Published Articles

What is Behind the Gyrations of the World Economy and Where is It Going?

by Nick Ares

Do yourself a favor and skip this article if you prefer to think the ship is simply rolling heavily in the calm seas. The captain of the Good Ship Earth, I am afraid, has a very definite agenda that is taking it off the course everyone thinks it is on as they go about their lives: sitting down to dinner, sleeping peacefully. Nobody thinks the ship can sink, as big, beautiful, and safe as it is, but the truth is rocks tear holes in metal hulls and they turn turtle. So it is with our world economy: sail close enough, long enough to enough rocks, and the ship goes down, no matter how many people are opining on the matter with complex or oversimplified theories.

Being asked to state accurately the condition of the world’s economy during calm times is difficult enough; predicting where it might go next is pushing the envelope of possibilities. But trying to state and predict the condition of today’s and tomorrow’s straining yacht in the thirty foot swells of today’s economy is as adventurous as navigating the real thing. At the risk of turning turtle in the explaining—if someone stands up to say something and is not willing to make a fool of himself, he is probably too timid to be standing there in the first place—I offer the below, simply because in any activity, if one cannot see ahead, one is sailing blind and liable to hit the rocks.

After my last article on the economy, Don’t Just Sit There, many hoteliers around the world commented on the apparent inadequacies of fixing the global financial system by issuing more credit to failed institutions while withholding it from the real economy. The continued contagion of the real economy by financial sector excesses has continued to result in wobbliness for the productive side of the economies in the US and Europe, and by extension, the rest of the world.

So where is the economy heading: onto the rocks and whirlpools or across a vast ocean at breakneck speed, the wind filling the sails? And what can we expect in the service industries in particular, for owners, operators, and employees of hospitality venues, for guests, both the wealthy and economy-minded, and closer to home, for those in my profession of butlers, and their employers who need the wherewithal to support their lifestyles?

Certainly, some 2012 predictions for hospitality offer grounds for cautious optimism—a PricewaterhouseCoopers report shows 2011 to have been a good year for occupancy in the US, up at 60.1%, RevPAR increasing by 8.2, and ADR growing by 3.7%. Based on a predicted increase in business travel and group bookings, 2012 looks to be another good year, with occupancy predicted at 60.9%, ADR growth at 5.1% and RevPAR growth at 6.5%.

The World Economic Forum weighed in recently with the findings of a Marriott International survey showing that, in the opinions of opinion leaders, international travel stimulates the economy and we should do more of it. In concrete terms, international arrivals have doubled in the past decade and the UN World Tourism Organization predicts it will increase to one billion this year. The World Travel & Tourism Council (WTTC) predicts an extra 69-million net jobs in the industry by 2021, 80% of which will be in Asia, Latin America, the Middle East, and Africa. In the US, one job is created for every 35 international visitors. WTTC also estimates worldwide GDP increases for the industry will rise by 4.2% annually to $9.226 trillion by 2021.

Certainly in the butler-training field, a small niche I have some familiarity with, there is much demand in the Far East and some in the West to support the general notion that things are improving.

Deloitte surveyed 1,000 business travelers in September 2011, 85% of who said they expected to travel in 2012 as much as, or more than, in 2011—Gen X and Y being the main drivers. The Global Business Travel Association recently predicted 2012 business travel will increase 4.6% over 2011, reaching $263 billion dollars—but then revealed that the increase was due to rising costs, not more travelers, and that the 2.1% increase in number of travelers during 2011 would decrease 0.8% in 2012.

To be sure, there are other rumblings of difficulties in our client bases. We can, perhaps, ignore the Chinese New Year astrology predictions for the Year of the Water Dragon being not so good for tourism and hospitality; but then the Chinese market is coming to the rescue of quite a few properties as they flood out of the region in mind-boggling numbers not seen since the forces of Ghengis Khan. If the Chinese were to take this prediction seriously, they might just bring it about.

