Joe Schlesinger: The debt pickle, when affluence breeds poverty

In this, the 100th anniversary of Marshall McLuhan's birth, the sage's sayings are being dropped everywhere, like candies spilling from a kid's Halloween bag.

His aphorisms about the medium being the message and the world having turned into a global village have become the iconic expressions of our age.

But there are dozens more such dictums. Some are straightforward, others more complex and a few quite funny.

Some of his pronouncements can seem so self-evident that you have to wonder why he even bothered. "Affluence creates poverty," he wrote. Well, of course it does.

From the dawn of history, the rich have grown fat by making others poor.

But, as happens so often with a McLuhanism, the light flashes on. This axiom about affluence that he articulated decades ago has suddenly acquired a new relevance and different meaning.

What is driving the current economic crises in the developed economies, most acutely in Greece and Italy, is not so much the rich making others poor — although that still exists, of course — but rather that the road to affluence itself is creating its own poverty in turn.

In other words, McLuhan's dictum has morphed into "OUR affluence has created OUR poverty."

Spendy Canada

The Greeks, Italians and others are in trouble because they've built their rising prosperity on borrowed money and have accumulated humongous debts they can't service, never mind pay off.

But before we cluck disapprovingly about the Europeans (and the Americans) having got themselves into this pickle, it might be worthwhile noting that Canada has also prospered by borrowing heavily.

In fact, our total debt load — money owed by governments, corporations and households — is higher than that of Italy or Greece. According to the International Monetary Fund, Canada's total debt in 2010 was 313 per cent of our GDP as opposed to Greece's 262 and Italy's 310.

When you look at these numbers more closely, you find that it is not Italian and Greek consumers who are the spendthrifts. By Canadian standards their household expenditures are quite modest.

While Canadian consumer debt stood at 94 per cent of GDP last year, Greece's was at 65 per cent and Italy's was only 53.

Italy's relative thrift is explained by the fact that Italians don't really go for credit card or mortgage borrowing.

In accordance with McLuhan's dictum that "money is a poor man's credit card," they've financed much of la dolce vita with cash. Though now their wallets have been emptying with dizzying speed.

Debt is king

In Canada's case, it is consumers with mortgages who might put our banking system at risk.

Once the current low interest rates go up — and they'll have to one day — we could face a housing market implosion similar to the one that devastated U.S. and Irish banks.

But in Italy and Greece, it is the public sector that has put these countries in a bind. They're a lesson on how quickly things can go catastrophically wrong. Simple numbers tell the story.

Greece has a long history of budget deficits (and of hiding them). But the shortfalls metastasized with the world economic crisis of 2008. In 2009, the deficit hit 15.4 per cent of GDP. (By comparison, Canada's 2009 federal budget deficit was 3.6 per cent of GDP.)

In 2010, austerity measures allowed the Greeks to reduce the deficit to 9.4 per cent. This year, if they are lucky, it may be below nine.

Italy's budget deficit is smaller — it was 5.4 per cent of GDP last year — but the Italians have not had a budget surplus in the past 20 years.

It's not that they haven't cut back. Budgets for government operations alone, that is excluding interest payments on the public debt, have consistently racked up surpluses. But debt is king and demands its obeisance.

Outliving our assumptions

Today, there are grave doubts that the new austerity measures the Italians and Greeks have put into place will be enough to pull them out of the debt spiral. We live in an era in which, as McLuhan put it, "most of our assumptions have outlived their uselessness."

We feel threatened, he wrote, as humans always have, by the rapid changes we are experiencing. "Innumerable confusions and a feeling of despair invariably emerge in periods of great technological and cultural transition."

The current economic storm has unleashed an avalanche. All the Greeks, Italians and others in their position can do is to prepare for the hard job of digging themselves out once the debt mountain stops sliding.

To do that, we may all, as McLuhan suggests, have to abandon the way we look at the future. ("We look at the present through a rear-view mirror," he wrote. "We march backwards into the future.")

It's going to be quite a challenge to leave the past behind and will require mastering the cascade of the ever-evolving machines of the digital revolution. (If we don't, McLuhan warned, the machines will master us.)

We need also to remember that McLuhan was right when he said the world had become a global village, that we are all tied together.

Today, it's the Greeks and Italians who are in trouble. Tomorrow, it could be us. By helping them dig out from under the avalanche of debt we may also learn how to do the same for ourselves.