JOHN CLARK's Blog

The revolution in communications has been the central theme of my work for the last decade, since plugging into the internet, turning to digital technology for media production and slowly abandoning 'old media'.

What I hadn't taken much notice of has been the change in my spending over the same period, but this is a rough list of the 'print' media we no longer buy on a regular basis:

Germany newspapers and magazines: Die Zeit, Der Speigel, TagesSpeigel (Berlin), Frankfurter Allgemeiner Zeitung: say Euros700 less per year.

UK newspapers and magazines: Guardian, Economist, Financial Times, Independent, Private Eye, UK Vogue, House and Garden, Screen International, New Statesman: say Euros3000 less per year.

US publications: Variety (international edition), New York Review of Books, say 300Euros less per year

There is also a saving on soap, because of no longer having to wash newsprint smudges off your hands. There is also an enormous reduction in the amount of paper to be bundled up for recycling.

However, as well as the 4,000Euros a year we save directly, the amount of advertising digested (and paid for by advertisers), has contracted enormously.

My guess is that I watch perhaps 80% less broadcast television than 20 years ago and 90% less radio. I also guess I spend half as much on books, partly because the number of titles you need to get are smaller once your bookshelves already have most classics.

I spend a lot of time online, reading the newspapers and magazines I no longer buy and follow various communities, reading postings and swapping opinions, but that too has become less costly. Our early internet connection was costed by the minute online, then by the volume of traffic, now a monthly 'flatrate' covers the lot. The same is true of phone calls. A flat rate for phone and net now costs 75% less than our bills a year ago. Online the mobile services still feel expensive, but I expect within 5 years that they too will be fully costed on a 'flat rate'. There are probably a couple of thousand euros savings in that mixture too.

So the change in my media habits has led to an overall reduction of about Euros6000 a year on goods and services, or the equivalent of a month or two's average wages for a journalist, publisher, or tv technician.

Its quite a big change.

The difference in a company's commercial performance that leads to hefty profits, just getting by, or thumping great losses can be quite slim. Change the exchange rate for an exporting company, the level of demand for a product, or re-price in response to competition and the health of a business can wither with alarming speed. Shareholders and banks that will happily lend or provide capital for new investment are never going to be happy if the same managers ask for a dollop of cash just to keep going. When does aggressive price cutting turn into a closing down sale? A point arises when every-one concerned, including governments, have to ask themselves a simple question: 'Do we want this business, or not?'. If the answer is no, or not really, or not particularly then a shop, a factory, a company, or a whole industry will go to the wall, before anyone has seriously assessed the situation.

Much of the investment in Eastern Europe since the collapse of communism has been based on wishful political thinking, as minor competitive advantages based on low wages were leveraged into huge incentives to make these countries 'attractive investment environments'.  Somewhere in the background mumbling of business rhetoric, lurked the undefined assurance that the EU and Germany in particular would come to the rescue, when trouble arose. The rhetoric hasn't changed. German Ministers emerge from international conferences to offer bland assurances that Eastern European countries will be rescued. The founding myth of the 'Euro' is that the strength of the German and
French economies is sufficient to cover the underlying weakness and endemic corruption of other member
state economies. The question that arises is whether Germany, in particular, is able to
live up to its word, or are EU's leaders engaging in a massive game of bluff?

German Foreign Minister Frank Walter Steinmeier is leader of the German Social Democrats (SPD), which he joined shortly before becoming its leader. Second in command of the Coalition Government under Chancellor Angela Merkel, Steinmeier is her main rival for the Chancellorship in the general election later this year.

This week as business confidence falls to its lowest since Unification, Steinmeier has unveiled the new SPD programme. Strong on new regulations (paperwork is a German specialism), the SPD stance on the economy is sentimental electioneering proferring concepts of awesome banality,"We come from a culture of small, family-owned businesses",with the goal "to end the short term focus on short term returns among businesses and investors".

Alongside other measures, the SPD will extend the period of time investors must hold shares before paying capital gains tax on their profits. At a time when institutional and private investors alike are facing catastrophic falls in the market value of shares, this is pretty irrelevant. Since the hyper-inflation of the 1920's, Germany policy-makers have always railed against speculators and the dangers of inflation. It is the easiest form of ineffective populism, as most Germans lack the wherewithal to speculate in the first place.