According to Peter Yesawich, a growing number of mass affluent consumers (with household incomes of $125,000-$300,000) in the US has cut back on travel plans for various reasons boiling down to higher prices and their greater indebtedness/the economic realities. As the numbers quoted are between 51% and 68%, and 41% don’t have enough time to travel, limiting themselves to local weekend trips, we are talking about a significant market segment moving in the wrong direction from the hospitality perspective; as could be said of the number of millionaire households in the $1-9 million net-worth range, which has diminished by three million since 2010, having been inflated by home prices and stock market investments. A November 2011 Harris poll found 30% of the more-affluent Americans saying they will take a vacation for more than a week in the next six months, a 20% drop from the prior six months, because of uncertainty about the economy.

While there will always be those who travel intensively because their wealth permits it, a snapshot of the bulk of US consumers is not encouraging: they have lost $20 trillion in wealth since 2007, their homes having lost an average 30% in value, and twelve million homeowners are underwater; the actual unemployment rate of 22.5% reflects nine million jobs lost, with 48 million having no work at all in 2010, and 5.5 million filing for personal bankruptcy (2008 through 2011). Those with work are mostly struggling, as incomes have dropped 10% since the crash (a median of $504 a week), measured against a background of incomes increasing only by 1% since 1987, while the official cost of living increased 103% in that time, and is running currently at 10-12% per annum. Retirees and investors are feeling the pinch with interest rates almost zero. 77% of Americans live paycheck to paycheck, up from 43% in 2007, while Americans carry $798 billion in outstanding credit card balances at an average rate of 14%. 56 million Americans (18.5%) live at or below the poverty line in 2010, with a record 44.7 million on food stamps.

OK, enough already!

So what now, is the economy able to support the expansion anticipated? Well, it is easy to become introverted on US and European troubles—the rest of the world is enjoying growth rates averaging 7%, so they may be impacted by a drop in US and European guests, but these are not the only pebbles (guests) on the beach.

From the discordant voices pitching different ideas, it is not clear which way the economy will go, so more late nights of investigation lead to un-chartered territory and finally, to cut a long story short, falling precipitously down a large black hole, like Alice in Wonderland, into a place the author did not want to be—the kind of situation where a butler finds his boss in flagrante delicto with the maid, at the same time as the Mrs. is discovered elsewhere doing the same with the tennis coach. Too much information, but once known, it cannot be unknown. It can be kept to oneself, in true butler fashion, but anyone who has read the classic book or seen the movie, Remains of the Day, with Stevens, the butler (played by Sir Anthony Hopkins in the movie), strictly focusing on his work while his boss backs the wrong horse in the bigger picture results in ruination for both butler and boss. Philandering bosses is one thing, but something on the order of a spiraling economy is another, as it impacts so many people’s lives.

As Sir Winston Churchill once said, “The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.” And so, for better or worse, here it is—the cascading torrent of unwelcome revelations that kept me up late at night: make of it what you will.

Just as magicians rely on confusing their audience in order to make them see what they want them to see, so can a subject be made so confusing that nobody can understand it, not even the experts: such obfuscation has occurred with the subjects of economics and money. Do you really understand them? Indulge me while I lay out the basics which then make the departure from the fundamentals crystal clear:

Money is a means of moving beyond simple barter, which is impractical beyond a simple village environment; money is simply the assurance that coin, paper, digital entries or whatever other symbol is in use, will be accepted by those wanting to sell and buy to and from each other. The authority issuing the currency (or credit) has one key responsibility: to always keep the supply of money in balance with the amount of goods and services in circulation, so that there will always be enough money to produce and consume, but not so much that the money inflates (raising prices) or so little that it deflates (prevents production and purchase by its absence). What is the key here? Money simply represents produced services and goods already in existence or about to be brought into existence—allowing for their exchange, which is really what economics consists of.

The difficulties in communicating these fundamentals are a) that the minds of readers crammed with complex and incorrect information will freeze and they will be unable to think with these fundamentals; b) the eyes of those who cannot understand the subject at all may glaze over as they space out; and c) experts will decry how over-simplistic are these ideas. I sympathize. The best I can suggest is that the reader, if he finds himself so embarrassed, go over and over the above paragraph and see how it could be true.

