Monday, February 23, 2015

The end of extend and pretend

Facing up to $200trn in global debt.

They say that the instinctive response to danger is fight or flight. But there is a third – being frozen in awe.

That appears to have been the world’s response to what must be one of the most threatening economic issues of our time – the unprecedented level of global debt. It may also explain the scant attention that the latest data, researched and published by McKinsey Global Institute, has received after its recent release. Collated to cover the main economies of the world, it paints a rather dismal picture of the world’s debt burden.

Debt is to an economy what fertiliser is to a plant. Spreading some around will enhance its growth. A little more may encourage greater growth. But when you get to a point where you are virtually covering the plant it becomes counter-productive. And when you submerge the plant in three or four layers of it, you will most likely kill the plant. When the debt of an economy is three or four times its gross domestic product (GDP), there is little chance that an economy can grow out of it. The production of goods and services is the root of the economic plant and the basis of debt redemption.

That is a frightening prospect. It is rapidly spelling an end to the approach of extending the debt and pretending that it will take care of itself in future. Not all are predicting doom, but a greater number are certainly expressing gloom and real concern about the ability of nations to effectively deal with the problem.

Of key concern is that typically recessions lead to deleveraging, or a reduction in debt levels. This has not happened since the great recession of 2007 and debt has risen by $57trn, or more than 40% to $199trn. Only five nations, the most significant of which is Argentina, deleveraged in that period. All of the rest of the 47 countries surveyed showed increased debt to GDP ratios. Debt now equals 286% of global GDP, compared with 269% in 2007. McKinsey points out that “High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

This is what happened in 2007 and instead of debt reduction we have simply seen a massive increase through monetary instruments such as lower interest rates and quantitative easing. Yet these have consistently failed to pull economies out of low growth, at least in part because of its large application in assets such as stocks, bonds and property, and not fuelling consumer demand or being earmarked for investment in production.

Our inability to learn from the past must be one of the most inexplicable features of recent economics. Japan has had fruitless successive quantitative easing for some years. The US did the same, and it is still too early to conclude whether its recent improved performance can be attributed to monetary policies or simply a natural cyclical rebound. Europe is now also applying these policies and no doubt others will follow, perhaps even some in the developing world such as China.

Increased interest rates are an important tool in reducing debt. While it is generally expected that the US will start raising interest rates by the middle of this year, many would not bet on it. Given the global currency war, the still fragile state of economic recovery and pressure on the Fed, the latter has a good excuse to delay such a move for as long as possible.


The McKinsey analysis shows a significant shift in debt from other sectors into government. Government debt has increased by nearly 10% a year since 2007, compared with the 5.3% annual growth in all sectors and less than 3% annual growth in household debt. The world’s biggest debtor nation is Japan at 517% of GDP with much of Europe (apart from Germany) and the US having total debt levels of between 300% and 400%.

The growth of China’s debt, now at 282% of GDP is an alarming addition to severely indebted nations. Most of the developing countries still have relatively low debt to GDP ratios. South Africa is a case in point. It ranks 32nd out of the 47 countries with a ratio of 133% (excluding financial services debt). This was a 19% increase over 2007, with government indebtedness showing the biggest rise (18%) and corporate debt only 2%. Household debt actually declined by 2% and financial sector debt by 3%.

But South Africa also proves the point that statistics on their own say very little. A key consideration is not only the level of debt, but the nation’s ability to pay for it. Given severe structural, infra-structural, energy, labour and government efficiency constraints, the South African picture is certainly not a rosy one.

Clearly the days of extend and pretend are rapidly drawing to a close, if we have not passed that point already. So is calamity just around the corner? McKinsey believes it can be avoided or alleviated. One positive sign is that growth in financial services credit has slowed, specifically as a result of new regulations and controls. It suggests among others the introduction of new tools to create, manage, and monitor debt; better bankruptcy and restructuring processes; asset sales and tax policies that do not unduly favour debt.

Austerity seems to be the only answer policy makers have, but the austerity warriors may also be facing their last days on the battlefield. Already there is such popular dissent against austerity that is has become politically implausible. It has changed governments such as in Greece, and anti-austerity demonstrations have been filling the streets of many European countries including the UK. There is some justification for the outrage. The shift in debt from other sectors to governments shown in the above chart, reflects in large measure bail-outs which now have to be paid for by average tax payers.

It may be stretching a point to connect the dots between increasing economic insecurity and the many violent conflicts across the globe. At the very least austerity and democracy are now clearly in conflict.

Tuesday, February 10, 2015

Profiles and prejudices

One thing we can all do to make South Africa a better place.

