the clean-up and repairs. The loss adjuster from the insurance company has been very helpful and reassuring. Currently we are getting quotes to pass on to the insurance company for approval. Having never had to deal with an incident like this before has made it all the more traumatic, and in a sense a leap into the unknown. Rationally, the worst of it for the time being is being unable to have a hot bath or shower, but who faces these things rationally? In our house there has been a return to the 1950s, with kettles of water being boiled for hair washes. A cold shower is unpleasant and not something to be undertaken lightly, if at all. Even James Bond only runs the water cold for the last 30 seconds of a normal shower.
The timing of the fire was not optimal, if such a thing was even possible. But to be without hot water in Summer is better than in Winter. However, my son's bar mitzvah is on the horizon, together with all of the final arrangements which need to be made to ensure a memorable occasion for him. As such we are juggling too many demands on our time. And this in the knowledge that it will be several weeks before we can even think about a return to a normal life. We have guests coming in from overseas for this occasion, as well as a home-based reception. This fire will make the bar mitzvah memorable, but not for the best of reasons. The need to deal with builders, plumbers and the quotes and estimates, means that I will probably be unable to get to the airport and collect my guests next week. I will have to call on the services of taxis (Darren: are you reading this?) to ferry people from Heathrow.
As if that was not enough there is also the need to work and earn a living, and do the "school run" twice each day. There is an American saying that "when life throws you lemons, make lemonade", but everyone knows you need more than lemons to do so. We have been thrown an overload of lemons, but without water and sugar all we can do is drown under them, experiencing their sour, bitter taste. I am sure that in the fullness of time I will look back on this experience with a wry smile, but for now all I can manage is a somewhat-forced sense of perspective: at least no-one was hurt. It could have been so very much worse.
As someone who spends his professional hours lecturing on the risk-return tradeoff (in financial and economic contexts), and thinking about financial risk management I have naturally tended to apply my knowledge to this incident. Consequently I cannot speak highly enough of the importance of smoke detectors and foam fire extinguishers for managing personal risk at home. My family and I owe our lives to these appliances.
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