The global economy and growth – why our leaders don’t get it
After a brief period of optimism, world leaders, economists, investors, corporate executives and many others are back to worrying that the global economy is failing to take off as hoped. Yet another IMF report (October 2015) paints a gloomy picture and once again lowers their forecasts for growth: “The revised forecasts in this latest World Economic Outlook underscore the challenges all countries face … the new forecasts mark down expected near-term growth rates … downside risks to the world economy appear more pronounced than they did just a few months ago.”Yet those in power, and even most top economists, don’t seem to grasp why this is happening. They talk about weak consumer spending, the threat of deflation (but also inflation in some cases, such as Russia), wonder if interest rates are too low (or too high), worry about the effects of inequality, but continue with policies that favour the rich and punish the poor. Central bankers, stuck for new ideas, keep feeding the financial sector with cheap money in the hope that this will somehow boost spending, when all it does is inflate stock markets and re-inflate the credit bubble and the bank accounts of the wealthy.
There’s little consensus, little understanding of what’s really wrong with the economic system. Most leaders, in fact, don’t blame the system at all – if we all spent more money, they say, everything would be fine. Never mind if you haven’t actually earned the money, just borrow more. If we can only generate more growth, everything will sort itself out and be rosy once again, just like before the crash. Debts will magically disappear.
But the reality is this: total global debt is now higher than ever (chart above), the credit bubble is now bigger than it was before the 2008 crash, and the majority are still getting poorer, while the rich keep getting richer (chart below).
Our economic system is broken. The boom times that most of us grew up in were a brief and anomalous ‘golden era’ brought about by rapid postwar industrial expansion from a low base. China has recently experienced the same thing, and this is now cooling off too. Such growth cannot be sustained.
The good news is that we shouldn’t really be aiming for ever more growth anyway, because continuous growth will worsen global warming and hasten the end of civilization, so the failure of the system should be seen as an opportunity to find a better way.
An Inquiry Into Wealth, Work and Values
In my book, Why Things Are Going To Get Worse … And Why We Should Be Glad, I explain the fundamental relationship between money, debt, earnings and inequality, all of which are closely linked. In a nutshell, the problem is this: Not enough people are doing the right kind of work any more; not enough workers are creating real wealth. And because of the financialization of the economy, the wealth that is being created is not being spread around as much as it was in the real boom years of the last century, before the bankers took over.
Financial services, which nations such as Britain rely on so heavily, don’t create wealth; they take wealth that’s already been created by real industry and try to profit from it, and in the process they transfer money from the majority, mostly the middle classes, but also the poor, to the rich minority – the 1%, and especially the 0.1%.
The recent growth in inequality is a direct result of the growth in financial services, and the sooner this is understood, the sooner it can be reversed. The reason for this is that banks now have access to far more money than is required for productive investment, so the majority of bank lending – around 80% of it (see the next two charts) – leads to the kind of debt that takes money from people and gives it to the bankers, without leading to anything useful in the longer term, such as more real industry and job creation. In other words, most financial activity is economically destructive.
How many people understand what money really is? Money is supposed to represent real wealth – ultimately, it represents our labour. When you trade in the marketplace you are effectively exchanging your own labour for the labour of others, and although it might be less obvious in a modern economy, this fundamental principle never really changes.
Labour is the source of all value, and in combination with the earth’s natural resources, the source of all wealth. We take the wealth of the earth and, through our labour, we add value by turning those raw materials into something useful: food, housing, clothes, machines, etc. There is no other way to create wealth.
Why Things Are Going To Get Worse
Debts are always, one way or another, a claim on future earnings. Whether it be private or public (ie, government) debt, the repayments will have to be made from future income, either directly or as taxes. It therefore follows that the massive rise in global debt over the last decade or so represents a massive claim on the future earnings of an increasing number of people, especially the younger generations.
Who benefits from all this debt? Those with money to lend, obviously. In other words, the rich. So the rise in inequality is a direct result of the rise of the financial sector.
Why can’t our leaders do anything to reverse this destructive trend? Because the people who really run the world are the same people that control the wealth; the 0.1%. (Or more accurately, we’re talking here about less than half a million very rich people globally – big investors, bankers, corporate bosses, etc – so it should really be the 0.01% at the most.)
The real social divide is between those who have to earn their money, the majority, and those who get rich off the earnings of others, making money from the money that the middle classes have invested in banks, pensions, homes, etc.
One of the great fallacies of the modern age is that the rich have somehow ‘earned’ their wealth. I explain in my book why this is never the case, that in fact it’s impossible for any one person to truly ‘earn’ a hundred or even ten times the average wage. It just isn’t possible to work that hard, however brilliant the individual might be. It is always down to a combination of luck and the advantages that come from having wealth to invest.
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