Families certainly play a more central role in Germany's biggest companies, many of them 'public companies', than in the USA or Britain. But is this a 'culture of small, family-owned businesses'? Volkswagon is a subsidiary of Porsche. Holzbrinck and Bertlesmann are major international players in the media. The Quandt family have played a major role in BMW's fortunes, while the Continental tyre company has recently been the subject of interest from private industrialists and an acquisition deal of disastrous proportions. The patriarchal owner of a drug manufacturer recently lost a fortune shorting Volkswagon, then killed himself, leaving the 'family' businesses facing chaos. The notion that this is a culture of 'small family-owned businesses' seems oddly nostalgic coming from the Socialist Party. It surprises me that the Steinmeier-socialists should be so relaxed about the enormous concentration of industrial and commercial power in such private hands.

There is an enormous contrast between  Germany's role in the world economy and the structure of its internal 'local' economy. While Germany's major corporations internationalise themselves, the backbone of the 'local economy' is property and the rents paid by tens of millions of tenants for their homes. Personal debt in the UK is so much higher than in Germany, because most people are buying their homes through mortgages. One reason German's save is that they expect to continue paying rent in old age. Since Germans rely mainly on state pensions, funded by a levy on employers and employees alike, Germany's biggest businesses are not burdoned with 'company pension funds'. So, the 'financial institutions' in Germany have a rather different balance to those in other countries. The central place of banks and building societies (S&Ls) in housing finance is proportionally smaller, while the 'pension funds' have only a tangential role in people's lives. 

It is therefore much easier for the German government to propose tightening up the rules on funds, as they are much more clearly associated with 'private wealth' and much easier to wag a finger at than would be the case in Britain, where prospective pensioners are concerned about their funds' performance.As Steinmeier proposes, "The government should set limits on the amount of debt private equity investors should be allowed to use when taking over businesses. Excessive leverage had not helped the economy, but 'destroyed healthy companies' by saddling them with unbearable levels of debt, "We do not want to destroy private equity, but we must establish new limits to the amount of debt these investors can raise to make acquisitions." "

Blame the funds is an easy accusation, when none of your constituents are beneficiaries. As for the promise to end 'short termism', well, everyone will recognise that it is easier for a politican to evoke dreams for the distant future, than address the issues of the day.

So what kind of a place is Germany and could the Steinmeier republic live up to its promises to 'bail out' Eastern Europe on top of its de facto commitment to funding the EU's western european basket cases in support of the Euro?

The short term prospects look pretty grim for 61,000 Volkswagon workers put on short time this week and for anyone associated with the car industry as parts suppliers, manufacturers, or distributors. A bubble of temporary demand has been created by offering trade in bonusses for very old cars against new models. But all the major car-makers have shut down factories for extended Christmas breaks, some of which began in early December and went on into the New Year, so the whole auto industry is facing trouble and Germany has a car based economy.

Officialy there is about 8% unemployment already, but another million or more workers are earning benefits plus €1 per hour under Govnerment 'make-work' schemes, an immense drag on the public purse. Yet more are employed in so-called €400/month jobs, which attract no tax, or levies for pensions and social contributions.

As spending moves from high value items attracting high levels of VAT (turnover tax) towards essentials bringing in 12% less, the tax system is going to see falling levels of revenue, on top of the expectation that only the most incompetent of accountants should leave a company with liabilities for corporation tax in the coming year. 

As young people have moved away, towns across the former East are demolishing homes in their thousands, leaving whole regions as geriatric enclaves of little, or no productive economic purpose. Is Land Brandenburg Germany's answer to the real estate disasters of Florida?

Germany's banks, through their international subsidiaries, appear to have indulged in the madness of complex derivatives and exposure to sub-prime mortagages.  Bank closures and amalgamations have become an almost weekly occurance as the gaping holes in their balances sheets become apparant. Even when the Government wants to mount a rescue, as in the case of Hypo Real Estate, complex legal issues stand in their way and the 'Loan Rangers' may not be able to bring help in time. As 'Hypo' is comparable to Lehmann Brothers in size, the issue of its survival is no small question for the whole of Europe.

In a desperate attempt to keep things on track, the German government has provided the largest financial boost in Europe, amounting to 1.6% of GDP. Within a couple of months, it should become clear whether this massive Keynesian intervention will have any effect at all. Should even one of Germany's major international companies, like manufacturers Siemens, or automaker Daimler, or insurer Allianz, get into trouble, then the effort will almost certainly have been in vain.

