A little late this week, I know. I apologize. I was enjoying a day with the wife.
I’m glad someone is finally pointing a finger at China’s proliferation crimes – and Pyongyang’s are just a shadow in comparison - as well as lauding its currency reform. Coming in for praise, too, is the Conservative-Lib Dem government in London showing how to start budgeting. But, it was a toss-up which leader to put first, the nukes or the debt. Finally, only the misguided military idolaters in the Korean blogosphere would find General McCrystal’s firing surprising or dismaying.
This newspaper argued against the America-India nuclear deal, not least because it would intensify nuclear rivalry in an already fissile region. A second wrong—shrugging the China-Pakistan one through, on the basis of some sort of big-power tit-for-tat—will only double the damage.
Before China joined the NPT and the NSG its proliferation record was execrable. It helped Pakistan make uranium and plutonium. It handed over the design of one of its own nuclear warheads, which Pakistan later passed on to Libya and possibly Iran. China hates talk of its irresponsible past. It will resent being told it is breaking NSG rules. But the other 45 countries in the group should find the courage of their anti-proliferation convictions and call China to account. Like others in this sorry saga, China richly deserves embarrassment.
For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.
As consumers leveraged up, so did companies. The average bond rating fell from A in 1981 to BBB- today, just one notch above junk status. Firms that held cash on their balance-sheets were criticised for their timidity, while bankruptcy laws, such as America’s Chapter 11, prevented creditors from foreclosing on companies. That forgiving regime encouraged entrepreneurs (in Silicon Valley a bankruptcy is like a duelling scar in a Prussian officers’ mess) but also allowed too many zombie companies to survive (look at the airlines). And no industry was more addicted to leverage than finance. Banks ran balance-sheets with ever lower levels of equity capital; private equity and hedge funds, which use debt aggressively, churned out billionaires. The road to riches was simple: buy an asset with borrowed money, then sit back and watch its price rise.
All this was encouraged by the authorities. Any time a debt crisis threatened the economy, central banks slashed interest rates. The prospect of such rescues reduced the risk of taking on more debt. Bubbles were created, first in equities, then in housing. It was a monetary ratchet, in which each cycle ended with much higher debt and much lower interest rates. The end-game was reached in 2007-08 when investors realised a lot of this debt would not be repaid. As the credit crunch tightened, central banks had to cut short-term rates to 1% or below.
Reforms to tackle the root causes of excess saving in China are therefore needed as part of a lasting solution to global imbalances. That means more liberalisation to make it easier for small firms in labour-intensive services to challenge cosseted state-backed firms; it means better corporate governance to help unlock the cash hoarded by state-owned enterprises and spread it around the economy; and it requires a wider social-security net to persuade Chinese householders that they need not insure themselves against every catastrophe. A stronger currency is a handmaiden to these changes. But it cannot do all the work of transforming China’s economy.
No one can deny that George Osborne has bottle. The emergency budget presented on June 22nd by Britain’s new Conservative chancellor of the exchequer aims to deliver a whopping fiscal retrenchment equal to 6.3% of GDP by 2014-15. Three-quarters of the adjustment will come from spending cuts, including cuts in welfare. The rest will come from tax hikes, both those planned by Labour and new ones, including notably a rise in the consumption-tax (VAT) rate. Government spending will fall from over 47% of GDP in 2009-10 to under 41%, and borrowing from 11% of GDP to 2%.
This is tough stuff, and the markets took it as such. Sterling and gilt-edged government bonds strengthened a bit; the credit-rating agencies expressed renewed confidence. The message—that, at a time of worldwide jitters over sovereign debt, Britain is determined not to be classed with the likes of Greece—is welcome. So is the balance of spending cuts and tax rises, and the reduction in the corporate-tax rate.
Mr Obama once described the fighting in Afghanistan as “a war of necessity”. The president must now put necessity aside and pose two fundamental questions. Can the American-led coalition still win in Afghanistan? And if so, how?
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