WELL, IS IT PROSPERITY OR ISN’T IT?
Vol. 7, No. 21, 6 August 2007
This is the time to get out those European novels about the never-had-it-so-good roaring twenties when ‘everyone’ danced the night away on a tide of prosperity. ‘Everyone’, of course, except those working Europeans falling deeper into debt because they had no jobs or their jobs paid peanuts; and the people in those colonies whose resources funded the champagne. But what the hell; forget the party poopers. Cheers!
World-wide, there is an eerie similarity between those times and these - including the disconnect between the rich and the poor, and the misunderstanding of how they are connected. We hear about delicious spending sprees, consumers confidently taking on more debt, splashing out prosperity, overflowing restaurants, booming travel. We note, but dismiss as inevitable, savage poverty at the bottom of the pile – inter-generationally deepening ill-health and ill-education, growing cultures of alienation, crime, fury, mutual and child abuse, hopelessness, hardened inhumanity. Ethnic hatred, xenophobia and fascism strike deep roots everywhere. Mafias flourish; refugees drown; drugs deaden, literally.
The worship of celebrities – from billionaires to film stars - distracts from all that. Forests are downed to provide acres of news about their wealth, foibles, possessions. The news media that seek to inform and discuss must attract goggle-eyed attention by sensationalising its presentation almost out of recognition.
OK. Perhaps I am Cassandra. But remember she was right. And that until the night before the great crash of the 30s – the night before they jumped from their sky-scrapers - they were still dancing.
The financial system, which structures the rest of the economy, is creaking in practically every joint. Take private equity deals. They are yielding literally billions for a few dozen people. Where do we think that money is coming from? Are they operating secret mints in the abandoned buildings they strip? Are they printing the money - creating it out of nothing? Or are they getting it off other people?
Actually it is both. They ‘leverage’ the assets they buy – that is, load them with debt from banks - which bonanza they use to trade in whatever else yields very short-term profit. The banks they borrow from are, in fact, making new money out of nothing.
But in that process, working people – running into hundreds of thousands of them for some deals – lose their jobs, their prospects, their careers, their pensions and therefore also anything they have bought on a bond or on tick. So other people – who work for a living – are subsidising those private equity beneficiaries. Britain’s Treasury select committee on private equity last month expressed concern that the private equity industry has mushroomed by a mixture of cheap debt, tax avoidance mechanisms and anti-labour practices.
Move on to the bond (mortgage) market. Income insecurity has a direct effect on whether people can pay their bonds. The American sub-prime mortgage market – where lenders, for large profit, take on clients who would never get a bond elsewhere – is already distressed. American banks issued profit warnings after large losses, leading to the collapse of two hedge funds.
Already first-time British home-buyers are paying something like a third (half is not uncommon) of their incomes on their bond, even when the bonds are issued by reputable lenders. The price of homes has risen at twice the rate of incomes in the past two decades, so there has been a 66% increase in mortgage payments in five years. Add to that a peaking-out of the property market, rising energy costs, practically static incomes, and you have a recipe for repossessions and a steep drop in disposable income.
Of course the media tend to talk up anything that gives confidence. The British economy grew in the first quarter by what is called a ‘robust’ 0, 7% - recession-free expansion – we are told. But Britain’s national debt is at record levels; while profit warnings have been issued by large companies depending on the mass market, including a supermarket, a car dealer and a low-cost airline. They rightly anticipate falling demand. And that means falling profits, falling employment and – yes – recession.
Recessions become depressions when they are internationalised. Not everyone believes that property will resume its upward slope and that the plethora of financial instruments is about real growth. All these trends are global.
Meanwhile, despite growing insecurity and falling demand at the bottom, boardroom bonuses continue upwards, partly pushed by comparison with the galactic rewards ‘earned’ by private equity managers. Such downward pressures as those bonuses encounter come from investors who want even better performance on share prices and earnings per share. In other words directors are not required to perform by reference to criteria such as long-term expansion, employee wellbeing or environmental criteria. The triple bottom line has nothing to do with the payment of executives.
Despite the pressure to moderate these incomes, the bonuses are jaw-dropping. For example, the British Association of British Insurers has given an ‘amber light’ (meaning ‘think carefully before approving’) to shareholders of both Marks and Spencer and Cable and Wireless who are asked to approve bonuses of some $40 million each to top Directors.
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