WHEN THE MONEY RUNS OUT 4099.indd 29/03/13 2:23 PM 4099.indd 29/03/13 2:23 PM WHEN THE MONEY RUNS OUT THE END OF WESTERN AFFLUENCE STEPHEN D K I N G YALE UNIVERSITY PRESS NEW HAVEN AND LONDON 4099.indd 29/03/13 2:23 PM Copyright © 2013 Stephen D King The right of Stephen D King to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press) without written permission from the publishers For information about this and other Yale University Press publications, please contact: U.S Office: sales.press@yale.edu yalebooks.com Europe Office: sales@yaleup.co.uk www.yalebooks.co.uk Set in Minion by IDSUK (DataConnection) Ltd Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Control Number 2013935708 ISBN 978-0-300-19052-6 A catalogue record for this book is available from the British Library 10 2017 2016 2015 2014 2013 4099.indd 29/03/13 2:23 PM CONTENTS Acknowledgements Introduction Whatever Happened to the Decades of Plenty? Chapter Taking Progress for Granted Chapter The Pain of Stagnation Chapter Fixing a Broken Economy Chapter Stimulus Junkies Chapter The Limits to Stimulus: Lessons from History Chapter Loss of Trust, Loss of Growth Chapter Three Schisms Chapter 8 From Economic Disappointment to Political Instability Chapter Dystopia Chapter 10 Avoiding Dystopia Notes Bibliography Index 4099.indd vii 37 55 69 97 121 151 179 207 231 263 273 279 29/03/13 2:23 PM To Yvonne, Helena, Olivia and Sophie 4099.indd 29/03/13 2:23 PM ACKNOWLEDGEMENTS Thanks must go first and foremost to those who provided detailed comments on the manuscript I am particularly grateful to John Llewellyn, Peter Hennessy (or, to give him his full title, Baron Hennessy of Nympsfield), Chris Brown-Humes and Karen Ward for their extraordinary generosity in reading drafts of the entire book, in the process saving me from otherwise inevitable logical or factual embarrassment Diane Coyle was a source of inspiration when the book was in its planning stages Later, as she launched her own quest into the usefulness of economics, she encouraged me to think more deeply about the relationship between economics and history (her edited book What’s the Use of Economics? is essential reading for anyone wondering how to rebuild the reputation of our profession) Colleagues and friends have been important sources of support throughout In particular, my conversations with David Bloom, Richard Cookson, William Keegan, Sir Richard Lambert, John Lipsky, Rachel Lomax, Gerard Lyons, Stephen Macklow-Smith, George Magnus, Robbie Millen, Peter Oppenheimer, Alec Russell and Anne Spackman vii 4099.indd 29/03/13 2:23 PM When the Money Runs Out have been inspiring and entertaining in equal measure I have benefited from many hundreds of meetings with HSBC clients who have, at all times, kept me on my toes I should also mention the dozens of policy- makers who have offered me candid views on the economic challenges ahead but who, perhaps, would prefer not to be named! My economic thinking has been honed thanks to my involvement with fellow economists in a variety of different spheres, including regular meetings at the Bank for International Settlements in Basel, the Oesterreichische Kontrollbank AG (OeKB) in Vienna and the Accumulation Society in London Although we have rather different views, I’m grateful to Richard Layard (Baron Layard of Highgate) for having invited me to join a panel debate on ‘Stimulus versus Austerity’ at the Houses of Parliament, chaired by Evan Davis The other members of the panel – Paul Krugman, Jonathan Portes and Bridget Rosewell – helped clarify some of the thinking contained in chapter As with my last book, I owe a huge debt of gratitude to Phoebe Clapham at Yale University Press, a truly brilliant editor who is never afraid to tell me when something just doesn’t work I am also, as ever, enormously grateful to Heather Nathan and Katie Harris At HSBC, Stuart Gulliver and Samir Assaf were, again, incredibly supportive of my book-writing ambitions, encouraging me to take time off to pursue my quest I offer thanks to Stuart Parkinson and Michelle Nash for organizing my sabbatical with the minimum of fuss Once again, my economics team has performed in exemplary fashion: special thanks go to Janet Henry and Madhur Jha, who contributed to an incredibly high standard of economic analysis in my absence I also acknowledge the help and support of Pierre Goad, Charles Naylor, Jezz Farr, Lisa Baitup and Fiona McClymont Nic Mason and Debbie Falcus have kept me sane throughout, while the superb University of Bath students have provided me with much-needed statistical assistance viii 4099.indd 29/03/13 2:23 PM Acknowledgements Finally, and most importantly, I am hugely grateful for the amazing support provided by my wonderful family My wife, Yvonne, and my three daughters, Helena, Olivia and Sophie, have at all times offered understanding, patience and love For my children’s sake, I can only hope that the recommendations at the end of this book are heeded ix 4099.indd 29/03/13 2:23 PM When the Money Runs Out Bernanke, B S ‘Deflation: Making Sure “It” Doesn’t Happen Here’, Remarks before the National Economists Club, Washington, DC, 21 Nov 2002 Bernanke, B S ‘The Economic Recovery and Economic Policy’, Speech at the New York Economic Club, Board of Governors of the Federal Reserve, 20 Nov 2012 Bernanke, B S Essays on the Great Depression, Princeton University Press, Princeton, 2000 Bernanke, N and James, H ‘The Gold Standard, Deflation and Financial Crisis in the Great Depression: An International Comparison’, in B S Bernanke, Essays on the Great Depression, Princeton University Press, Princeton, 2000 Beveridge, W Social Insurance and Allied Services, HMSO, London, 1942 Blanchard, O and Leigh, D ‘Growth Forecast Errors and Fiscal Multipliers’, IMF Working Paper, Washington, DC, Jan 2013 Board of Governors of the Federal Reserve ‘Monetary Policy Report to the Congress’, Washington, DC, July 2010 Borio, C ‘The Financial Turmoil of 2007–?: A Preliminary Assessment and Some Policy Considerations’, Bank for International Settlements Working Paper No 251, Basel, Mar 2008 Broadberry, S and Howlett, P ‘The United Kingdom during World War 1: Business as Usual?’, University of Warwick, June 2003 Brown, W A ‘The World of Sterling and the World of Gold, September 1931 to April 1933’, in W A Brown, The International Gold Standard Reinterpreted, 1914–1934, National Bureau of Economic Research, Cambridge, MA, 1940 Browne, J and Hood, A ‘A Survey of the UK Benefit System’, IFS Briefing Note BN13, Institute of Fiscal Studies, London, Nov 2012 Bruner, R F and Carr, S D The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, Wiley, Hoboken, 2007 Campante, F and Glaeser, E ‘Yet Another Tale of Two Cities: Buenos Aires and Chicago’, NBER Working Paper No 15104, June 2009 Campbell, C Scapegoat: A History of Blaming Other People, Duckworth Overlook, London, 2011 Coggan, P Paper Promises: Money, Debt and the New World Order, Allen Lane, London, 2011 Congressional Budget Office, ‘Trends in the Distribution of Household Income between 1979 and 2007’, US Congress, Washington, DC, Oct 2011 Congressional Budget Office, ‘The 2012 Long-Term Budget Outlook’, US Congress, Washington, DC, June 2012 Coyle, D The Economics of Enough: How to Run the Economy as if the Future Matters, Princeton University Press, Princeton, 2011 Coyle, D (ed.) 