The world economy is in shambles and yet I find if shocking that what politicians are doing about it is virtually all wrong. No one is really taking a long term view and interest in fixing the problems that got us here…instead we are massaging the truth and giving people false hope. And as much as I am critical of the banking system and its failure to serve society I think our economies were troubled before the banking crisis. Bankers did what they do best – get greedy, put their self interest above all else and by virtue of their misdoing magnify the problem. But they weren’t necessarily the root cause.
Being an entrepreneur makes me look at the economy as no different to a large company. That company first has to have a business model, remain efficient and keep reinvesting profits into driving innovation and change. Its needs to be resilient and agile, listen its customers and – a notion often confused these days – differentiate between solvency and liquidity. A CEO who leverages the company beyond what the company can afford to repay is simply betting his company’s success on a miracle happening (It may happen once but there’s not yet a proven formula for repeat miracles happening at will!).
All of these things are important but it all starts from having a business model. And to have a business model you have to be producing things that others want to buy and secondly you need to ensure that those people can actually buy them. In economic terms this translates to two things: exports and real income of people. If real income keeps rising people will be spending more, investing more and that will generate growth. The fallacy of the west and in particular countries like the UK and the US which are by and large consumer led economies is that this increase in spending over the past decades has really in its vast majority come from consumer borrowing (instead of rising real income) in turn fuelled by the abundance of cheap money. And that’s where the banking system became a catalyst of the problem and failed to protect us. The prevailing mindset became: if you can’t earn more in real terms just borrow and spend. If you find yourself in a pickle just refinance and borrow more to cover your debts. The need to feel richer and unable to do that with real income growth suddenly threw away all economic fundamentals. In layman’s terms: people with as much credit-worthiness as my neighbor’s over-fed cat found themselves with a second home!
You don’t need to have a PhD in Economics to realize that this is nothing other than a large ponzy scheme. As long as asset prices keep rising its ok and people keep feeling richer and richer…so they go out and borrow more. Banks of course are happy to do that as they make money. Of course when asset prices start falling as they did in 2007 the scheme collapses very rapidly and we have a massive credit crunch.
Its no surprise that the countries that fared well throughout this long recession have been those that have strong export-led economy like Germany or economies which are going through radical transformation which fuels productivity rises (like India and China) and ultimately rising real incomes. The problem with the West started way before bankers lost all sense of control and ethics and started acting like rock stars on steroids. The problems started when we forgot that what drives long term growth is producing things that people want to buy and that to maintain that we need to keep investing in driving productivity growth through education, technological and innovation. We became over reliant on services with all the real stuff moving to places like China. Until we get that through our heads it won’t change.
So whilst there is a lot of complexity in the system right now what we really need to do is simple: go back to good old fashioned fundamentals and stop trying to buy ourselves out of the pain though crafty financial engineering and monetary policy. Every country leader I believe needs to priorities on a handful of things alone, especially in times of crisis:
First, ensuring their economy is remaining competitive. This is the biggest issue with the European Union which constrains countries like Greece of devaluing their currency to jump start their economy again, make it more competitive and start generating foreign income. Which as long as they remain in the Euro they cannot do. I’m one of those skeptics who believes that that is not sustainable. However strong the political will of those who want to preserve the European Union, in the end you cannot defy gravity, and as it stands the big gravitational force of the Eurozone is Germany whose economic fundamentals just couldn’t be further apart from an economy like that of Italy, Spain, Portugal or Greece. If they don’t decouple and let their currency float becoming competitive will be like trying to swim up-water. In other words: near impossible. As proven historically by economies in Latin America like Argentina or in Asia a devaluation resets the economy in one big bang . You feel more intense pain but shorter lived. Three years after Argentina devalued in the late 90s it was a booming economy again when people thought it would never recover. And that’s what economies like Greece need right now.
Second: Investing in human capital – in educating and training the workforce of the future that will ultimately lead to increase in productivity and improved competitiveness. If one looks at university enrollment rates in the west in the last two decades or so they have been pretty much flat whilst those in the East are growing at a frightening rate. Soon we wont be able to compete on skill and what we’ve been seeing as ‘offshoring for cost-saving’ may in fact reverse.
Third: investing in and encouraging innovation, helping businesses to get off the ground and create employment. As someone who is running a business both in the Eurozone (Athens) as well as London and the US I am amazed that in Greece of all places taxes are in fact increasing making the few like us that are investing in the place more reserved. Its like saying “jeez my business model is screwed, I have no income so what shall I do? I know – raise prices!”. What they should be doing is lowering taxes but collecting them better and then going all out to give talented entrepreneurs incentives to invest and hire people.
(I can tell you from my experience Greece has a very talented and hungry workforce with very technical skills, some of the best real estate and holiday destinations on the planet and yet none of this is being utilized.)
Last but not least: have the strength to just get out there and tell your people what needs to be done not what they want to hear. Times of crisis need ruthless leaders who take a long term view of what’s best for their stakeholders and they take action without consideration to their personal popularity or other selfish agendas. We need altruistic leaders who put the good of the country above themselves and pursue it with tenacity and grit. And we have none of these sort of leaders around any more. ‘The iron lady’ movie that just came out serves as a stark reminder of that.