Preface

Niels Bohr, the quantum physicist, once said that every statement should be taken by a scientist as a provisional hypothesis that has to be tested. This holds true not only of physics and engineering but as well of finance and economics whose theories are too often accepted without scrutiny by chiefs of state, ministers of finance, central bankers, economists, analysts, and common citizens.

An example is the theory (or, more precisely the myth) that high leveraging is good for a person, a company, or even a nation. If accepted, this leads to the DEBT syndrome and its disastrous aftereffects. The fallacy that “debt is good” is the subject of this book. In each of its 15 chapters, the evidence emerges that piling up public debt can lead to an unmitigated disaster. This is documented through case studies on Greece, Spain, Italy, France, and the United States—in short, those western countries that nowadays lost control of their senses and of their economy.

Bohr’s thought demolishes the generally held opinion that scientific, economic, or social “truths” and “theories” are forever. By extension, it dissipates the widely prevalent delusion that books in science and in economics contain only eternal wisdom. Books are learning tools written by people who are fallible. As such, they may include impractical theories like:

Written for professionals, academics, and researchers, the book the readers have in their hands provides the documentation and describes the implications of current policies by sovereigns and central banks, in dealing with the debt abyss. In so doing, it brings in perspective the diversity of opinion reigning in modern economics and finance. It also outlines themes which, among themselves, are defining the society in which we live.

“Authors are the engineers of the human soul,” Stalin once said, adding that: “If you want to know the people you deal with learn about what they are reading.”¹ In this, the Soviet dictator was right. Ideas and arguments contained in books are basic to culture and civilization. They are eye-openers to the wisdom of the past and help in positioning one’s mind in a way confronting present challenges by making use of assumptions, interpretations, and extrapolations.

Usually, though not always, when the author succeeds in his or her mission, books become living entities aimed to both inform and provide the grounds for a discussion where different, contradictory opinions can be heard. “I completely disagree with you but will fight for your right to state your opinion,” said Voltaire to Jean-Jacques Rousseau. Like Voltaire’s writings, this book brings to the reader contrarian opinions, but its intention is not polemics. It is a reflection of the dynamics of social, economic, and financial life which are almost entirely built on contradiction.

Contradiction and diversity enlightened the past centuries and permitted different philosophies to develop. By contrast, our world has been flattened by the steamroller of the nanny state. Margaret Thatcher was right when she said: “… too many people have been given to understand that when they have a problem it is the government’s job to cope with it. … They are casting their problems on society. And you know, there is no such thing as society. There are individual men and women and there are families.”²

There are individuals and families who in the post-World War II generations have been taught that “debt is good” and they are accumulating it crazily. Individuals and families depend on entitlements to enlarge their income, and if they are homeless, the government must house them. Run by politicians who are no better than second raters, western governments are happy to oblige no matter how illogical are their citizens’ demands.

Deception is far from being unheard of in politics and in society at large. In 1957, at the time of the Treaty of Rome, the “European dream,” embraced by the majority of the old continent, promised a middle-class lifestyle for most people. But delays and bickering made this almost impossible. The more public debt rose, the less was the prospect of secure jobs for the young as financial crises:

No wonder that the majority of Europeans have deep cynicism toward their governments, national institutions, and political leaders. To make educated guesses about how long this will last, we must appreciate what has happened and why.

Part of the answer can be found in drift, which always accompanies a rich society misled to believe that the good times last forever. Another part of the answer is wrapped in the comic thinking that “debt is an asset.” That’s the concept which led to wrong-way policies by chiefs of state and their cohorts, all the way to common citizens. We will see why.

Hopefully, this wrong-way thinking could be corrected through decisions which are factual, motivating, and able of changing the direction of future events. The potential of a correction is increased by nonmainstream books able of showing how to think out of the box, inciting their reader to:

Along this line of thinking, this book provides a probing discussion on the state of the economy, the reasons why we came into the trough in which we reside for over 6 years, and what it takes in terms of effort to get out of it and get moving again. The text makes plenty of critical thoughts public, relying on the right to freedom of opinion and of expression, as well as on the obligation to provide thinking people with contrarian arguments and information different to the one that so often is being heralded by politicians and the media.