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Gala, Federal Reserve Bank of San Francisco, San Francisco, 21 Oct 2005 Yellen, J ‘A Minsky Meltdown: Lessons for Central Bankers’, Board of Governors of the Federal Reserve, Washington, DC, Apr 2009 Zarnowitz, V and Moore, G ‘Forecasting Recessions under the Gramm-Rudman-Hollings Law’, NBER Working Paper No 2066, Nov 1986 278 4099.indd 278 29/03/13 2:23 PM INDEX Africa 19 ageing populations 78, 88, 250 age-related expenditure 48 generational divide 171–4, 241, 243–5 Germany 136 Japan 23, 25 AIG 30 Akerlof, George 123–4 American War of Independence 154 ancien régime and the French Revolution 151–7 Angola 19, 82 Anwar Ibrahim 200 Arab Spring 160 Argentina 13–19, 24–6, 39, 42, 161 Arizona Support Our Law Enforcement and Safe Neighbourhoods Act (SB 1070) 192 Armstrong, Neil 9–10, 35 Arrow, Kenneth J 132–3 Asian crisis 192–6 recovery from 204–5, 206, 208–9 asset prices 62–3 asset-backed securities 73 Audit Commission 173–4 austerity 67–8, 111, 205, 226, 242 and political extremism 227 Statute of Labourers 211 versus stimulus wartime 114, 143 see also Snowden’s budget Australia 15, 16, 117, 187 Austria 225 baby boomers 1, 7, 243 bailouts 61–2, 241 Balls, Ed 101 Bank Negara 199 Bank of England 33, 61, 90–2 economic growth forecasts 74 interest rates 71, 102 and Libor 126 Bank of Japan 21 banking free 255, 257 and protectionism 215 union (eurozone) 256 banks 125–31, 252–7 bankers’ rewards 48–9 failure 30–1, 255 liquidity buffers 84, 90 mortgage loan-to-value ratios 51–2 regulatory uncertainty 251–2 and savers 136 see also central banks Barclays Bank plc 126, 127–8 279 4099.indd 279 29/03/13 2:23 PM When the Money Runs Out Basel III regulations 83 Bean, Charlie 63–5, 75 Bear Stearns 30 Belgium 184 Ben Ali, Zine al-Abidine 160 Benedetti, Count 182 benefits 47, 203–4 see also social spending Bernanke, Ben 4, 21–2 Beveridge, William 44–5 bimetallism 184–5 Bismarck, Otto von 182 Black Death 209–10, 213 blame culture 108, 161, 189, 200–1, 226–7 Blenheim Palace 222–3 bonds 73, 77, 80, 86, 221 borrowers 97, 133–4, 137 borrowing, government borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues Botswana 19 Brazil 19, 89, 163 Britain see UK (United Kingdom) British Empire 14, 15, 16 Bryan, William Jennings 187 budget deficits 58, 69, 79, 110, 117 France 54 Germany 54 Spain 54 UK 52, 54, 66–7 US 53–4, 66–7, 118 Buenos Aires 15 Business Week 29–30 Buxton, Thomas Fowell 128 California 173 Calonne, Charles-Alexandre de 154–5 Canada 15, 16 capital adequacy ratios 256 controls 16, 199–200, 201, 234 flight and the euro 191 foreign 198, 202 immobile 250–2 markets 31, 133 and the rise of living standards 180 Carr, Jimmy 148 Case-Shiller house price index 63 Catalonia 153 Central African Republic 163 central banks and bailouts 241 expansion of remit 86 and government debt 80–1 and illusory wealth 64–5 interest rates 71 and a new monetary framework 245–6 nominal GDP targeting 247–50 and politics 78, 89–90, 91–5 and redistribution 121 see also quantitative easing (QE) Chicago 15 China and commodity prices 77 financial