The End of The Free Lunch

Over the last twenty years the people of Britain, New Zealand and the United States have been living beyond their means and have been persistently lied to by their political leaders and economic journalists. The essential lie is that there is, contrary to common sense, such a thing as a free lunch - you can live off the industry of others without saving or producing. However this free lunch is soon likely to end.

The U.S and Britain have had a crutch that allowed them to survive de-indutrialisation in the 1980s - cheap oil and gas. However, both countries domestic supplies are now declining rapidly. The Bush administration's bold attempt to grab Iraq's oil has succeeded but only at a huge political and economic cost. Furthermore, the ongoing cost of maintaining steady oil flows means that cheap oil from Iraq is now a thing of the past in any case.

The negative economic impact of industrial decline in the U.S has been temporarily countered by massive borrowing, running down savings and inheritances, and slashing the wages of unskilled and semi-skilled workers. Subsequently, the middle classes have found plenty of money to splash out on cheap Asian imports and European luxuries. However, trade deficits and personal debt have continued to rise.

Even though most people in English speaking countries have been comparatively unproductive many still work very long hours. This fuels the illusion that their economies are healthy. Surely if people are working hard they must be paying their way. However, workers haven't been rewarded according to how much they produce. CEOs have been often been awarded huge pay packets for their ability to accumulate wealth, not for producing it.

At present the U.S economy is propped up by massive Asian investment which helps keep interst rates low and consumer demand high. However, a fall in foreign investment will put big pressure on interest rates. The rapid aging of Japan, and in another 15 years China, will mean that investors from these countries will be cashing in their savings to pay for retirement. Hence, the U.S will not be able to rely on Asian investment for much longer.

In contrast high interest rates have been a prominent feature of economic stagnation in New Zealand. U.S style financial deregulation has contributed to poor savings rates and high public and private debt, which in turn has led to chronically high interest rates. This has enriched parts of the financial sector while speeding the decline of manufacturing. Meanwhile foreign investors have been busy buying up real estate or investing in the dollar rather than investing in productive businesses.

Besides rising oil and gas prices the English speaking countries will soon be hit by the cost of a rapidly aging population. Although all the developed countries are aging rapidly, the English speaking countries (apart from Australia) have fewer savings, higher debt levels, and are more de-industrialised than countires like Japan and Germany. With most people employed in services it will be difficult to raise productivity levels and generate sufficient income to pay for rising health and pension costs.

The superior performance of the English speaking economies over the last 15 years has largely been an illusion. Low real growth is a fact of life in most of the develped world, not just in Continental Europe and Japan. Australia, which has maintained relatively high levels of savings and investment, is one of the few countries in a reasonably strong position.

Suggested Reading: William Bonner, Empire of Debt: The rise of a financial crisis. 2005. Also check out some of the economic articles in American Conservative Online.