Mr Micawber and the Real Cure for our Financial Woes.

All the media frenzy that we have experienced over global financial woes in the last months seems to have focused on symptoms of the disease, rather than the disease itself. Things like bank recapitalisation, liquidity and even sovereign debt are just that- symptoms or the result of the disease being allowed to run unchecked for 10 years, they are not the disease itself. The problem with this is that most (or all) of the measures being proposed to solve the problems are only treating the symptoms and fall short of being a cure for the disease.

To echo something I said yesterday, we all caused the disease and we all have to be part of the cure.

The disease itself? Well I am going to return to one of my favourite bits of financial analysis, published well over a hundred years ago by somebody who obviously understood how global economics really work.

“Annual income twenty pounds, annual, expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the God of day goes down upon the dreary scene and, in short, you are forever floored.”
Mr Micawber in David Copperfield, in case anybody didn’t know…

For me, that quotation just about sums up the true cause, and nature, of our global financial disease.
For a period of at least ten years governments, corporations, banks AND INDIVIDUALS BY THE MILLIONS all lived a lifestyle possible only because they spent more than they earned. That is not, whatever we all thought, a sustainable model.

The only solution for that disease is for governments, corporations, banks and individuals to adjust their lifestyle so that they are only spending what they have, the same (or less) than they earn. That expenditure now to include, of course, repayments on all the debt they have built up in the so called “good times”.

You can only balance the numbers by reducing what you spend, or increasing your earnings. The latter, on a global scale, requires economic growth of a scale few countries are likely to see during the next decade- or maybe for much longer than that. That means, like it or not, expenditure must be reduced or the debt problem keeps on getting worse and worse. As I have said before, heaven help us all when the USA finally has to face up to its budget deficits and debt and try and do something about them. I hope to be living in peaceful requirement somewhere far way by the time that happens, because that really will be the big one.

In the meantime, we have to accept that redressing the balance will require austerity, harsh measures and some personal sacrifices. That may mean sovereign defaults (Greece) and lenders being prepared to accept lower repayments and haircuts. It may well mean no automatic pay rises and inflation linked pensions, no 125% mortgages fixed at artificially low rates, no huge credit card balances with 0% interest for 18 months, cutting down to three holidays abroad each year… well, anyway…. It should mean very low interest rates for several years and largesse from central banks, to keep economies and the financial system from completely seizing up. This will provide some sort of growth to help the balance be restored; inflation also helps the process- but brings many evils of its own.

One idea a learned friend suggested yesterday appeals to me… for confidence and a feel good factor to be restored we need the housing market to improve and our house prices to start going up again. We need to feel we can sell our property if we want to or need to. This requires more buyers coming into the market. How about the government subsidising a 5 year fixed mortgage for any first time buyers at generous terms? That means they could buy with confidence they knew their payment level for five whole years and remove uncertainty. Or how about a guarantee that during that period they could sell the property at a minimum price equal to their original mortgage? (Which would not be 100% of the purchase price) a guarantee also subsidised by government. So they have low, fixed payments for 5 years and the knowledge they cannot fall into negative equity. That should help- and the price guarantee need cost the government nothing if prices do start moving upwards again. Together with plans to help people with deposits that are already coming in, this might just get property moving again.

We’ve moved from the disease to the symptoms, so enough for today. As laid out yesterday, this balancing of finances requires one thing sorely lacking in society today. That is, a willingness to accept the consequences of our own actions and do something about them ourselves, rather than expecting somebody else to do it all for us.