The Sad Tale of the Fall of the Magic Kingdom.

Once upon a time, far across the ocean, there was a magical land that was the envy of the whole world. It was the land of the free, the home of capitalism, where anyone could become rich through hard work, and it was the world leader in business productivity and financial innovation. The economy became the largest in the world and led where others followed. Its stock market set the tone for the world’s investors and its currency took over from gold as the ultimate store of value. But one day all this changed and slowly a kind of rot set in that began to eat away at all the good things that had been achieved.

Some would say that the country got too big for its boots when it tried to ‘persuade’ other nations to adopt its version of a political system. Others say that putting numbskulls in charge was never a great idea, especially where huge sums of money are involved. But for the casual observer, it seemed that the country simply started to struggle to live up to its own reputation and the people had started to paper over the cracks that were appearing in the system.

The rich got richer and the poor got poorer, although they didn’t always know it. Those at the top of the tree devised a way for those at the bottom to continue spending more without actually having to earn more money, thereby postponing the day when the gap between the haves and the have-nots grew untenable, the day the people would rise up. For many years the popularity of television had acted as valium for the masses, keeping them happy and occupied for several hours a day whilst at the same time encouraging them to spend their money through the use of commercials, thereby fuelling the need to work and earn money. However, as time passed, the average person felt a stronger desire to emulate the people they saw on the tv, the celebrities with the expensive clothes and the luxury houses and cars. They started to spend money like it was going out of fashion, the mall became a home from home and for a time people were able to make easy money from get-rich-quick schemes such as flipping condos or trading tech stocks during the dotcom boom.

However, even that route to riches turned out to be a get-poor-quick scheme for lots of people and something else was required: cheap and easy finance. This time there was no need to work longer hours, get a second job or even, heaven forbid, to save up for things. It was now possible to buy that new car, to get that second home or that hot tub for the patio, and you didn’t need to have the money to pay for it because people just gave you the money! You didn’t even have to prove that you could pay back the money.

This truly was a magical kingdom. Some people say that this new found ‘wealth’ made the inhabitants of this land lazy and with the exception of the ipod they hadn’t come up with a good idea since the hamburger. Empires aren’t built on trendy music devices alone and pretty soon it became apparent that there could be a flaw in the economic miracle that had been driving the economy for the past few years. As soon as someone realised that there could be a flaw then that possibility alone was enough to make the bankers nervous.

The heroes of the financial world had brilliantly sold the concept of ‘buy now, pay later’ but what if the people couldn’t ‘pay later’? What if they suddenly found that certain household expenditures were rising and that they were precisely the things they couldn’t cut back on such as food, electricity and petrol for the car? They had already bought the new car, they had to fill it up and use it otherwise it would make the purchase look stupid, and besides, no-one ever went anywhere without their car, it was clearly a sign of poverty or delinquency. It was going to be difficult to cut back on food because you tend to get hungry quite quickly when you weigh 23 stone and it was going to be difficult to use less electricity, having just bought a huge plasma screen to go with your 7-speaker surround sound system.

As the bankers got more concerned they stopped lending money because they decided that they might need more of it for their shareholders. They cut back on the easy lending, raising the eligibility criteria for all types of credit, and they then paid out increased dividends to their shareholders. In the meantime the kingdom’s central bank had started offering virtually free money and was taking virtually any kind of assets as collateral for loans. This was a great opportunity for the banks to borrow money very cheaply once more, they could offload a load of rubbish assets they had taken on after a boozy lunch one Friday and maybe they could even start up the whole lending merry-go-round again. After all, the king wouldn’t complain if people were spending more money. He had actually cut taxes and returned some of the money the people had only recently given him, in the hope that they might spend it on more tvs and cars.

One day a little boy came to the king and asked him “What happens when the money runs out?”. The king replied “We print some more!” The king thought ‘This economic management malarkey is simple. If we need more money, we just print it and buy things with it. Everyone knows our currency is the safest thing in the financial world so if we print more of it then the world will be an even safer place. Stands to reason.’ And that is what they did, they borrowed money from those who were stupid enough to lend it to them and they printed more notes when it needed paying back. What could be simpler?

There were rumblings in the newspapers and the tide started to turn when the people noticed that they weren’t getting as much for their money as they used to. They were vaguely aware that their salaries had hardly budged in 5 years but that didn’t matter so much when they could still buy things on the never-never. However, now the punchbowl had been removed and when they tried to borrow more money they were told that ‘they couldn’t afford it’, a phrase some of the older members of the community remembered from their distant past. At the same time the 1% introductory interest rate period on their jumbo mortgage had come to an end and they were surprised to find that the rate had now jumped to 7%. They were shocked that their repayments had now also become ‘jumbo’ sized. Many people were in dire straits and when they asked the government to help them out they were told that there wasn’t any more money because it had been lent to the bankers who, it turned out, were old college chums of the king and needed it to pay their shareholders.

The inhabitants of the magic kingdom were unhappy because the magic had disappeared. The only ‘wealth’ they had left was tied up in their homes, which they couldn’t sell, and more people were slowly starting to lose their jobs in greater numbers as the economy slowed. With no savings in the bank (savings are what old people have and who trusted banks to look after them anyway?) some people just popped the keys to the house in the post to the mortgage company and walked away. The mortgage companies that held the loans against these formerly-safe assets started panicking. They weren’t in the real estate business, they were in the finance business. They didn’t want to own homes, they just wanted their money. They auctioned off what they could and told their investors that the unforeseen circumstance of more than one person defaulting on their mortgage at the same time meant that they couldn’t raise as much money from asset sales as they had thought. Many of them suddenly found themselves unable to continue in business.

By now the long economic miracle was starting to look a bit like a sham. True, a few young people running hedge funds had gotten very rich and lot of people had very big tvs, but generally it appeared that many people were worse off now than their parents had been. Some people even questioned if this could be considered to be progress and, if not, what had gone wrong? Some people are started to question an economy that is 70% reliant on money going round in circles and some people started to get a distant feeling that they should be trying to develop something useful to sell to the world rather than just shopping all the time. The wealth of the last few years had turned out to be an illusion created by a bunch of friendly bank salespeople, many of whom were now facing unemployment themselves, but who had inadvertently handed out a lot more IOU slips than they should have.

The future looks bleak for the magic kingdom. The printing presses are still churning out the banknotes but they aren’t as popular as they used to be and those unhelpful chaps at OPEC refuse to lower the price of oil. The war on foreign soil that was supposed to secure a future oil supply and unite the nation against a common enemy has become a farce, has tarnished the good reputation of democracy and is costing a fortune (and still no sign of oil). Whilst sales of superyachts are still booming, the average working man has run out of money and out of credit and everything is getting more expensive. The economy has been propped up by spending on defence and on construction for a very long time but with house prices setting new records for declines every day there doesn’t seem to be an obvious driver of economic growth to take over. The kingdom needs a miracle, and ideally one that isn’t based on shuffling paper money around. This is one fairytale that is unlikely to have a happy ending.