The New Capitalism

[B16Enk]

Non-UK guys may appreciate the read this offers, copied from the BBC Business news an article by Robert Preston, who has consistently been ahead on the unfolding crisis:

The New Capitalism

There's next year, and then there's the next decade.

Economic conditions in 2009 will be treacherous. There'll be a formal recession in most developed economies, and the economic contraction is highly likely to be more

severe in the UK than almost anywhere else.

Companies and consumers will continue to tighten their belts. There'll be a sharp rise in unemployment. The extraordinary volatility we've experienced in the price of sterling, commodities, energy, shares and capital - which makes it so hard for businesses and investors to plan - is unlikely to dissipate.

Many businesses, especially big ones, will become unviable - and will present the Government with an appalling dilemma of which ones to put on life support.

So it’s understandable that most of us, including ministers, central bankers and regulators, are planning for the next few months. We're building the economic equivalent of bomb shelters and mobile hospitals.

But this is no downturn like any we've seen since the Second World War, for two reasons: it's global; and its primary cause is the pricking of a massive debt bubble.

We borrowed too much, especially in the US and the UK. And the process of paying the money back is not only leading to a fall in living standards but is also precipitating very significant changes in how the global financial economy operates.

Capitalism is changing in fundamental ways. For many years to come, what's happening will affect the relationship between business and government, between taxpayers and the private sector, between employers and employees, between investors and companies.

Arguably the global economic crisis will turn out to be more significant for us and other developed economies than the collapse of communism.

A New Capitalism is likely to emerge from the rubble. And although it’s impossible to be precise about how the reconstructed economy will operate, parts of its outline are taking shape. What lies ahead can be determined from an understanding of what’s gone wrong with the existing model.

This, in itself, is no reason for gloom or despair. For many, the New Capitalism may well seem fairer and less alienating than the model of the past 30 years, in that the system's salvation may require it to be kinder, gentler, less divisive, less of a casino in which the winner takes all.

Here are some of the numbers that tell us what’s gone wrong. For the UK, if you aggregate together consumer, corporate and public-sector debt, the ratio of our borrowings to our annual economic output is a bit over 300%, or over £4000bn. That’s a similar ratio of debt to GDP as that of the US, and it’s a record. Over the past decade, we borrowed and we borrowed and we borrowed: we assumed that the day

when we had to pay it back would never arrive, that there would always be an opportunity to roll over the debt.

Households borrowed too much, £1200bn on mortgages alone. Big companies borrowed too much, especially those taken off the stock market in private equity deals. Note however that for all the political fuss about the need for banks to maintain lines of credit to small companies, they're the unsung heroes of our tale of monumental financial folly: even today, the aggregated savings of small companies exceed their debt.

One of the best ways of understanding how all our debts were accumulated is to look at the gross foreign current liabilities of our banks. These rose from £1,100bn in 1997 to £4,400bn this year (again, about three times the size of our annual economic output).

This trend tells two stories. It shows the massive and unsustainable growth in the City of London and our financial services industry - which is now shrinking with a vengeance, at the cost of massive job losses and evaporating tax revenues (perhaps £30bn to £40bn of income for the Exchequer gone forever).

But it also shows that our debts are, to a large extent, the recycled savings of other countries, notably the massive savings and surpluses of China, other Asian economies and the Middle East (one note of caution here: a sizeable proportion of these foreign currency liabilities, but by no means all, were used to buy foreign currency assets).

To put it in crude terms, for much of the past decade, millions of Chinese slaved away on near subsistence wages and still managed to save, both as a nation (China swanks £1,400bn in foreign exchange reserves) and as individuals. And to a large extent they were working to improve our living standards, because they made more and more of the stuff we wanted at cheaper and cheaper prices - and clever bankers took their savings and lent the cash to us, so that we could buy the houses we cherished, the cars we desired, the flat-screen TVs.

This imbalance - between the savings of China, India, Japan and Saudi and our indebtedness, between their massive trade surpluses and our deficits - was never sustainable. At some point, the Chinese were bound to say, “we’d like some of the cake now please, which means you’ll have to have a bit lessâ€

[Tribunus]

Excellent article.

[Jediteo]

Read this a few days ago. Things might get a bit rough over the next year or two, but according to most economical theoriest, handles delicatly, things could bounce back quite quickly (relative concept I suppose) I do not really like the China link though put forth in the article.

[JensenPark]

Great and interesting article.

I blame all this on the sense of "I deserve this new house...I deserve a big TV in every room" mentality.

[sged]

I've never trusted banks, I fear my feelings of mistrust have been proven...

Easy access to money has made communities go to hell, people are getting