  Germany's politicians may be in a state of shock, or even denial about the seriousness of the current crisis, but the long-term horizon that Steinmeier want to focus on has all the dreadful signs of a forthcoming capitulation.

"It's not as bad as it looks," said Andreas Scheuerle, an economist at DeKaBank in Frankfurt, "The main drag is the current conditions component. Expectations on the other hand have improved considerably in the past two months, showing there is hope global policy packages and lower commodity prices will revive the economy in the seond half of the year," report Bloomberg, 24/2/09. Let's hope he's right!

  Is this the economy that is going to rescue Eastern Europe?

(Steinmeier quotes here from the Financial Times, 22/2/2009) 

'Year Zero' entered the vocabulary at the end of World War 2, when Germany was in tatters and a wholesale reconstruction of institutions, government, industry and services was imperative. A line was drawn under the recent past. Year Zero meant a new beginning. Italian neo-realist director Roberto Rosselini also used the phrase as the title of a film.

The intense pressure on Government and the whole of society as they nurse the financial sector losses invites comparison with Year Zero and creates a once in a century opportunity for policy-makers and strategists to reshape the British economy. While crisis management to avoid collapse is essential in the short term, those economic and industrial policies based on restoring market equilibria address symptoms, rather than reshape the structure and culture of economic activity and beyond that, the kinds of lives people lead.

Thankfully Britain has not faced any physical destruction, merely the collapse of credibility among its financial institutions. Like soldiers facing demobbing, many of its most talented young people have chosen jobs which make little long term sense and may soon be free to follow more productive careers. They deserve encouragement, rather than unemployment.

Oddly, I am beginning to feel rather optimistic about the UK's prospects. The current market value of 'toxic' debt is based on the assumption of default. I expect this will prove to have been exaggerated (as an end of year book balancing exercise) and a real return will be won in the medium term. Combined with the massive devaluation of the pound in the last half year, the nationalised banks could look extremely attractive in two or three years, when EU competition rules will begin to create pressure for re-privatisation. Before that happens, ownership and economic power will have moved at least temporarily from private hands to government and could provide a strong base for a planned recovery with targeted investment in industries for the future, given that the service based economy has demonstrably failed. This could be the shock that enables to UK to begin a new path based on new and emerging technologies. A lot depends on the quality of the 'plan' which might emerge.

What kind of Britain is desirable, one based on patching up and re-constituting industries and organisations associated with past success and current failure, or creating a new environment based on forward looking prognosis' of technological and organisational change and a targeted framework of support for investment opportunities based on wealth creation, rather than financial opportunism. 'No more lifeboats for sinking ships', as I wrote in my novel, 'The Swoop', should at some stage be signalled to reluctant late-arrivals for the rescue. Reluctance and resistance to change should be recognised and acknowledged by allowing adherents to discredited strategies to follow their instincts, but they shouldn't expect to be bailed out!

 Britain has some interesting advantages. Firstly, the last decade has already seen big improvements in facilities for education and health care, including a large scale extension of higher education. Secondly, the civil infrastructure of physically connectivity is acceptable by international standards. There is no British 'New Orleans'. Thirdly, despite devolution, the lack of regionalisation means the UK need not address crisis' like the California State default. Fourthly, most of its heavy industry in the UK, car production, steel etc, are foreign owned, so the epicentre of corporate collapse will be elsewhere. Tokyo, Detroit, India? Luckily, British roads match Japanese right hand drive cars. Closing the UK's blastfurnaces has probably achieved the cut in CO² expected under climate change commitments for this year. Fifthly, the collapse of house prices and commercial property values will make recovery cheap. Additionally, with a long coastline, two closely linked long term issues can be addressed simultaneously, CO² free power generation and rising sea levels, as potentially massive infrastructure projects could be initiated with a very local character of global significance.

Having taken control of the banks, the first steps towards regeneration must come from government. Some important lessons might be learned from Germany, most importantly by creating a body similar to the KfW, with both a national and regional structure. This could be created as a partnership between commercial banks, the neo-nationalised banks and government to provide a tiered pathway of business finance from start-up to major corporate status, with products designed for businesses as they progress through each stage of business development, including specific projects at regional, national and international level. As Investor's in Industry, 3i's went some way towards this before being floated off as an independent business. A new institution with a wider remit is now desirable.

