The current US financial crisis was within my radar for sometime - I read George Soros' "Crisis of Capitalism", Ravi Batra's "Greenspan's Fraud" and have been keeping up with the thoughts of short seller Peter Schiff. I thought the crisis might have ended with Bears Stearns but it actually got worse. The Lehman collapse caused the credit market to totally freeze up - the CDS (credit default swap) is the latest shoe to drop. The pessimists have been spot on. The next few shoes may be consumer credit (credit cards, car loans) as unemployment rises, loans to businesses, US$ etc. But I'm here not to go too much into the detailed mechanics of how this crisis will get worse or better.
Last week I was listening to BBC and there was a interesting segment on the financial crisis. A British economist went on the air to present some interesting statistics on income distribution. I don't remember his name but he said he found out that the income inequality today is only matched in history by the period just before the Great Depression. He went on to hypothesize that the crisis will be over and the global economy will recover only when a sustainable income distribution is put in place.....similar to the New Deal(s) of the 1930s. I found this very interesting because I read something from Ravi Batra 2 years ago that predicted a crisis of the same magnitude as the one we are seeing. I knew he was onto something but the problems with predictions is you don't when exactly things will start happening. Ravi Batra's findings goes something like this:
- In the past 2 decades, wages have been lagging productivity.
- To consume all the goods produced, there has to be an expansion of credit. Household debt in US has indeed risen to all time highs.
- By keeping wages low, corporations have reported huge increase in profits. Corporate profits as a % of GDP is at historical record levels.
- This profit growth is unsustainable because it requires workers who are also the consumers to take up more debt.
In Singapore it is interesting because the govt advocate that wage increases be kept smaller than productivity gains. The logic is to keep the Singapore work force competitive globally. We have also eliminated most of the workers' benefits such as retrenchment benefits, medical, etc to stay competitive. While Singapore banks have expanded consumer credit with the proliferation of unsecured personal loans and credit cards, they have not been as irresponsible as their American counterparts. Still I was quite shocked when I found out that NTUC was offering unsecured loans known as the Fair Price Plus Loan. These loans are necessary only because workers don't make enough to make ends meet and they are so stretched they have little savings to buffer against emergencies. In the name of competitiveness, we have also imported hundreds of thousands of foreign workers depressing the wages of our low income workers. If they don't borrow, the only way is for them to cut down on consumption. Eat less, use less electricity, live in rented flatetc. When he really cannot make it, his electricity is cut off and a meter is installed so that he can use electricity only when he has money in his cash card so that the govt owned monopoloy Singapore Power does not have to risk non-payment that will eat into its profits.
There is little doubt that the current crisis and the unavoidable recession that follow will cause the most pain to the lower middle and low income members of our society. My point is their plight is not caused by the own lack of ability to earn more but by a system that our govt has chosen and bought into to achieve a high rate of economic growth. This govt is allegic to higher corporate tax as it is to welfare for the poor. The system is not equitable, it is not just...things have to change.