systems 135 and globalization 167 income inequality 160, 163 living standards 27 per capita incomes 251 and regional tensions 228 renminbi currency 177 silver standard 183, 185 trading partners 82 and the US 12, 139 Chinese Exclusion Act 188–9 Chrysi Avgi 227 Churchill, Winston 103 circuit breakers 242, 256 Coinage Act 184–5 Committee on National Expenditure 98–9 commodity prices 77, 109, 116–17 conduits 129–30 Connecticut 163 consumer credit 11–12, 52, 135 contingent redistribution 236 credit consumer 11–12, 52, 135 derivation of word 125 expansion 56–7 and the property boom 61 and protectionism 215 queues 80–1, 83–4, 85–9, 217 Creditanstalt 225 creditors creditor nations 224–5, 232 and debtors 139–43, 174–7, 188, 191, 232–4 280 4099.indd 280 29/03/13 2:23 PM Index foreign 193, 221, 223 home grown 138 Japan 22 cross-subsidization, of banking services 256–7 currencies 177, 221 ‘currency wars’ 82, 190 see also eurozone; renminbi; ringgit; sterling Darling, Alistair 92–3 debt and asset prices 63 and central banks 241–2 eurozone crisis 145, 235–9 excessive 67, 213–14 France 154 household 12, 63–4, 85 and inflation 220 Japan 23 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 repaying 34 debt deflation 115 debtors and creditors 139–43, 174–7, 188, 191, 232–4 eurozone 224–5 home grown 138 deficient demand 57, 59 deficit expansion 119 deficit reduction 242 deficits 58, 69, 79, 110, 117 France 54 Germany 54 Korea 202 pension funds 75, 172 Spain 54 and surpluses 134–7, 232–4 UK 52, 54, 66–7 US 53–4, 66–7, 118 deflation 21–2, 185 democratic deficit 143, 221 Deng Xiaoping 12, 160 Denmark 158 the Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Dexia 30 Diamond, Bob 126 Dickens, Charles 43 disaster-avoidance District of Columbia 163 dollar standard 190 dotcom bubble 169 Draghi, Mario 94 economics profession 3–4, 5–6, 258–9 Edelman Trust Barometer 148 education 12 financial 257–9 literacy 15 training 254 Edward III 211 Egana, Amaia 153 emerging nations 28, 116 employment 115–16 see also labour; unemployment enfranchisement 222, 242–4 the Enlightenment 6, 11, 154 entitlement culture 45, 48, 137, 143, 209, 218 absent from Asia 204, 209 need to reduce 178, 205 equities 79, 172 ethics 254 Ethiopia 19 European Central Bank (ECB) 92, 93–5, 119–20, 144–5, 146 eurozone banking union 256 crisis 224–6, 235–9 and the European Central Bank 93–5 northern creditors and southern debtors 67, 139, 145, 157, 191, 232–3 and trust 145–6 and the UK 111, 214 variations in borrowing costs 215–16 exchange rates 81–2, 111–12, 175, 239–42 executive pay 48 exports 11, 112 extremism, political 226–9 Fannie Mae 190 Federal Reserve 74, 92, 105, 241 and the Great Depression 59, 106–7 Ferguson, Niall 26 Ferguson, Roger 194 feudalism 213 financial services 168–70 innovations 11–12, 38, 133–4 Financial Services Authority (FSA) 171 Finland 158 First World War 103, 114 ‘fiscal club’ concept 237–9 fiscal policy 58, 66–7, 69–70, 77–8, 246–7 fiscal trap 79–81 281 4099.indd 281 29/03/13 2:23 PM When the Money Runs Out fiscal unions 236–7 Fisher, Irving 108, 115 football 165 forecasting 52–3, 63, 71–2, 74, 108 Fortis 30 France age-related expenditure 48 ancien régime and the Revolution 151–7 and Austria 225–6 benefits 204 budget deficit 54 exports 82 Latin monetary union 184 per capita incomes 101, 105 and political extremism 192 and public spending 49 Franco-Prussian War 182 Frank, Barney 65 fraudulent acts 35–6 Freame, John 127–8 Freddie Mac 190 free banking 255, 257 French