While this may be worthwhile in itself, the relationship between Theoretical and Applied Research, Industrial R&D, Investment and Business strategies should also be enhanced. Germany has two tiers of research institutions, the Max Planck Institutes for Pure Research and the Fraunhofer Institutes for Applied Technologies. UK Universities have departments that function well within the European network of research clusters, but this could be encouraged to go further with the creation of a deeper range of autonomous research centres on the German model. Analogous to the British Research Councils, the German Research Association (DFG) is a body open to enable applications for research funding by any qualified individual (doctoral) whether they are linked to an institution, or work independently. That simple extension of the Research Councils' remit would be welcome.

Institutional reform of this kind would make it easier for British initiatives to mesh with resources available via the EU in Brussels.

Which directions British industry should pursue is a wider issue, perhaps one of the tasks for Mandelson's Department of Business, Enterprise and Regulatory Reform, however a shift from commerce to industry seems unavoidable given the turmoil of recent experience and the rediscovery of the old adage that it is much easier to close things down, than to create something new. One thing I would like to see, is the creation of entrepreneurial teams to work in partnership with university research teams and patent holders to exploit and develop opportunities based on new technologies.  However, if regulatory reform wins pre-eminence in that Department, then it is unlikely much will be achieved.

'The Swoop' can be downloaded here: http://www.berlinpicturecompany.com/ebooks/ebooks.html

As a result of the Russian's
bizarre gas 'cut offs', I suspect a lot of oil is now being burned for
power generation throughout Europe, offsetting falls in demand elsewhere. I'd be
interested to know how this is effecting refineries, stocks and
deliveries. A couple of
weeks or more without gas across central and eastern europe must amount
to several million barrels of oil equivalent a day, with even the UK
being more cautious about gas consumption (hopefully) despite being
more or less independent of Russian supplies. Should we anticipate a
greater spread between the European benchmark (Brent) and WTI in the
USA?



Worth noting that the European monitors are confirming that in
'restoring' supplies, rather than simply using the normal pipelines,
the Russians have been using odd routes, which the Ukrainians cannot
handle straightforwardly. This is vicious political game.


At the same time, we are told that tankers full of crude are being used as storage. Keeping crude oil in tankers for any length of time is a form
of hoarding, which I suspect will be used as a way of manipulating
supply/price to the refineries to the benefit of speculators. Since shipping costs have collapsed,
clearly shipowners will be relieved to have cargoes sitting at anchor,
rather than having to pay for fuel to have them sailing around at a
potential loss.



This is a fascinating sub-plot within the framework of the global
economic crisis. It must be hurting the Russian economy at a time when
gas prices are at a historic high and set to fall, with their currency
in an endless pattern of devaluations. Who are the Kremlim trying to
bankrupt, themselves as owners of Gazprom, the oligarchs, international investors and companies with projects in Russia, the
Russian people as a whole, or is it all aimed at the former Soviet satellite countries, the 'near abroad' as Russia so quaintly describe their neighbours? That seems to be the question. Whichever, it is an expensive way of destroying political goodwill.

'The Swoop' is a novel I wrote about a bunch of historians looking back at our own era from about 300 years in the future and begins with a take on the Great British Crash and the financial crisis I anticipated a couple of years ago (2006) and thought might happen in 2010. Events have overtaken my thinking, novels take time to write, but in many ways the crisis is emerging much as I anticipated though on a broader geographic scale. You can download a copy of The Swoop here, http://www.berlinpicturecompany.com/ebooks/ebooks.html, and pay for it (€5) if you want to.

So, how is the real Crisis differing from my fictional version?

The first thing to understand is that my historical view is based on the notion of there having been a remarkable recovery, The Swoop, based on sweeping away many of the underlying assumptions around the British economy and its political landscape. I have long derided the shift from an industrial economy to a service based, post-industrial, model proposed by Thatcher and entrenched by New Labour under Blair and Brown. The concept of The Swoop goes further.

The Service-based Economy tends to overshadow one of the basic rules of capitalism, which is that capital gets used up. Everyone recognises that a used car, or an old machine, is worth less than a new one. Accounting systems acknowledge this through the notion of depreciation, where the capital value of an asset is written down to 0 over a period of time, beginning from the moment it is acquired. A service economy thrives off the notions of intangible assets and the expectation that land and buildings have instrinsic worth. This is a long standing British tradition. When the English Revolution began in the 17th century its politicians had to work out how to replace the King and a society built on notions of aristocracy seeking an answer to the question 'who belongs in society and should have the right to vote?'. The Putney and Whitehall Debates came up with the notion of property being the measure of a man's worth (women weren't really taken into consideration, except as chattels - tangible assets/liabilities).

