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We are heading for inflation and currency collapse

"Western social democracies can only maintain their expenditures through taxes or borrowing. As companies disappear eastward, and the tax base disappears: somehow we’ll replace lost jobs with new industries."



Jon Moynihan

Financial Times Deutschland

26 September 2012


Central Bank approaches to the Eurocrisis are just delaying the solution, and worsening the problem, argues PA Chairman Jon Moynihan.

The Eurocrisis continues. Discussions focus on Germany’s wage rates versus the rest of Europe. The fundamental cause of the crisis is a far larger wage disparity: five hundred million OECD workers earn $135 daily. 1.1 billion industrialised workers in developing countries earn $12. 1.3 billion rural workers, $1 or less a day. $12: if a job can be taken from the West, it will be because workers in developing countries work harder, longer, don’t have social charges and are increasingly better educated. $1: the $12 won’t increase --too many $1 workers are seeking the $12 job. Jobs are steadily lost to the East.

Western social democracies can only maintain their expenditures through taxes or borrowing. As companies disappear eastward, and the tax base disappears: somehow we’ll replace lost jobs with new industries.  Maybe: but in your, or my, lifetime?  The pace of job loss is too fast, and is accelerating.  Reform in developing countries started in the 1990s. In two decades, they have come to own the steel industry, and many others. America was astonished as China unveiled a Stealth fighter last year – not expected before 2020.  Education, investment and cyber-theft accelerate in developing countries, growing their ability to take business from us.

The West has a dilemma, worsened by Keynesian nostrums that the crisis is curable through financial and fiscal moves. Wages not growing to match your increasing material desires? Borrow. Company not making enough? Borrow. Taxes too small to fund social programmes, government inefficiency? Borrow. Speculate in order to balance the books? – and when the bets turn sour: borrow. Result: Eurocrisis, but the response to that is, in one word: Borrow. Keynesian approaches argue borrowing is needed to maintain full capacity. But borrowing to fund consumption of cheap Chinese goods (or expensive German ones) does not resolve the wage disparity issue; it exacerbates it. Keynesian approaches argue for more taxes to keep borrowing down, but high taxes inhibit economic activity as much as does government austerity, and, to cover welfare benefits that sustain consumption, prevent the growth of savings that in turn build the economy productively.

Germany's economic success, even while assisted by the single currency absurdity --which gave Germany competitive superiority for a decade against its Southern EU brethren-- points the way to solutions to this problem. First, a national settlement to scale back an unaffordable social cushion. Second, strong technical and practical education, rather than a free-for-all where maths, science and technology were gradually de-emphasised. Third, practical technology, getting technological breakthroughs and commercialising them. These have played a huge role in Germany’s success, but were not followed in the rest of Europe –which saw continued decline.The German Constitutional Court and the ECB have, it would appear, committed Germany’s national wealth to a short term solution for Europe’s problems, while not addressing the fundamental wage disparity problem. When the bailout money has all been spent, the problems still remain, and deficits continue to rise, Germany may find it has spent its treasure to no benefit. When the monies run out, three to five years from now, bailout will not be an option. A readjustment, leading to considerable disruption and social unrest across Europe, will then be imposed by the markets, far more painful than if voluntarily taken now –but Europe’s politicians are not willing to face cheaper near-term readjustments, such as a breakup of the Euro.  Argentina’s spectacular fall, from one of the richest countries in the world in the early 1900s to one of the world’s poorer nations, its currency depreciating in 2001 to 40% of its dollar value overnight, saw enormous social dislocation and hardship. Equally large dislocation is occurring in the peripheral European countries, and Germany itself will suffer as its Euro-markets dry up, and as the global wage disparity exercises its power even on Germany.

I have previously asserted that real wages in the western countries must eventually halve through inflation and currency collapse for their economies to be eventually competitive with developing countries, even as the global economy grows. You might wonder, when you do the math, whether this estimate will one day be prove to have been insufficiently pessimistic.


Jon Moynihan is Chairman of PA Consulting Group

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