Revolution, and the ancien régime 151–7 Freud, Sigmund 51 Friedman, Milton 59, 60, 86, 106, 188 Fuld, Dick 253 GDP forecasts 48, 52–4 targeting 247–50 General Strike 104 generational divide 171–4, 241, 243–5 see also ageing populations Germany ageing population 48, 136, 171 benefits 204 budget deficit 54 and the eurozone crisis 34, 191, 225, 232–3, 235 exports 82 Franco-Prussian War reparations 184, 186 government borrowing 71, 144 interest rates 146 late 19th-century economy 186, 189–90 living standards 13–14 national income 32 per capita incomes 101, 105 and the Protestant work ethic 26 and public spending 50 surplus 135–7 Treaty of Versailles 103 unification 182–3 Weimar Republic 55–6, 89 GfK/NOP Inflation Attitudes Survey 92 globalization 166–7, 169, 214–16, 224–6, 250–1 Gold Standard 186 and Germany 184 and the UK 57, 98–9, 102, 103, 105 and the US 107, 109, 187–8 gold standards 183–4, 185 Golden Dawn Party 227 Goodwin, Fred 253 Gordon, Robert J government bonds 73, 77, 80, 86, 221 government borrowing borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues government debt and central banks 241–2 eurozone crisis 145 excessive 67, 213–14 France 154 and inflation 220 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 governments and central bank bailouts 241 and credit queues 83–92 mistrust 140, 147–8, 217–18 social spending 45–7 spending 58, 109, 119, 142, 203 spending increases 49–50, 66 Gramm-Rudman-Hollings Act 242 Great Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Great Railroad Strike 187 Greece 82, 134, 140–1, 144–6, 234 and the euro 191 and political extremism 192, 227 Greenback Party 187 Greenspan, Alan 61–2 growth forecasting 74 global 28 start of the 21st century 169–70 targeting 247–50 282 4099.indd 282 29/03/13 2:23 PM Index Hamada Marine Bridge 23 Hayek, Friedrich 56, 207 HBOS 30 health spending 45–6 Helmsley, Leona 148 high-quality liquid assets (HQLA) 83–4 home bias 215–16, 251–2 Hong Kong 163, 204 Hoover administration 118 housing markets 30–1, 61, 63–5, 115–16, 130 foreign buyers 177, 223 see also mortgage-backed securities; subprime HSBC 126, 254 Hundred Years War 209–10 Hungary 89 hyperinflation 78, 89 Iceland 32 Illinois 173, 174 illusions and asset prices 62–3 illusory prosperity 49–51, 56–7, 64–5, 68 and investment philosophy 137–8 public sector 52–3 IMF 200, 202 import tariffs 16 income inequalities 25, 34, 48, 158–70 income, national 32, 49–50, 141–2, 247 Germany 33 Japan 32 UK 110–11, 112 US 117–18 incomes, per capita 27, 49, 159–60, 163 Argentina 14 China 251 France 101, 105 Germany 14, 101, 105 India 27, 251 Indonesia 197 Japan 21 Korea 202 Malaysia 198 UK 1, 44, 101, 105 US 14, 101 India 27, 183, 185, 251 Indonesia 193, 195, 196–7 industrial relations 103–4 Industrial Revolution 38 IndyMac 30 inflation and ageing populations 250 Argentina 18 and commodity prices 116–17 deflation 21–2, 185 excessive 77–8, 89 housing market 64 and the New Deal 109 and stagnation 219–20 targeting 59–61, 87–8, 246, 247 UK 114 US 115 infrastructure projects 236 innovations, financial 11–12, 38, 133–4 interest rates and asset prices 63 credit queue jumping 83–92, 217 expected future 87–8 falls 32, 69, 137, 146–7 inflation versus GDP targeting 248–9 Libor 126 and monetary and fiscal policies 245–6 persistently low 72, 75, 76, 89–91, 239 and stimulus 58 subsidizing 190 UK 61, 71, 102 US 57, 61, 105, 135, 193 intergenerational divide 171–4, 241, 243–5 see also ageing populations International Monetary Fund (IMF) 