This notion of having 'an interest' in society is very similar to the New Labour rhetoric of stakeholders, in which people's interests are based not only on their humanity, but also their social and economic status. Some people are worth more than others. So we write down the value of industrial investment, putting tremendous pressure on businesses to requip and modernise as part of their refinancing, which means a service based economy requiring nominal caqpital investment is a much cheaper way of creating new businesses and getting people into work, but it is much more fragile.

What I had failed to anticipate was the extent to which the hedge fund industry had infected the traditional banks with expectations that could not reasonably be fulfilled. Hedging is based on using large amounts of money to take advantage of very small fluctuations in asset values, share prices, bond yields, commodities. The basic principle is very simple. A small, or traditional investor must wait for significant shifts in value before being able to sell at a profit. It costs money to buy and sell, the buying and the selling receive different prices in the market. A fund relies on economies of scale to make small prices fluctuations meaningful. There shouldn't really be that many hedge funds, but they have proliferated like rabbits.

I have been astonished to see that people were impressed that Madoff could regularly create a 1% profit per month. Much is made of the 'funds' abilities to play the markets both ways, but I suspect their real advantage is simply scale. Well half a percent has been easy to achieve for small investors by leaving their cash in a German Post Office Savings banks, so if the extra half per cent per month represents an outstanding performance, the gain is not especially impressive. Venture capitalists would demand a far better performance from a new business. Of course, a fund requires next to no capital investment so these requirements can be overlooked, as scale buys credibility, but their fragility is based on the limits of competence. This is perhaps where the traditional banks fell foul, as more and more semi-competent people of average ability were swallowed by an industry that once prided itself on outstanding candidates being trained to elite MBA's at Harvard. The MBA now seems to represent a modest business studies qualification - another symbol of devaluation.  Merryl Lynch's 'thundering herd' of agents, were mimicked by the 'wandering crowds' of Pooterish British bank clerks and building society salesmen. 

I still suspect the worst of the British Crash is yet to come. While the global economy will teeter into recovery, the British 'fundamentals' look all wrong, making it difficult to see where recovery will begin.

First and foremost is the massive over-valuation of property, which cannot really be rectified until land prices and the size of plots for building land are reassessed. No-one can build cheaply on expensive land. No-one can build well on pocket handkerchiefs.

We have already seen banks nationalised. If there is a severe sterling crisis against all the world's major currencies, then the banks will lose their sheen and my exaggerated scenario of rump institutions based on debt collection and zero credit may become a reality.

What my own scenario envisions is the creation of an economy based on robust new enterprises, involving large scale capital investment and this is where the fun starts. What kind of industries and what kinds of technology should be involved? 300 years into the future, I built in some notional structures, like a global hologram, a tourist industry taking advantage of climate change and some pretty dramatic changes in geography. There is also a downside to be read about. Work out which of these might make sense and you might be able to settle on some businesses to build for the future and some it may be better to avoid.

'The Swoop' is volume three of a trilogy about 'authenticity' that began with 'Lone Hunter', the story of a book thief from Berlin in a world of criminal fakery and will be followed by volume 2 that takes a look at the issue of cultural authenticity and personality. What we might learn comparing the three, is how the frameworks of fiction can be authenticated as fact by the diligence of historians armed with new technology. These satirical novels are also intended to make people smile. 

Madoff's "investors" are loudly claiming that they have lost many millions.

If Madoff's funds really were a large scale Ponzi scheme, which may not turn out to be the case, then many of the early investors have already probably benefitted to the tune of many other people's subsequent investment. I wonder whether the authorities should be working back through the calculations and be asking the some-time beneficiaries to return what might be considered 'ill-gotten' gains, if that proves to be the case? Will it ever be clear whether Madoff's schemes really were a Ponzi game.

The pyramid of a Ponzi must mean that long term participants have, perhaps unwittingly, been the recipients of payments, which were inappropriate. Should they be looking at their portfolios and wondering what to sell to make good the deficits?

Merry Christmas.

2009 looks like a frightening prospect for Russia.

Already battered by falling oil and metals prices, a collapse in the value of its gas exports will follow in the coming half year. Russia contracts with Europe are pegged to the price of oil, with a lag of several months. So, as winter begins mildly and European industry shuts down in the face of the world economic crisis, Russia is probably experiencing lower export consumption than in recent years and the trajectory of the value of its gas exports is set to plummet. It is already well known that the government's budget has been calculated with oil at $70/barrel. The rouble has been repeatedly devalued already and the first signs of social unrest have begun to surface with demonstrations against import tarifs on foreign cars.

