“Americans think we are stupid,” said a European diplomat at a dinner party in Washington. ”But we’re not stupid. We’re just working out the problems involved in forming what you might call ‘a more perfect union.’”
“Well, you can unify all you want…it won’t make your debts go away,” we replied. We always try to be a cheery presence at dinner parties…especially in Washington.
“No…but it will make it easier for us to manage them, just as you do here. And by the way, the US has about the same amount of debt as Europe. The latest figures show the average of all OECD countries is about 100% of government debt to GDP. The US is right in the center…right at the average.”
“Oh, don’t think I’m holding the US up as a superior example. Not at all. To the contrary, I’m just pointing out that if Europe follows the US model, it will go broke just like the US.”
“Actually, there is some very intelligent and sophisticated thinking going on in Europe. I think you’d approve of it. We don’t talk about it publicly, of course. Most people wouldn’t understand. But we know that something very important has changed…and we are not at all sure how to respond to it.
“No country has ever been able to work its way out of such high levels of debt without exceptionally strong rates of growth…and an exceptionally good set of circumstances that make it possible — such as very agreeable creditors who essentially forgive debt, as the US did after WWI and WWII.
“And I don’t see either of those things happening. The creditors can’t forgive the debt…because they owe money too. They’d be broke too. And growth levels seem to have come down to negligible levels. If this continues, all our planning and all our efforts to ‘build a more perfect union’ will probably be for nothing.”
“I’m glad to see you thinking along those lines. But you’re aware that this is not a problem that just appeared in the credit crisis of ’08?”
“Yes…we know it has been a long time coming. Ever since the end of the ‘30 glorious years’ following WWII, real growth has been hard to get.”
“Exactly. In the US, the average man of working age earns about 20% less, in real terms, than he did in 1972. If he only went to high school and not college, he earns nearly 50% less.”
“In Europe, outside of Germany, the figures are similar…though not as bad, I believe.”
“Yes, it was possible for the US to reduce its WWII debt because it ran very high rates of real growth up until the ’70s. Same thing in Europe. Since then, most of the improvement in living standards has been smoke and mirrors. In America, women went to work. More people working more hours. They were able to increase household income…while the quality of life at home generally went to Hell. Then, when they couldn’t work any more hours, they began borrowing money. Then, their balance sheets went to Hell. That is the reason, and the only reason, for the boom of the Clinton…and later, Bush…years. It was a phony, unsustainable boom…with phony, unsustainable growth.”
“In Europe, it was a little different. People didn’t want to work more. They wanted to work less. So they emphasized high wages….but fewer people had jobs. We learned to live with high unemployment. And governments borrowed to boost living standards for everyone — including those who didn’t work.”
“But those days are over. Nobody — household or government — can continue to borrow to raise living standards. And without more real demand…and real spending…and real wealth…it’s not possible to work your way out of so much debt.”
“Yes, this time capitalism really does seem to have failed us,” our diplomat friend concluded.
“Well, it looks that way. You have to ask… How is it possible that the most dynamic, best capitalized, most high-tech economy in world history could not add a single dollar to the real wealth of the average working man over a 40 year period?”
More to come…
for The Daily Reckoning