144–5, 200, 201, 202 international/domestic conflict 232–5 investment demand for financial services 168 and income inequality 162–3 international 134, 136, 176–7, 193, 232 private investors 144–5 Ireland 49, 134 Israeli–Palestinian conflict 122–3 Italy 49–50, 82, 146, 184, 191 ageing populations 171 Japan 20–6 ageing populations 171 attempted reforms 42 debt repayment 135 exports 11 government borrowing 144 government debt 52 liquidity trap 72 living standards 14 national income 32–3 and quantitative easing (QE) 85 stockpile of assets 240 and trust 161 unreliable estimates 113 283 4099.indd 283 29/03/13 2:23 PM When the Money Runs Out Jay Cooke and Company 186 Jerusalem trip 122–3 Jews, attitudes towards 189, 200–1, 213 jobs 115–16 see also labour; unemployment Kahneman, D 41 Kalecki, Michael 59 Das Kapital(Marx) 179 Keynes, John Maynard 38, 57–9, 72, 86, 108 ‘Economic Possibilities for our Grandchildren’ 259–60 Essays in Persuasion 100 The General Theory of Employment, Interest and Money 58–9, 89 on the Gold Standard 104 How to Pay for the War 114 Keynes Plan 233 Keynesian policies 60 on the Snowden budget 99 King, Mervyn 73, 90–1, 92–3, 180 Knetsch, J L 41 Knickerbocker Trust Company 131 Korea 14, 193, 195, 202–4, 205 Krugman, Paul 112–15, 117, 118–19 labour market 115–16, 252 productivity 53 Landes, David 26 Latin American debt crisis 216 Layard, Richard 114, 117 Lehman Brothers 30, 255 Leveson inquiry 148 Libor 126 life expectancy 47 liquidity 84, 90 liquidity trap 72 Liquidity Coverage Ratio (LCR) 83 Little Dorrit (Dickens) 138–9 living standards 11, 27, 158, 169, 180–1 belief in ever rising 13, 34 China 27 Indonesia 197 Japan 23 Korea 195 late 19th century 185, 186 Malaysia 198 post-Second World War 139 US 11, 163 loan-to-value ratios, mortgage 51–2 Long Depression 189–90 loss aversion 40–1 lotteries 164–5 Macroeconomic Imbalance Procedure (MIP) 233 macroeconomic policies 32, 60, 121, 181, 253 Japan 21 macroprudential rules 256 Madoff, Bernie 35 Mahathir Mohamad 198–201, 205 Malaysia 193, 198–201, 205 Malthus, Thomas 37–9 Manchester United 165–6 Marr, Wilhelm 189 Marx, Karl 57, 179–80 Mary Poppins 131–2 May Report 98 Megawati Sukarnoputri 197 Mellon, Andrew 106, 108 Mexico 158 Mieno, Yasushi 21 miners 103–4 Mississippi 163 mistrust creditors and debtors 141 cross-border 176 endemic 147–9 governments 140, 217–18 of money 219–21 and political extremism 227 monetarism 59 monetary policy 58, 68–74, 77–9, 87–9, 97, 111–12 a new monetary framework 245–50 see also Gold Standard; interest rates; quantitative easing (QE) Monetary Policy Committee 90–1 monetary unions 236–7 see also eurozone moral hazard 62 mortgage-backed securities 30, 65, 136–7 mortgages 51–2, 63–5 Napoleon Bonaparte 156 Napoleon III 182 National Bank of North America 131 national incomes 32, 49–50, 141–2, 247 Germany 33 Japan 32 UK 33, 110–11, 112 US 33, 70, 109, 115, 117–18 284 4099.indd 284 29/03/13 2:23 PM Index National Lottery 164–5 nationalism 228 the Netherlands 48 New Deal 108–9 ‘new economy’ of the 1990s 29–30 New Order (Indonesia) 197 New Zealand 187 Nicholson, Viv 50 Nigeria 19 Northern Rock 30, 51–2, 129, 255 Norway 158 Occupy movement 162, 170–1 Office for Budget Responsibility 33 Oliver Twist (Dickens) 43 Osborne, George 231 Overend, Gurney and Co 131 painkillers 70–1, 89 ‘The Panic of 1873’ 186 Paul, Ron 93 Peasants’ Revolt 213 Pension Protection Fund (PPF) 172 pensioners’ voting patterns 88 pensions 47, 51, 75, 171–3, 174 per capita incomes 27, 49, 