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The book divides into six parts. Part One provides the reader with a snapshot of the economic, social, and financial world today which, as different commentators suggested, is a casino society. This includes the globalization without limits which started in earnest in the 1980s and the “kingdoms of debt” which it created, practically in all western countries. No attention has been paid to the fact that both public and household debt is in the upside, and it is very difficult getting up from under if this could be done at all.

The theme of Part Two is an answer to destiny by the land of Homer: The Greek economy and its fall to the abyss can teach very valuable lessons on what “not to do” if you wish to keep your freedom and your independence. But is anybody listening?

Part Three presents to the reader more case studies on self-wounded economies: Spain, Italy, and France. These are brought to the readers’ attention in an as is way, with every effort made to avoid the political and bureaucratic romanticism that “the worst is behind us.” The worse is still ahead of us and nobody can tell for how long it will last.

Part Four attempts to answer a daunting question: “Who killed the Golden Eagle?” When WW II came to an end, the US economy was supreme and it continued being so for over a decade. But slowly its mighty weight was eaten up from within. Like ancient Athens, American citizens listened to the fallacy propagated by weak politicians that, no matter how fast you used them, your assets last forever.

One thing that we learned during the past half a dozen years is that events which appeared unimaginable do sometimes occur. Therefore, we need to enlarge our mental map of how the world works and how conditions change. Part Five adds to the names of troubled economies those of the BRICs, even if a couple of them are still bystanders. Can anyone prognosticate what will be their future?

The answer is “yes!” and this in several respects, from sovereign governance to the unexpected aftermath of an aging society. I strongly recommended paying attention to the words of Taro Aso, the Japanese minister of finance in Section 5 of Chapter 13, about longevity risk.

Part Six has two chapters complementing one another. The first is constrained by the fact that there are so few cases of economies which have been successfully deleveraging—and therefore improving their creditworthiness. Both are small countries: Iceland and Latvia, but what they have accomplished can teach the big ones about what is required to take hold of oneself and change course while it is still time. I also added to this chapter case studies on Ireland and Britain (though with mixed feelings); as well as on Germany for being able to walk since 2007, the very beginning of the deep debt crisis, at the edge of the abyss without falling into it.

The book’s last chapter has a polyvalent objective, starting with the viewpoint of those who believe that the higher is the public debt, the better. True or false? Have this theory’s proponents duly considered the effects of ineptocracy when it comes to judge, for example, how unfunded liabilities will be managed? What will be the effect of higher public debt on our living standard? Why matters get worse because of the lack of ethics, all the way to sovereigns adopting the policy of grabbing money out of common citizen bank accounts? And, not to be forgotten, what should be done with parliaments voting in favor of democratic cleptocracy?

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Because the best way to convey a message is through facts and figures which can be understood and appreciated, this book is full of real-life examples. It has been a deliberate choice to depend on case studies as evidence of good and bad approaches to social, economic, and financial life. Live events also help as undisputable demonstrators of successes and failures in the search for solutions in getting out of the hole western governments find themselves. As Denis Healey, a former British chancellor of the Exchequer, once said: “The first law of holes is that if you are in one stop digging.”

In conclusion, in the course of the last six years, political, social, and economic events have been crowding one another. A prolonged financial crisis opened the door to all instincts. At sovereign level, tragedy alternated with comedy, for the same reason that in life the sublime is mingled with petty and with self-deception. Governance admits errors, but errors are magnified when they are hidden. The first requisite for success is to hide nothing—weaknesses least of all—and to call everything by its right name.

This book has been written on that principle. The evidence is provided through the case study presented to the reader as a Conclusion. The trickery associated to the birth of the Euro.

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I am indebted to a long list of knowledgeable people, and of organizations, for their contribution to the research which made this book feasible; also to several senior executives and experts for constructive criticism during the preparation of the manuscript. Dr. Heinrich Steinmann, Dr. Nelson Mohler, Eva Maria Binder, and Souzy Capoyannopoulos-Biris have made a significant contribution of out-of-box ideas, double-checking on facts, and review of text samples.

Let me take this opportunity to thank Dr. Erin Hill-Parks for suggesting this project, Dr. Scott Bentley for seeing it all the way to publication, and Vijayaraj Purushothaman for Production.

September 9, 2013

Valmer and Schlössli