What might 2009 bring? In the trajectory of Russian discontent, summer seems to have been a boiling point (the July Days), while autumn has been definitive, (the October Revolution). Of course, the pathways of repression are strange and unpredictable. Who knows what is to come?

How long can a car be left standing in a field and still be sold as 'new'? Whatever your answer to that question, Germany faces hard times, as industrial production slumps and the Euro has temporarily emerged as the preferred currency for overvaluation in the financial markets.

Germany hosts a range of world class companies, in engineering, car-making, pharmaceutics and other industries. It also has a large and
complex system of social services and a massive public sector. Germany
is also the de facto paymaster of the European Union. A lot of damage is being done and the main victims will be ordinary people, who lose their jobs, see social provisions contract and  their savings curtailed.

There is a stage in national affairs when the accepted way of doing things turns to myth, despite a growing list of contradictions that should have brought those notions into question. Britain is no longer an imperial power, nor a significant 'Ally', yet holds dear to its permanent seat on the UNO Security Council, or the notion that the Greenwich meridian defines the world. The USA clings fitfully to the notion of the 'pioneer spirit' and the 'American Dream'.

In Germany, the prevailing concensus is known as the 'social market economy', its founding principle a compromise between labour and employers to achieve concensus, rather than pursue their conflicting interests through industrial strife. It is much closer to everyday decision making than the myths of many countries. All three major political parties subscribe to this convention, the SPD, CDU-CSU and FDP. The newer, Green and Left Parties have done nothing to challenge it. The rhetoric of concensus is adhered to, yet everyday German experience points to a practical dissolution of those concepts to become a myth, rather than a functioning 'modus operandi'. The global economic crisis is finally bringing this divergence into the open.

Industry was capitalised by the state though the decades of the 'wirtschaftswunder' and the state never challenged its commitment to provide social services, pensions and business finance. The first cracks in this system appeared during the passive political years of the Kohl Government and were brought into sharp contrast when the DDR was integrated within the Federal Republic following the collapse of communism. The wholesale sell off of East German industry and property via the Treuhand provided one of the first signposts of a new order based on speculative prosperity. The early nineteen nineties saw national champions like Siemens and Daimler, internationalise their corporate presense, culminating in Daimler's adoption of US accounting standards prior to listing on the New York Stock Exchange. Germany's publicly owned utilities, water, gas and power generation were redefined in large companies like E-on and Vattenfall, or the privatisation of Deutsche Telekom. This has culminated in the effective take-over of Volkswagon to become a subsidiary of Porsche. Encouraged by pressure from the EU in the name of competition, there should be no doubt that most Senior Managers were enthused by the prospect of being able to act like 'real businessmen', rather than proxy public servants and dazzled by the rewards that might unfold. There were surprisingly few corporate failures before the onset of the 'Credit Crunch', notably Mannesmann and some long established construction companies.

The era of German Unification is over. In the last decade a number of measures have dug deep into the roots of the social market, partly in the name of Unification. Public employees continue to be paid on different scales in different german regions, which added to emergency measures for job creation, led to a wholesale casualisation of the labour market, depressing wages and nullifying employers social contributions and pensions. Well qualified people have been encouraged towards self-employment. Skilled and semi-skilled workers are increasingly pushed towards agencies, reselling their labour to erstwhile employers. Poorly qualified people have been lured towards part-time 'mini-jobs' paying a maximum of  Euro100 per week, while the unemployed are forced into workfare programmes bring them no more than Euro1 per hour in addition to their benefits. Young people now accept that they will work for nothing at the outset of their careers, in 'prakticant', or 'voluntariat' job placements. Among those employed directly by the companies they work for, short-term contracts, or permanent freelance work has become commonplace. Only a tiny minority of newcomers to the workforce can claim the status of 'full time-employee' with all the attendant provisions of employment law that implies.

The logic behind these moves was often to maintain a semblence of employment in depressed areas and also to maintain services, like healthcare and education, in the major cities. The domestic economy has seen a gradual erosion of spending power and tax income, massaged and disguised by infusions of project based funds from Brussels. 