159–60, 163 Argentina and Germany 14 China 251 France 101, 105 Germany 101, 105 India 27, 251 Indonesia 197 Japan 21 Korea 202 Malaysia 198 UK 1, 44, 101, 105 US 14, 101, 105 Perón, Eva 16 Perón, Juan 16–17 Pew Center report 173 Pickett, Kate 159 Pigou, Arthur 59 policies and central bankers 65 fiscal 58, 66–7, 69–70, 77–8, 246–7 macroeconomic 21, 32, 60, 121, 181, 253 monetary 58, 68–74, 77–9, 87–9, 97, 111–12 new monetary framework 245–50 political extremism 226–9 politics and central bankers 78, 89–90, 91–5 and economics 24–6, 34, 102, 191–2, 217 and the eurozone 224–5, 237 and expectations 152–3 and income inequality 160–1 and lack of trust 147–8, 149 and monetary regimes 119–20 voters 50, 78, 88, 222, 242–4 poll tax 211 populations, ageing 78, 88, 250 age-related expenditure 48 generational divide 171–4, 241, 243–5 Germany 136 Japan 23, 25 Portugal 50, 146, 158, 191 precious metal standards 183–4 see also Gold Standard prices asset 73 commodity 77, 109, 116–17 rising 157 see also deflation; inflation property sector see housing markets protectionism 214–15 capital controls 16, 199–200, 201, 234 tariffs 16 Protestant work ethic 26, 28 public sector see governments public spending 49–50, 66, 142, 147–8, 203 government spending 58, 109, 119 social spending 45–7 quantitative easing (QE) 72–82, 84–6, 91, 97, 176–7 ratings agencies 234–5 rationing 114–15, 142–3 recessions recovery from the Asian crisis 195–6, 204–5, 206, 208–9 UK in the 1930s 101–2 redistribution by stealth 90 Reform Acts 222, 242–3 regulation 125, 256 dangers of further 214, 251 dollar transactions 177 reduction 168 the regulatory trap 83–4 Statute of Labourers 213 renminbi (currency) 177 Réveillon, Jean-Baptiste 155–6 Ricardo, David 183–4 Richard II 211–12 ringgit (currency) 198 285 4099.indd 285 29/03/13 2:23 PM When the Money Runs Out risk and banks 255–6 creditors and debtors imbalance 234 and financial services 168 and rapid economic change 170 risk aversion 216 Roosevelt, Franklin Delano 107–9, 117–18, 119, 219 Royal Bank of Scotland 30 Royal Navy 99 Russia 117, 135 Rwanda 19 Samuel, Herbert 104 Saudi Arabia 117, 135 savers and banks 136 confidence 65 and illusions 137 and income inequality 162–3 and interest rates 90, 91, 97 and the subprime boom 133–4 schisms between debtors and creditors 174–7, 191 generational 170–4 income inequality 158–70 Schwartz, Anna 59, 106, 188 second-hand car market 123–4 Sierra Leone 163 silver standard 183 SIVs (structured investment vehicles) 129–30 Skidelsky, R and E 37 Smith, Adam 39–40, 207 melancholy state 42, 124–5, 159–60 Snowden’s budget 99–102, 105 soccer 165 social contract, between generations 244–5 social insurance 44–8 social security systems 12 social spending 45–7 Soros, George 200 South Korea 14, 193, 195, 202–4, 205 South Sea Bubble 29 space exploration 9–10, 35 Spain deficit 54, 134 and the eurozone 191, 235–6 exports 82 fiscal position 85 government borrowing 144 interest rates 146 political disenfranchisement 95 property bubble 140 suicide of Amaia Egana 153 spending government 58, 109, 119 public sector 49–50, 66, 142, 147–8, 203 social 45–7 stagnation 37–43, 50, 52–3, 158, 219 and political extremism 227–8 Standard & Poor’s 80 ‘stately home’ effect 221–3 Statute of Labourers 211, 213 sterling 98–106, 110 Stern Review 38–9 stimulus 3–4 and jobs 116 monetary and fiscal 30, 57–8, 181 Paul Krugman 112–15, 118–19 policy 32, 69–70, 82 political debate 205 prior to the financial crisis 67 stock markets 20–1, 30, 193 