It’s been 12 years almost to the day since the collapse of the global financial services’ firm Lehman Brothers, which had a market capitalisation close to $60 billion at its peak. That collapse is widely seen as marking the moment when the world economy started its slide into the great financial crash of 2008-09. Lehman’s key problem was its massive exposure to the US sub-prime (aka rotten) mortgage lending market, in which basically anyone who could sign a form was offered a mortgage. This in turn was facilitated by the Gramm-Leach-Bliley Act in 1999, which repealed the Glass-Steagall Act of 1933; Glass-Steagall had separated investment banking from retail banking. After 1999, banks re-discovered the joys of gambling with depositors’ money – only to be reminded of the pains once the real estate bubble burst.
Lehman at the time of its collapse was the world’s 4th biggest investment bank, with 25,000 employees worldwide. These people were largely scattered to the wind, which is now presumably happening to the 695,000 people in the UK who have lost their jobs since March this year. Many of those – 146,000 – are young people, aged 18 to 24. They typically work in the sectors most hit by the recession – hospitality and retail. These jobs may never return. The number claiming unemployment benefits in the UK has reached 2.7 million, up by 121% compared to March. In the 37 countries of the Organisation for Economic Co-operation and Development (OECD) unemployment is projected to reach nearly 10% by the end of 2020 and could go to almost 13% if further lockdowns are imposed. A jobs recovery is not expected to start before 2022. In the US, the unemployment rate rose from a 50-year low of 3.5% in February to 14.7% in April, the highest since 1948. We are living through a time of massive instability, when many people are looking for protection against the coming harsh winter winds.
People need certainty
Besides the loss of income, unemployment can create a wide range of mental health problems. The responses to the Covid-19 virus have worsened care for non-Covid patients according to a poll of 16,000 doctors by the British Medical Association. Given that Prime Minister Boris Johnson has ruled out extending the country’s job support (furlough) scheme when it ends in October, many more could join the unemployed queue in the coming weeks. The UK could soon be uncomfortably reminded of the famous 1979 Conservative poster: except that this time it could be re-titled ‘Conservative isn’t working’.
Under the headline unemployment figures is the huge amount of borrowed money which the UK, the US, and other governments have ploughed into the monetary system since March this year. Around the world, governments have been throwing money at the economic crisis, totalling around $20 trillion – this completely overshadows the cost of clearing up the mess caused by the 2008 crash, which was put by the International Monetary Fund at $11.9 trillion. While these fiscal and monetary measures have no doubt helped stave off the extremities of job losses and consequent anxiety, they have come at a cost.
The decline in tax revenues due to lower economic activity and greater unemployment could lead to a multi-national sovereign debt crisis, in which several countries find themselves unable to pay their bills or service the interest payments on their debt. The UK is headed for a massive fiscal deficit – government spending more than its revenues from taxes – in 2020/21; public sector net debt crossed £2 trillion (100.5% of GDP) for the first time in July, a record since the Second World War. US debt will rise to 140% of gross domestic product this year, according to the International Monetary Fund (IMF).
Is such a situation sustainable? The Tokyo Bureau chief of the Financial Times certainly thinks so – he wrote on 25 August a piece entitled Leave public debt worries for another day. He argued that in the context of the need to respond to Covid-19 (in reality, in response to government lockdowns imposed in an effort to eliminate the spread of the virus) and rock-bottom interest rates they can “leave worries about public debt for another day”.
There are only three ways a government can finance higher spending – by more borrowing (selling government bonds), printing money, or higher taxes and/or spending cuts. The last option is most unlikely in the UK and the US, as either higher taxes or spending cuts could snuff out any economic recovery. Governments can borrow right now with ease, as interest rates are so low. They can borrow all the time lenders have confidence in their ability to pay.
Demands for more economic ‘stimulus’ – more money – are coming thick and fast in the UK, where every sector that has seen its revenues slump, from the arts to airlines, is still clamouring for government (taxpayer) aid. The same is true of the US, where siren voices are now warning that without a further $1 trillion support package (on top of the $3 trillion handed out at the start of this crisis) that large sections of the US economy will become a “wasteland”. It’s not beyond thinking that the kind of welfare provisions that the UK has, may become unaffordable – yet will remain politically necessary.
The UK and the US face unpalatable choices – either draw an end to the stimulus measures and risk that the economic recovery is half-hearted and millions of people face continued anxiety, or carry on borrowing in the effort to inject more money into the system and hope that eventually things return to near normal.
Either way, more instability seems baked into the cake. We should all remember the fall-out from the collapse of Lehman Brothers and how much global effort it took to rectify what was a blunder, created by supposedly clever politicians, central and private bankers. Getting some stability in one’s life means, in part, taking more control over those parts of life where you can build greater independence, greater self-reliance. In no-where else is that more important than in finances. That’s the fundamental reason why Glint – with the ability it gives to buy, save, spend and now, share gold, a currency beyond the control of government – should be so important to us all.