The consequences of these changes were disguised while the economy boomed and German exports flourished. With the collapse of German industry, not only as the global contraction takes effect, but also as German goods are priced out of world markets by the rising value of the Euro, the spectre of catastrophic deflation is arising  across Germany and no-one within the political or management elite has offered a single initiative to alleviate its progress, or its consequences.

As corporate Germany has diverged from society, the social market has died and its first victims are Germany's children. A recently announced increase in child benefits paid to all families will be denied to the very poor, as their social benefits will be reduced in line with the supposed increase. Already, a third of Berlin's children are said to live in poverty. Despite the consequences of their actions, which politician, or manager would openly admit that it is their intent to ensure that this proportion grows, that social deprivation and poverty is now their goal?

 

  'Quantitative easing' is merely a euphemism for printing money, or 'debasing' the currency. Within a framework of Keynesian fine tuning it may make sense. If it moves out of control the outcome is runaway inflation of a type Germany experienced in the 1920's. I usually give our visitors to Berlin a million, or ten million mark note as a present - they cost little and provide harmless amusement on people's return home, ending up on childrens bedroom walls.

The goal of most systems of economic management is to encourage growth within a stable system of valuation, reflecting real increases in wealth, while protecting the value of financial instruments, principally the currency for imports and exports, savings of all kinds including pensions and loans of all kinds including mortgages and the value of businesses as reflected in their balance sheets and share prices. They are all closely linked to ideologies based on different interests, (Harvard Business School MBA programmes and most management consultancies depend on a theory of the firm, Marxist economics on notions of equality, Keynesianism on gentlemenly rational behaviour, monetarism on quantitative analysis, Manchester economics and J.S. Mill on utilitarianism, etc.) For the last 200 years the big issue has been rationalising the relationship between the state and business, with many different outcomes. From time to time attention is drawn to different features of the economy, which are seen as new or emerging factors, such as globalisation (though economic historians argue that the economy has effectively been globalised for at least 700 years and internationalised since ancient times). Currently the feature of note is energy and pollution as reflected in the climate change debate, though many ecologists argue that human intervention in climate has its roots in the stone age when people started burning down forests. One thing all economic theories accept, is that the individual is trapped within a set of local conditions not of their own making from which it is nigh on impossible to disengage. There is no 'running away' and little merit in 'self suffiency', even though we might well be advised to grow some of our own vegetables.

Economies may be seen metaphorically as 'complex adaptive systems' (see Murray Gell-Mann's 'The Quark and the Jaguar'), in which powerful stimuli create unequal reactions in other areas of the system, yet also provoke a response in which the system changes its internal behaviour and characteristics.

The current conjuncture sees a number of powerful negative stimuli, each with unpredictable outcomes, the collapse of the property market, discredited products in financial markets, shutdown of major industries (how temporary, one wonders), wildly fluctuating commodity prices and complete disorientation in currencies. Its consequences include risk reduction (project cancellations) and hoarding (moving into gold or other 'safe havens'). There is also a perception that the geo-political balance of influence is moving away from the US and Europe to Asia.

At some stage, the world economy will settle into a new stable pattern, in which expectations and aspirations will have been redefined. Again, we only see the general outline of several big factors, digitalisation, increased skilling in many countries, the collapse of communism.

The response to the current crisis has so far been an exaggerated display of interventions based on Keynesian fine tuning, recapitalising the banks, falling interest rates, now the threat of printing money, or 'quantitative easing'.

If debasing the currency is the only option left, then it is worth asking whether any of the earlier attempts at crisis management have been worthwhile. Has the 'fine tuning' in the USA and UK been mere coarse panic measures? Might it have been better to let the banks collapse, if people are going to see their savings, earnings and purchasing power evaporate anyway? Should dramatic systemic change have been encouraged, rather than hindered? The lack of any clear political framework that will embrace systemic change means hindering systemic collapse was clearly rational. Yet the political challenge will not go away.

We have yet to experience any of the political consequences of the current crisis, however it might be possible to predict a chain of events that will lead decades into the future, just as the impact of the first world war might be described as characterising the whole of the twentieth century to 1989.
WW1 led to Russian Revolution and the end of the Ottoman and Austro-Hungarian empires, the Versailles Treaty led to German inflation and the euphoric 'Roaring Twenties' which culminated in the Wall Street Crash of 1929, introducing the 'dirty thirties' and Fascism, World War 2 (which cost 70million lives), the end of Britain's Empire and the Bretton Woods era characterised by two massive blocs divided by the Iron Curtain dominated by the USA, Soviet Union and their military - NATO and the Warsaw Pact.