It was tempting to rush to the keyboard immediately after the killings in Paris and the inspiring march through the city streets. But I’m glad I didn’t. Because with all due respect to my colleagues in the media, the wallowing in the overwhelming cologne of freedom of speech was somewhat overdone. Of course, it is always an issue but perhaps not the most important in those events and to use Charlie Hebdo as a worthy cause to champion freedom of expression was stretching a point.

“Ah”, I hear you say. “It is not what you say, but your right to say it that is the issue.” Really? Plain old fashioned courtesy is an essential value in our co-existence and while provocation in an environment that can easily be provoked can never excuse a crime, by all principles of jurisprudence and justice it does serve as a mitigating factor. It is reckless at best. But that aside, as the media lets go of its self-absorption, the debate has shifted more to other, perhaps more important issues at stake.

What those events have demonstrated is how deeply entrenched the divisions in our species are, listed in the latest World Economic Forum as the most critical risk factor of the year ahead. As the world continues to forge a global village through mass and social media, trade, international finance, cross border industrialization and travel one would have hoped that these divisions would have become more blurred and the ideals of plurality and multi-culturism more actively pursued.

The dramatic events that played themselves out in the streets of Paris have been seen by many as a symptom of a clash of cultures, “civilisations”, religions and classes. It has become clear in the aftermath that while there was a massive demonstration of solidarity for tolerance, there has also been an extension and hardening of extremism on both ends. But even that is not the full story. (See an analysis by American academic Jeffrey Sachs in Project Syndicate here).

The real crux is that ultimately radicalisation of behaviour is strongly rooted in despair, real or perceived, and often economic, but experienced at an individual level by those involved. The question then is whether society’s responses, including the media, address these root causes or merely serve to exacerbate them. For the media it should perhaps be less about opposition to being muzzled by extremism, but about muting the voice of extremism, not through censorship but by bringing hope where there is despair, alternatives to being radical, supporting the voices of moderation and offering an outlet for the forgotten oppressed. This will never eliminate extremism, but may help in reducing it to a lunatic fringe which is ever present in all societies.

Of course it’s a debate that is always just below the surface of South African society. No doubt there will be some who will fall back on Verwoerdian convictions on the one hand and outdated struggle rhetoric on the other that the current events merely confirm an inherent incompatibly for people of different colours and beliefs to co-exist in a single state.

That horse has bolted. Yet we still cannot seem to focus on common ground but have to reopen old wounds in passing blame or diverting attention from our own shortcomings. We saw that more recently in President Zuma’s blaming our problems on events in 1652, and author Zelda La Grange’s response.

The thought struck me that we will never really achieve any form of harmonious co-existence without individual introspection rather than relying on state or institutional solutions that for the most part actually make the problem far worse, emphasise differences and widen the divide. In the end the most important thing we have is our own individual and personal relationships. This may appear to be a trivialisation of a serious global issue, but if it creates even the smallest shift in individual behaviour, it will serve both society and our personal lives.

We can start by making a clear distinction between profiling and racism – or any other “ism” for that matter. The latter is a deeply ingrained, mostly irrational prejudice that kicks in under any circumstance and is an impenetrable wall against contra thought. To label someone or oneself as being a racist or any other “ist” is unflattering at best. I suspect few of us are genuinely that dogmatic.

On the other hand we all practise profiling. To do otherwise would be to deny knowledge and experience that we have gathered and tested throughout our lives. In most cases it is harmless and malleable – the more it is so the more open our minds and the less, the more closed.

We do it all the time: being a blond female has a certain connotation; having a name like Steve, Paddy or Koos van der Merwe, likewise. We learn to read body language to profile behaviour, and filter our knowledge at source to entrench preferred views. The list is endless.

When we interpret a profile as a permanent, dogmatic state in others, we needlessly generalise and instigate conflict, fear and insecurity and solidify prejudices. More importantly, we harden attitudes to become fundamentalism.

Perhaps the worst form of profiling, and one that should be of particular concern to South Africa, is the profiling of thoughts and views. It is cementing an ideological barrier that is virtually impossible to penetrate in the search of solutions to some of our most pressing problems. Key among them are profiles that become incapacitating slogans such as “monopoly capital”, or more commonly “capitalist”, “socialist”, “Marxist” etc. They are dialogue stoppers.

We can never stop profiling people, things, thoughts and situations. Indeed it can be useful in applying our knowledge and experience. But it is like a filter that has to be constantly cleaned to prevent it from being blocked and preventing further enlightenment.

The trick is simply to be aware of them and constantly test their validity. The British philosopher, William Paley once wrote: “Contempt prior to examination is an intellectual vice, from which the greatest faculties of mind are not free.”

Regularly testing our profiling is not only a great tool in the path to self-enlightenment, but it certainly will make South Africa a better place for all. And it really is such a simple thing to do.