Global Crisis

Financial Times’ Martin Wolf Clears the Fog:   Why You Should Read Every Word

By Shlomo Maital

    Of all the economics columnists writing today in the financial daily press, I urge you to follow and read Martin Wolf.  This prize-winning journalist is able to slice through the fog of jargon and uncertainty with sharp analysis.  His style is not lively or filled with metaphors.  But please, persist.  If you read Martin carefully, you will understand what in the world is going on.

    And, yes,  what in the world IS going on with Britain?  Here is Martin Wolf’s ‘take’ on it, in today’s (April 14) FT issue (p. 11, “Only rebalancing will revive Britain’s precarious economy”). To save you time I will “interview” Martin and summarize his argument, adding some points of my own.

     What is a ‘balanced’ economy?

    One in which money taken out of the system in saving is offset by money put back into the system, as demand, by government, exporters, consumers and businesses, creating just enough demand for growth and full employment without inflation.

     Does the U.K. enjoy this balance now?

      Not at all.  Households have a net savings surplus.  So do businesses (they spend less than they earn).  Government, though, has a big deficit.  It has to borrow one pound for each four it spends.  This creates massive debt which rattles capital markets.   More is still being withdrawn than put back in, hence Britain’s weak economy.

     Why doesn’t the government cut its deficit and borrowing?

     Because if it does, the recession will deepen, because — who will take up the slack in demand? 

    Will there be a crisis, Greece-style?

    Perhaps.  If private spending and exports recover to generate demand,  the UK govt. can cut its deficits without ruining the economy.  This would be a smooth ‘rebalancing’.  If private spending, investment and exports do not recover, and the government slashes its deficits, the recession will become ‘double dip’.  This would be rocky unbalancing.  British  Households are saving more, because they are struggling to get out of debt.  The worse the deflation is, the more burdensome the debt. 

    Is the falling value of the pound sterling a problem?

    It is for Britain’s bloated financial system. A strong pound helps it make money.  A weak pound drives money away. But it is the solution for Britain’s exporters, and Britain desperately needs to boost its exports.   Can the weak inefficient British manufacturing sector shape up and drive exports?  Some are doubtful.  Can the ‘real’ economy (exporters) overcome the sham one (financial services)?  Stay tuned.

    Do other countries have the same problem?

   Yes.  The U.S.  There too, deficits created enormous debt overhang.  There too, business investment and exports have not taken up the slack.  There too, manufacturing is moribund. Rebalancing is as vital and as tricky in America as in Britain.  It will take a very clever, steady hand on the policy rudder.  As Martin Wolf puts it, “this is going to be a very tricky policy performance”.   With Britain’s political system facing a divisive and probably non-decisive election, and with America’s political system more partisan than ever, with rancor between Republicans and Democrats,  very little bipartisan good will can be mustered to handle this rebalancing. 

    The conclusion is that in contradiction to popular opinion and wishful thinking on Wall St. and among many businesses, the 2007-9 crisis is far from over.  It is metamorphosing, changing its form from a banking and financial crisis to a national crisis — one where governments’ solvency itself is questioned.  In some ways this is worse.  Government policy has shifted from being the solution to potentially becoming the problem.   If you thought the bankers were great at ruining their businesses — wait until you see what the politicians can do to theirs.