It is probably time to engage with the politics of this crash, which belongs to the post-1989 era. As much as we try to defend our personal economic positions, in the medium term it will be politics that will define the way we all live, wiping out livelyhoods, or opening new routes to prosperity and the day to day mechanics of economic affairs. If political issues are seen only as symptomatic reactions, historians might well look back on our own era with the same contempt and in some cases downright revulsion that we sense when looking at the political creeds, Prime Ministers, Presidents and Dictators from the twenties and thirties.

My own unease with European Union, for example, reflects opinions many have expressed, the democratic deficit and an unusual bureaucracy. My more pressing criticism of the EU is that its basic framework (as represented in the various treaties and the so-called constitution) is passée and its failures stem largely from a refusal of individuals and institutions to engage in a fundamental debate about its structures and goals, while fumbling around the edges of policy and EU Programmes for local advantage. Worst of all is that across Europe, neither politicians, nor media, provide an accurate account of what the EU is doing and planning to do.

The Lothian question ceases to be relevant if your local economy is dominated by a 'fund' driven by investors from all corners of the world, who can ignore the legal and legislative framework that should determine how things can be done.

If Britain begins to resemble Argentina in its dependency on foreign interests, or like Turkey, or Spain in the 20th century with their rump of imperial grandeur and a shattered economy, some of the responsibility will lie in the quality of the political debate about the ways we want to live now.

All Governments are likely to be borrowing enormously in the coming year, as tax revenues fall and the demands for state funding rise. Slashing interest rates will make life easier for the Treasuries as they become borrowers of first resort, rather than lenders of last resort, a important reason for the reduction of base rates to zero, or close to zero. Issuing huge volumes of long term bonds at nominal rates of interest will have an interesting function towards establishing new benchmarks for the world economy.

Having lent the banks thousands of billions at highish rates, via tarp and other interventions, it will be clawed back at very low rates and effectively frozen for decades, say 30 year bonds, as an unattractive asset.

Since the alternative to supporting bonds issues is the threat of higher taxation and other unwelcomes moves, like printing money and debasing the currency, there will be little alternative for the institutions but to comply.

The only way the banks can limit this is by resuming lending to their clients, who will then avoid bankruptcy, stay in business, pay tax and keep wages flowing into the real economy. This institutional stimulus could have the virtue of being targetted to 'good' borrowers, sustaining the value of stocks and ensuring the flow of goods and services. If the institutions fail to play their role, then an accellerating deflationary spiral will gather momentum and wipe out yet further acres of assets and push those institutions into long term, rather than short term crisis.

A post-neo-classical self-sustaining endogenous slump can be achieved by classical economic means in a relatively short time. A general contraction is given extra momentum by unemployment, which hits government more than the private sector, as they have to pick up the costs, including lost tax revenue, (income tax, added value and sales taxes etc), unemployment benefits (both direct and indirect - all kinds of means tested allowances like drug charges) in addition to a decline in spending power by the unemployed.

My rough and ready calculation suggests each newly unemployed person might cost the treasury about 30,000UKP a year. If, as Blanchflower suggests, the UK faces 3m unemployed, this is a not insignificant number, say 90billion UKPounds a year. This is all matched by lost resources in factories and service industry workplaces, etc.

Creating a new full time job in high tec manufacturing probably requires the better part of 1mUKP, probably more, sometimes much more. Service sector jobs, like banking, require much less of course, as the investment in a desk, carpet and some IT is nominal. Despite this, getting 3m million people back to work is therefore a hell of a challenge. So to recreate a balanced economy, 1m high tech jobs - 1000billion, 1million low tech jobs 300billion, 1million service jobs 200billion - 1500billion total. Say the state pays half and institutions provide half the loans, the treasuries are still looking at finding 700bn to address the problem. Say the process was planned over 3 years, (far too short a timescale of course) we could be looking at say 1,000billion in new government spending to get back on track. That is only the UK and doesn't include a bill for retraining and getting the workforce up to speed.

As the UK is about 20% of EU population multiply this by 5 for Europe (5,000billion) and the same again for the USA, then add in the same again for the other 3billion people on the planet and you have some considerable sums, say 15trillionUKP, or about $20trillion.

This is a measure of the consequences of a collapse in normal commercial lending. It is also a measure of the consequences of the banks taking their eye off the ball to concentrate on products of limited merit, rather than seeking business that would contribute to sustained economic development.