Extend-and-pretend runs out of puff

Extend-and-pretend runs out of puff

Kicking the can down the road brings forward benefits and defers risks or costs, but while it's a convenient model, it's now in danger of breaking down.

Extend and pretend is predicated on financialisation, especially time-value concepts that favour the near term while discounting future events. It may also be a consequence of the human predilection for immediate gratification. To adapt Thomas Hobbes, we seem to have decided that only the present is real because the past is memory and the future has no reality.

Despite the financial crisis of 2009, the world remains dependent on increasing levels of debt to bolster demand, ignoring an uncertain ability to meet future obligations. Global non-financial debt increased to a record $175 trillion in the third quarter of 2017, equivalent to 238% of global gross domestic product (an increase of 46% since 2007). This excludes unfunded pension and health-care commitments which would, for example, triple the US government's debt of about $20 trillion.

Businesses, too, follow this model. They emphasise short-term performance using accounting tricks to increase current income while deferring expenses and using debt-funded stock repurchases to boost earnings per share. General Electric Co's current problems reflect, in part, the extend-and-pretend model: Its now-discredited expansion into finance relied on leverage and underpricing of future risk, which has necessitated payments of $15 billion over the next seven years to cover continuing liabilities.

Even Berkshire Hathaway Inc relies on extending and pretending to some extent. Its core insurance business generates premium income against promises to cover future risk. From time to time, it also sells options to generate upfront premium income. Risk is deferred until the contracts are unwound or expire. Cash flow finances the company's investments, much of which goes into financial institutions.

In politics, extend and pretend has become standard procedure. Underinvestment in health, education and training saves money today but creates future costs and problems that may exceed any current benefit. Policies are focused on short-term growth and the maintenance of current living standards while longer-term issues are ignored. The Paris Agreement may have offered a political victory for leaders claiming to address climate change. But it will probably prove inadequate to limit severe changes in weather, agriculture, mortality and economic conditions.

The complex pathology of the extend-and-pretend model also corrupts information and knowledge. Elegant theories now "prove" that debt and deficits don't matter. Scientific evidence on the effects of climate change is dismissed as "fake news". Selective use of statistics supports ideological positions that favor the prevailing model. Partisan disinformation hides real problems and discredits opponents.

Voters, for their part, eschew painful decisions and embrace populists preaching simple solutions, such as anti-globalisation, anti-trade or anti-immigration policies, which merely defer difficult choices. This is exemplified by trite slogans: "Make [country] great again!"

Around the world, this model discourages political leadership. Finding it difficult to pass full budgets, the US legislature lurches from one continuing resolution and debt-limit renegotiation to the next. In Germany, Chancellor Angela Merkel's political style simply postpones dealing with critical questions, whether on Europe, immigration or infrastructure. Japan has failed to address key questions on its economic and demographic challenges for decades.

Extend and pretend can, in some cases, be effective. But only where there's sufficient time, resources and political options to take corrective actions, and only when the time purchased is used wisely. Last month, the International Monetary Fund warned the present global economic momentum reflects a confluence of transient factors. Failure to address structural impediments, deteriorating demographics and inequality is likely to result in a reversal. Rising resource constraints, accelerating climate change and looming geopolitical risks all suggest that the balance between current benefits and future costs that sustains the extend-and-pretend model is deteriorating.

Human progress is based on interconnected groups working together to solve problems. The extend-and-pretend model may be symptomatic of a system that has run out of ideas about how to renew itself and meet challenges. Corroboration is available from an unusual indicator. The ultra-wealthy are increasingly investing in space travel and in technologies that prolong life. They recognise the need to buy time and find new worlds, untrammeled by the largely manmade problems on Earth. ©2018 Bloomberg View


Satyajit Das is a former banker whose latest book is i

Satyajit Das

Former banker and author

Satyajit Das is a former banker and author.

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