How not to lose ground or how the developed world can dodge the sword of Damocles – Part II


Second Part – Way Out

“We have to define that word which good economists always try to avoid: capitalism is that form of private property economy in which innovations are carried out by means of borrowed money” Joseph Schumpeter

As in the previous article the difficulties have been addressed, and we have created hopefully a sense of urgency. We would now like to characterize a possible solution scheme to eventually end the era of Ponzi finance in order to prevail over the economic downward spiral of the developed future world. Various stakeholders will have to prove their willingness to make sacrifices. The day of reckoning will have to be faced, because the underlying issues cannot be ignored any longer.  

Some of the suggestions might overlap, tensions and tradeoffs among these points will occur. However, those steps are necessary to be heed for the purpose of putting the developed economies on a more positive economic footing.

Fast cleanup of the debt overhang – immediately.  A combination of write offs and restructuring, austerity, higher taxes (preferably merit-based), and sizeable inflation will be essential. Bear in mind that many of today’s debts will never be repaid, embrace debt restructuring and defaults. Right now governments (with some exceptions mentioned in the previous part) have to “stop kicking the can down the alley”, postponing the ultimate resolution of the crisis and will result in even bigger losses down the road.

Fast reduction of the trillions of unfunded liabilities that are weighing down budgets and balance sheets across the developed world. The aim is to find a combination of several measures to bring these unfunded liabilities under control

Raise the retirement age. In the light of shrinking workforces, early retirements are more than counterproductive.

Restructuring of the health care systems for greater efficiency. Governments should aim on improving efficiency and not just only on reducing cost per se. Indeed, a perceived outcome of a positive rightsizing process is a solid decrease in expenses, due to simply improving processes and mechanisms within each system. Make it lean, without disregarding the needs of the people in need for care.

Reduce spending on size of swollen governments and bureaucratic systems. A smaller government sector does not correlate with a weaker government. In addition, periods of increased labor scarcity will be faced; more people will be needed to work in the private sector in order to generate GDP (instead of merely consuming and redistributing it). The public sectors can provide the right roadmap with infringements for society and businesses in order to promote a structural change. What about one election year every 4 to 5 years. Instead of having 2 to 3 federal state elections every year. With the indirect negative effect on national political progress, as parties usually try to spoil their base voter before sending them to the ballot box, rather than following sustainable, future-orientated and conceivably non-popular reform schemes.

Moreover the implementation of structural reforms is vital to maximize the economic potential of the economy. The flexibility of labor markets has to be increased by abolishing rules that block new entrants with the benefit of generating more competition. Such measures could increase the growth potential of economies in Western Europe by 4.5% over five years, according to a study by the IMF.

 Bergljot Barkbu, Jesmin Rahman, Rodrigo Valdés, et al. “Fostering Growth in Europe Now,“ IMF Staff Discussion Note, June 18, 2012

The efficiency of the social-welfare system has to be increased significantly. Finding the equilibrium between giving a jobless person the right inducement to start to work again (provided there is a workplace), and to provide effective support in times of need without taking his or her basis of existence and self-esteem.

The developed economies will have to make preparations for labor scarcity. Yes indeed, labor scarcity, due to several reasons, disregarding the current high unemployment rates in countries like Spain, for instance. People will have to work longer in general and early retirements, if not really necessary (i.e. physical/mental state), have to be abolished. We encourage increased workforce participation by women. As discussed in the previous article, the fertility rate is too low in developed economies with some exceptions. This will demand a great deal of families in particular. Encouraging larger families will require additional social investment in the form of widely available high-quality childcare, a positive example for that is to be found in France.

However, demographic trend cannot be reversed; we will have to wait “for the waves to hit us”. Thus, immigration policy has to be developed smart. The aim from a European perspective is to attract people from outside Europe. The Internal Eurozone migration we currently experience in Germany for instance is counterproductive, as people form southern Europe, such as Greece, Portugal, and Spain. Those migrants can help the German economy to grow, but simultaneously are harmful for the economies of the periphery. Hence, German gains vanish due to higher transfer payments, essential to keep the Eurozone periphery from collapsing.

A good model for smart immigration policy is Canada, because the emphasis is on attracting well-educated and highly motivated people who want to contribute to the country’s economic growth and build their own lives in their new country.

It cannot be denied, that investment in education is one of the most important decisions to make for future generations. It is another key target of social investment, and once more we have to point out, that quality education is a precondition to fully utilizing the innovative capabilities and entrepreneurial talent of society’s members.

Some critical points in terms of education should be; The improvement of the average education levels, an improvement of the quality of teaching, the purposefully encouragement of studies related to relevant topics for future economic development, and support for top students to foster innovation and entrepreneurialism.

Scarcity of raw-material will lead to higher prices naturally; as a consequence efficiency has to be increased considerably. The time of cheap resources has come to an end, meaning that developed countries have to decouple economic growth from excessive resource consumption. Investment in sustainable energy sources as a matter of fact is an advantage, and that is out of question. Indeed, developed economies will still need high levels of crude oil, and gas, for instance, but the overall consumption can be reduced significantly with already existing technologies.

Nevertheless, cooperation on a global basis will be key to success. Competition among countries will become fiercer, all will try to secure scarce resources, attract the best-educated immigrants, and increase their exports. This increased state of competition will pay dividends in terms of new and innovative products. However, a cooperative way on a global scale is preferred.  The world has never become more entangled. The emerging markets are not immune to the problems facing the developed world. As an example, China alone holds more than $1.2 trillion in U.S. Treasury bonds and also piled sovereign debt investments in Europe up to 600 billion, in 2011.

One the one hand, support economic restructuring in the developed world has to be achieved. Developing economies should focus more on domestic consumption instead of export-based growth, like India partially does today. On the other hand, the reduction of energy and commodity intensity has to be targeted. Disregarding global warming, further excessive use of natural resources, such as water, commodities and oil will consequently lead to higher prices, due to increased scarcity. In contrast, efforts to become more efficient in the use of energy and other commodities would dampen price pressures, greatly improve economic growth, and support the adjustment process.

Last but not least, the next “Kondratiev Wave” has to be launched. Investment in state-of-the-art infrastructure should be set in place in order to promote innovations and to create highly productive workforce and make it easier for engineers and technologists to innovate and for entrepreneurs to start new businesses, the developed economies need to unleash a new Kondratiev wave of global economic development

Make entrepreneurship more attractive, progress is based on innovations and these have to be supported, embraced and promoted sufficiently in the developed and the emerging economy. Especially, in the developed world the social acceptance of innovations has to be increased. In many developed countries, especially in Europe, the public has grown skeptical of innovation and new technologies, biotechnology is a shining example for it. Only increased innovation can help deal with the costs of demographic change if overall levels of wealth are to be preserved.

Once again, we would like to point out, that young students established the most innovative companies – Apple, Facebook, Google, and Microsoft etc. An investment in the youth and in the generations to come is an appropriate and recommended solution.

 Challenges described in this article are not to be resolved by politicians alone. They require the whole society to stand together, share the burden, and define the path forward. Company leaders must play an important role in this discussion. But they will have to look beyond their immediate business needs and shareholder interests. As the Ponzi scheme deflates, the only way to achieve a good outcome will be through cooperation.

Daniel Shelter with contributions from Ralf Berger, Jendrik Odewald, and Dirk Schilder:  Collateral Damage: “Ending the Era of Ponzi Finance – Ten Steps Developed Economies Must Take”. January 2013.

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