stock-market crashes 18, 61–2, 66, 99, 186 Straw, Jack 212 structured investment vehicles (SIVs) 129–30 subprime boom 130, 133–4 crisis 190 Suharto 196–7, 205 surpluses 66, 135–7, 204, 232–4 Sweden 158, 204 Switzerland 158, 184 Taiwan 14 Takeshita, Noburo 24 Tanzania 19 tariffs 16 tax avoidance 49, 211, 214 taxation ancien régime and the French Revolution 154–5 death duties 139 medieval poll tax 211 taxpayers 145, 170, 174, 215, 254 technological progress 2–3, 10–11 dotcom bubble 169 and financial industry wages 167 Industrial Revolution 38 Thailand 193, 195 Thaler, R H 41 Thatcher, Margaret 59 The Times 100–1, 148 286 4099.indd 286 29/03/13 2:23 PM Index Tobin tax 234 Tocqueville, Alexis de 151–2 training 254 see also education Treasuries 135, 240–1 Treasury View 100–1 Treaty of Versailles 103 trust 121–5, 147–9, 158, 177–8 and the culture of blame 161 declining between creditors and debtors 174–7 and the eurozone 145–6 and the financial industry 125–34 Tunisia 160 Turgot, Anne-Robert-Jacques 155 Turkey 158 Tyler, Wat 212 UBS AG 126 Uganda 19 UK (United Kingdom) 2008 devaluation 81–2 age-related expenditure 48 asset ownership 76 austerity 67–8 deficit 54, 134 economy 33–4, 112, 114–15, 116 equities 172 and the eurozone 214, 228 exports 82 government borrowing 144 growth forecasts 74 income inequality 160–1, 162 inflation targeting 60–1 interest rates 61, 71, 85, 146 liabilities 240 mortgages 51–2, 63 national income 32, 110–11, 112 per capita incomes 1, 44, 101, 105 precious metal standards 183 public spending 50 quantitative easing (QE) 84–5 social insurance 44–8 sterling in the 1920s 98–106 voters 88, 222, 242–3 unemployment 102, 104, 114, 116, 235 US Treasuries 135, 240–1 USA (United States of America) benefits 203 budget deficits 53–4, 118 Coinage Act, 1873 184–5 confidence in banks 125 Congressional Budget Office forecasts 52–3 debtors to China 139 deficit 134 demographic changes 15 dependent on serial bailouts 61–2 economy 115–16, 186–7, 190 education 12 and globalization 166–7 and the Gold Standard 187–8 government borrowing 71, 144 government debt 80 Great Depression 56, 106–10 growth forecasts 74 household debt 63 housing markets 30–1, 64, 136 income inequality 48, 160–1, 162, 163 interest rates 57, 61, 85, 105, 146 lack of trust 147 liabilities 240–1 life expectancy 47 living standards 11 national income 32, 70, 115, 117–18 per capita incomes 14, 101, 105 public spending 50 Utah 163 Venezuela 117 Volcker, Paul 59 von Mises, Ludwig 56–7, 60, 68 voters 50, 78, 88, 222, 242–4 Wadlow, Robert 23 wages executive pay 48 in the financial industry 167 warfare 209–14 Washington Consensus 192–3, 194, 199 Washington Mutual 30 Weber, Max 26, 28 Weimar Republic 55–6, 89 The Who 48 Wilhelm I 182 Wilkinson, Richard 159 Wisconsin 173 Wonga 137 work ethic 26, 28 Yellen, Janet 64–5, 113 Zimbabwe 78, 89 the ‘zombie’ trap 82–3 287 4099.indd 287 29/03/13 2:23 PM 4099.indd 288 29/03/13 2:23 PM .. .WHEN THE MONEY RUNS OUT 4099.indd 29/03/13 2:23 PM 4099.indd 29/03/13 2:23 PM WHEN THE MONEY RUNS OUT THE END OF WESTERN AFFLUENCE STEPHEN D K I N G YALE UNIVERSITY... charged, when economic shocks upset the political applecart, when a desire to stick to the conventional thinking of the time led to acts of rebellion and when nations simply ran out of money There... then, the outpouring of ideas that subsequently became mainstream Western thinking – the persistence of scientific progress, the benefits of pure reason, the rights of man – helped capture the