The surplus is squandered, welcome to debt

And, down we go

I bought a high-end mobile phone recently. While I saved for it, and in the run-up to the purchase, I was extremely excited and interested in the industry. Every new technology announcement was cause for wild speculation. Now I have my phone and I am no longer interested.

It is the classic biblical tale of the seven abundant years and the seven lean years. Everything is cyclical.

At some point, all of us get old enough to want to stop working and retire. Not all of us will be able to. Those who failed to save during our most productive years fall back on relatives, friends or even the state, in order to survive.

Businesses go through similar cycles. New products, or surges in consumer-confidence, create massive opportunities for profits. Businesses seem to be awash in breathtaking amounts of cash during boom-time. It is also during these periods that executives come under tremendous pressure to “give back” the money to the community through social investments.

Executives want to be loved, and they don’t mind since it isn’t their money anyway, so they spend freely. Charity splashes vie for attention with new corporate headquarters and lavish bonuses.

Cycles change. Companies must start to cut costs and rely on savings as the cycle shifts downwards. If they didn’t save, then they go back to their investors; those same investors whose money they spent so freely during the good years. The investors may balk, at which point business leaders turn to government.

There are few businesses which will remain unaffected during an economic crisis as severe as the one we’re going through. Those that were prudent will survive better than those who weren’t.

In the US, GM has received $13.4 billion from their government in order to keep the company afloat. Chrysler has received $4 billion. GM believes they may need a top-up of $30 billion still. The South African government has just announced a raft of measures to “save” local jobs.

The problem is that few governments invested wisely during the tax-boom period either. China and Japan have tremendous surpluses, in the trillions of dollars, but they are the exception. Governments were just as excited by the tax bonus and have been as frivolous as teenagers with a gift from granny.

The responsibility for paying off the hangover is like a game of pass-the-parcel.

Consumers borrowed excessively and spent unwisely. They ran up huge debts, lived beyond their means and left themselves a cash shortfall a few years ahead. Businesses pocketed consumers’ money, spent it unwisely on major bonuses to senior executives and new corporate jets. Politicians declared that all this wealth was entirely due to their economic foresight and spent the tax dividend on new presidential jets, champagne parties and faux Tuscan homes.

This could only continue as long as consumers still found new and exciting things to buy, and were prepared to go into debt to do so.

Government’s response, of massive stimulus packages and protectionist import tariffs, will fall back on consumers as well. The stimulus packages will have to be paid from even higher taxes, and the tariffs will raise the price of all goods.

The ultimate recipient of the parcel when governments promise to spend more, or raise product prices to give local companies higher profits, is the same consumer who triggered the boom in the first place. You.

Would that political and business leaders learn that the best time to invest for the worst times, is when the going is good.

When things turn bad, it is far too late to demand major investment. It is like expecting that, after a lifetime of toil and sweat, a recent retiree will go back down the mine and work twice as hard.

The surplus has been squandered, and now we are all to be held to account.

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