If I haven’t lost you yet, then hang on, because the slide down the black hole becomes steeper at this point: if we believe President Franklin Roosevelt when he said: “In politics, nothing happens by accident. If it happens, you can bet it was planned that way,” then we cannot simply accept that the sub-prime, predatory lending loans, the trillions (and perhaps quadrillions of dollars) in unsecured derivatives, the collapse of the economies of whole countries, could just be a case of bad judgment, untrammeled greed, poor planning, unpredictable market forces, nor bad luck.

And indeed they weren’t. Not to name any names, but brokerage houses mainly centered on Wall Street, have placed their men in the White House and US administrations for quite some time now, and they worked together with the privately owned central bank of the US (not naming names) to strip away any possibility of government oversight of their actions: they passed at least 14 key laws between 1989 and 2006 that gave them free rein in the financial sector, the results of which we see today in the US and Europe. If it were not for the fact that the privately held central bank for all major central banks then made an accounting rule change that forced all banks to reevaluate their portfolios drastically downwards,* sending them into instant insolvency and precipitating the crisis of 2008, and then insisted on keeping that rule in place so banks went under or were bailed out, the crash would not have happened.

* The Federal Home Loan Bank of Atlanta, for instance, projected a quarterly loss of $44,000, but per the new accounting rule, ended up writing down the value of its mortgage-backed securities by $87.4 million and $98.7 million in the following quarter.

And at this point, we are in the twilight zone that Alice discovered in Wonderland, because further investigation shows, as William Pitt the Elder (Prime Minister of England during the 18th Century) said: “There is something behind the throne greater than the King himself.” He also said: “The little I know of it has not served to raise my opinion of what is vulgarly called the ‘Monied Interest;’ I mean, that blood-sucker, that muckworm,* that calls itself ‘the friend of government.’” He was referring to a relatively small group of individuals who, in his time, ruled England behind the scenes, and has since come to rule most of the world. This group handily pulls the strings behind our elected officials, and believes itself superior enough in intellect to determine our futures. If it were not for the fact that they scrambled their way to their current positions of power by at least twenty dishonest strategies that I have counted, and if their actions did not lay waste to countries at a time and their bewildered and suffering populaces, I would say “all power to them.”

* Muckworm: worm-shaped insect larva found in manure.

But that is not the way it is, their superior intelligence notwithstanding.

Just as it was not the place for Stevens the butler to tell Lord Darlington that he was making a mistake in supporting the Nazis—something he was to find out for himself after it was too late—it may not be my place to point this out, either. Certainly, a messenger’s lot is often unenviable, especially when the people of which he speaks bankrolled the Nazis in real life—but there comes a point where standing by while well-meaning individuals and groups, trying to determine their fate, are looking everywhere but the ceiling (where, to borrow from investigative report Matt Taibbi, there is a giant vampire squid controlling things unseen), would show a lack of moral fiber that cannot be countenanced in a butler.

For while the majority are working and hoping for good forward progress, the few who steer the boat actually have the ship heading straight for the rocks, and no matter how much you stoke the fires, keep the brass shining, and ensure your guests are comfortable, the ship will keep heading for the rocks unless someone pulls the wheel hard-a-port, and in a timely fashion. And there it is, just as Churchill said.

Conclusion: Do nothing and watch it all unfold, including the collapse in the value of the US dollar and perhaps Euro in the next year or two (lots of ramifications there for the hospitality industry) and the concomitant loss of business volume. Or become active in returning the US and other economies to a sound, production-oriented footing, with government issuing money and credit, and usurious personal and national debt to bankers a thing of the past.

The above is necessarily short and generalized: an easy-to-understand, thorough (and complimentary) ninety-page analysis is available—what it took eventually to write this article—including specific outcomes and action points.

Published initially by Hotel Executive magazine, March, 2012