In Hotel California, the Eagles tell us “we are all just prisoners here of our own device ……. you can check out any time you like but you can never leave”. While it’s not impossible Messrs Felder, Frey and Henley were referring to the reality of 1970’s Californian hedonistic indulgement, it reminded us of the perils of debt. The spending was fun but the aftermath brings serious consequences. If you’ve used resources from the past to fund the present then you will be forced to use resources from the future to rectify it. Which, of course, is where the fun stops.
The state of California faces a budget deficit of approximately $40bn this year. Its economy is larger than that of many developed countries and as a result of its financial crisis, has resorted to IOUs to pay some of its bills. In absolute terms, Greece’s budget deficit will exceed California’s in 2010 although the situation is of a different dimension as the Greek economy is only 20% of the size. In addition, it has accumulated debt of $450bn. Unless the world develops a feta addiction, it’s going to be grim.
The tough choices facing Greeks and Californians (significant public spending cuts, higher taxes etc) will be replicated here. It is ludicrous to pretend we have a choice as to how much economic pain we endure and the idea we can grow our way out of a non-cyclical recession is simply naïve. With Britain’s accumulated debt on the way to £1 trillion, just paying the interest will represent a similar sum to the entire defence budget. No doubt, politicians will point to the extraordinary events that have unfolded since 2007 but deficits the size of Simon Cowell’s ego (well, ……. perhaps not quite that large) need to be tackled head on.
To create more of a commodity that was the problem in the first place defies commonsense. Would MPs’ rehabilitation be aided by a larger expense account? Would Toyota’s reputation be salvaged by producing more defective vehicles? Will John Terry’s chances of regaining the England captaincy be enhanced by more extra curricular activities?
While the world has possibly undervalued the Eagles’ contribution to predicting the credit crunch, by our reckoning, there are only two ways in which this period of economic history can end. It will be either depression or stagflation and when a region as vibrant as California runs out of money, the alarm bells should be ringing. While California’s been dreamin’, it’s walked into a nightmare. As for the Greeks, it will be some time before they return to livin’ it up at the Hotel Kefalonia.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
