Why did we abandon a generation? Debt

Iain MacWhirter

Columnist

Sunday 20 November 2011

ANY way you cut it, the unemployment figures look as bad at the end of the week as they did earlier.

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Iain Macwhirter

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One in four young people in Scotland workless. A million in the UK. A dearth of ideas about what to do about it, except blame migrants coming here and taking our jobs. According to reports last week, young people are now being press-ganged into working for nothing in Tesco and Poundland for two months’ unpaid “work experience”.

When a society abandons its young people, it loses its moral integrity. The contract between the generations breaks down. We saw some of the consequences on English city streets last summer. We see a more constructive response in the tents being erected by the Occupy movement in city centres. What we don’t see are the hundreds of thousands who end up resorting to drugs and alcohol. In the 1980s, when last we had youth unemployment at this level, Scotland was ravaged by a drug-addiction binge from which the nation has yet to recover. How did we get here? How could a society that was enjoying – if that’s the right word – the most profligate consumer boom in history suddenly, within a few years, end up in the middle of an economic depression with millions facing poverty? The short answer is debt: public debt and private debt. We spent and spent on goods we mostly didn’t need, from flat-screen televisions to overpriced cafe lattes. Monster cars that block the roads. Piles of cheap clothing that make instant landfill. The state-hired legions of extravagantly paid bureaucrats.But mostly we spent the money on houses. If you look at where the biggest debts lie, they are in real estate, and when you look at the roots of the current financial crisis, they are all to do with housing. The banking crisis really began the day Northern Rock started offering those 125% mortgages – the ultimate lending madness. The US property bubble collapsed first in the third quarter of 2006, when house prices started to fall. That undermined the value of those subprime mortgage bonds the banks had been trading, which triggered a global credit crunch. The Bank of England still holds hundreds of billions of toxic mortgage-related paper. Countries such as Spain, which at the height of the boom were building 800,000 houses a year, are now drowning under debt as whole estates lie empty. The eurozone turmoil might look like a crisis of political leadership or fiscal incontinence, but what lies beneath is the banking crisis caused by the collapse of the great noughties property bubble – a bubble of which everyone, including the governor of the Bank of England, denied the existence until it popped. The sovereign debt crisis is a kind of pass-the-parcel – everyone trying to get out from under their huge pile. It’s important to remember this as Britain blames Germany for forcing the pace on the eurozone; Germany attacks Britain for protecting the City of London; France blames Berlusconi; and everyone blames the Greeks. And here’s the funny thing about debt: it isn’t tangible. You can see a house – it is a physical object – but you can’t see the debt that relates to it. Moreover, if all the debts and all the assets were to come together in some great financial reckoning in the sky, the books would eventually balance, and there would still be all the physical assets. The factories and ships, the Amazon warehouses filled with stuff, the laboratories and universities: all of these would still exist. That’s a gross over-simplification but it’s important to remember because what happens in a debt-driven depression is a wanton destruction of these productive assets. This is happening right now across Britain, as factories close because they are denied credit from the banks or because they have no buyers for their goods. The machines rust, and the skills of the workers deteriorate as they become unemployed. Young people don’t get jobs, don’t learn skills, and after a while become unemployable. This means lost production in future as well as human misery today. Britain lost much of its manufacturing industry during the bubble years, and now the remains are rotting.John Maynard Keynes analysed all this in the 1930s. It requires some political agency to stop the rot. Or perhaps to accelerate it. One way of looking at the Second World War is that it massively accelerated the destruction of assets. It’s no accident that the economies of the West boomed in the 1950s. All the debts built up during the Great Depression were erased during the war when governments seized the banking sector. Post-war reconstruction – kick-started in Europe by America’s Marshall Aid programme – restored full employment. High taxes on the rich created the original consumer society as ordinary people were able to afford cars and washing machines. So are we going to have another war? Of course not. Angela Merkel, the German chancellor, says this is Europe’s toughest hour since the Second World War, but she’s not about to invade Poland. The muttering about “German domination” in the British press doesn’t mean David Cameron is going to launch a rearmament programme. War is not an option any more – at least in Europe – mainly because the EU economies are so interlinked. The EU will have to do the reckoning.The debt that is causing all the trouble isn’t actually that large by historic standards. Also, the productive forces are so much greater today than ever before. Not just computers and robot factories, but renewable energy, efficient agriculture, medical advances, nano-technology and life sciences. We are far smarter and more productive than in the 1930s, which means we can do more with less. Email means we don’t need a labour-intensive postal service, for example.If we get the debt reckoning done, erase the phoney wealth in house prices and reduce wealth inequalities, then a future beckons in which everyone can have a decent standard of living without having to work long hours or destroy the planet. We just need the political will. Perhaps, in those ragged tents in town centres, we are seeing the beginnings of a movement that ultimately will. History tells us that revolutions arise when there are large numbers of unemployed young men and women.

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Why did we abandon a generation? Debt

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