04 January 2013

US: the repo man's at the door

The West is about to be repossessed. The debt crunch might mean the end of democracy as we know it, says Susan Erasmus.


The West is about to be repossessed. The debt crunch might mean the end of democracy as we know it, says Susan Erasmus.

Democracies encourage politicians to think no further than the next elections – that's why so many of them are facing financial disaster.

Spain, Greece, Italy, and now the United States. For all of them, the equivalent of the repo man has just stopped in front of the house.

We've been hearing a lot about the  so-called US fiscal cliff: what it basically comes down to is that the state coffers are empty. People have been predicting it for years, and now it's happened. Efforts have been made to avert the crisis, but it's a bit like putting a plaster on a cancerous growth and assuming the problem is solved. You don't need to be an economic whizz kid to work out that for Congress to merely raise the debt ceiling of $16,39 trillion is not a long-term solution.

Both governments and households need to rein in their spending: the days of living on credit to maintain a high standard of living are now simply over.

Your January cash crunch

What's happened now in the US is a bit like when you go to the ATM in the third week of January, and it won't let you have any cash. You have exceeded your limit, so no more cash– finish and klaar.

Think of how one gets there: overspending during the holiday, using one credit card to pay off the minimum amount on another, saying yes to the personal loan the bank offered you, and going on a holiday you can't afford. Oh yes, then there was the heap of presents under the Christmas tree for the kids and a few expensive restaurant dinners. And the sky-high car repayments.

And for a government, the rules are the same, albeit on a much, much larger scale: you cannot indefinitely spend more than you earn.

There is a point where it all crashes. You have too much debt to be granted any more credit and now your options are as follows:

  • You need to increase your income
  • You need to decrease your spending
  • You possibly need to sell your car/your house/liquidate your assets to cover debts
  • You need to declare bankruptcy

To decrease the household expenditure, you will need the co-operation of every family member, and boy, are you going to be unpopular. You try and explain to your teenager why there will be no more DStv, why you will all be doing your own housework from now on, and why he is moving from the expensive private school to the state school around the corner. Oh yes, and the 4X4 will be traded in for a 10-year old sedan car. The time has come to differentiate more severely between needs and wants.

But there is one big difference between you and the presidents of fiscally challenged nations: your kids don't have to re-elect you in four or five years' time.

Leaders want to be re-elected

Welcome to the world of deficit and debt, faced by many democratically elected presidents. In short, these countries have reached their borrowing limit. To reduce their debts and their deficits, they need to cut spending (read no more wars, less social security, less spending on unemployment benefits, health and education and government departments) and increase income (read increased taxes). It doesn't take a genius to work out that no one who does all of these things will be re-elected next time.

And this is precisely why things have been allowed to get to this desperate level: each leader, rather than cutting spending, and increasing taxes, has been borrowing more and more money to foot the bill while they are in office.  What happens after they have gone is frankly the next politician's problem. They have been passing the financial buck and they have been doing it for generations. They have been robbing Peter to pay Paul, and now nobody has any money left.

The issue of re-election is indeed the Achilles heel of democracy.

The US faces harsh decisions that will have a worldwide impact on other economies. Federal employees and government contractors could lose their jobs, the unemployment rate could rise, the recession could deepen, payment on social security benefits could be halted, and the government could default on its debts. The US credit rating could be further downgraded, increasing borrowing costs. This will have a worldwide knock-on effect.

But it has reached the point in many US and European countries where the choice has been reduced to feeling the pain now or feeling it later. Germany cannot be relied on to bail out other Eurozone countries. (Germany has worked its way out of complete ruin twice in the last 100 years, and absorbed the fiscally challenged East Germany in the early 1990s. That's quite enough for a century.)

The US doesn't have a Germany to bail it out. Neither do we. Although our situation in SA is somewhat less dire (thanks to Trevor Manuel), we still cannot afford to treat the state coffers as an endless resource. It's one thing using social grants and promises of better health care as re-election ploys, and quite another to foot the bill after the election.

Financial disaster is a real threat to democracy worldwide. Unless we come up with some way that makes long-term financial health attractive for democratic leaders, the danger exists that more autocratic forms of government could slip through the back door, bringing with them more financial security as their main draw card. Some of the biggest lenders to the US, such as China, are not known for their democratic forms of government.

Now what are we going to do about that repo man?

(Susan Erasmus, Health24, January 2013)




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