0:00:03 > 0:00:06The world today faces a fundamental shift in the balance of power
0:00:06 > 0:00:08from west to east.
0:00:08 > 0:00:11The global economy is on the edge of a precipice.
0:00:11 > 0:00:13'Mayhem on the markets.
0:00:13 > 0:00:17'Fears of contagion in the eurozone sends stocks tumbling.'
0:00:17 > 0:00:20'The Dow fell as much as 705 points,
0:00:20 > 0:00:22'as traders watched in disbelief.'
0:00:22 > 0:00:26'Anxiety over the Greek debt crisis spooked markets
0:00:26 > 0:00:28'in Europe and Asia again today.'
0:00:28 > 0:00:30Since the crash of 2008
0:00:30 > 0:00:32Western banks, and now governments, have lurched
0:00:32 > 0:00:34from catastrophe to crisis.
0:00:36 > 0:00:39This is the most serious financial crisis we have seen,
0:00:39 > 0:00:42at least since the 1930s, if not ever.
0:00:42 > 0:00:45We still haven't had the full consequences of this crisis.
0:00:45 > 0:00:49In this series I investigate how globalisation went badly wrong,
0:00:49 > 0:00:52and what we can do to mend our economy.
0:00:54 > 0:00:56Unless we fix our tax system, financial system,
0:00:56 > 0:00:58Social Security system,
0:00:58 > 0:01:00it's game over.
0:01:00 > 0:01:03Years of borrowing by banks, households, companies
0:01:03 > 0:01:07and governments have left many of us in the West hopelessly in debt.
0:01:08 > 0:01:12What we've been doing is funding an unsustainable lifestyle.
0:01:12 > 0:01:16We used to talk about debt being a developing country problem.
0:01:16 > 0:01:18It's now a developed country problem.
0:01:18 > 0:01:22Now countries like China are in the driving seat.
0:01:22 > 0:01:27PRESIDENT OBAMA: We are facing an economic crisis that has left millions of our neighbours jobless.
0:01:27 > 0:01:30- DAVID CAMERON:- Some people say that to succeed in this world,
0:01:30 > 0:01:31we need to be more like China.
0:01:31 > 0:01:36This is the story of how we kidded ourselves that we had found
0:01:36 > 0:01:39the secret of ever rising prosperity.
0:01:39 > 0:01:42In truth, our long boom was founded on a dangerous lie.
0:01:42 > 0:01:47The financial sector was saying house prices are never going to fall across the board,
0:01:47 > 0:01:51"Don't even worry about it, it hasn't happened since the Great Depression."
0:01:51 > 0:01:55- Well, it did happen.- And that's when the party came to an end.
0:02:10 > 0:02:13Shanghai, the fastest-growing city in the world,
0:02:13 > 0:02:15home to 23 million people.
0:02:15 > 0:02:18It's China's capital of commerce,
0:02:18 > 0:02:22and the city has helped China accumulate reserves in excess of 3 trillion.
0:02:24 > 0:02:28So, if you want to find out why we seem to be losing
0:02:28 > 0:02:31the global economic battle, we first need to meet the winners.
0:02:38 > 0:02:41TRANSLATION: My parents wanted me to do an easy job as a sales girl,
0:02:41 > 0:02:43working in a retail store.
0:02:43 > 0:02:46But I felt I would be a salesgirl for my whole life
0:02:46 > 0:02:48if I took that job.
0:02:50 > 0:02:53So I chose to be a worker at a factory.
0:02:55 > 0:02:58Though the job was hard, it would give me a better future.
0:03:02 > 0:03:08'Rena Li works for NVC, a lighting company based in Shanghai.
0:03:08 > 0:03:11'She's worked hard to reach her position as purchasing manager.'
0:03:15 > 0:03:18TRANSLATION: My dream was to go to university.
0:03:18 > 0:03:22It took me two and a half years working in a factory to get there.
0:03:22 > 0:03:24It was a tough time for me.
0:03:24 > 0:03:26I had to work all day, and even nights sometimes,
0:03:26 > 0:03:29and I had to study in my time off.
0:03:29 > 0:03:32But finally, I managed to enrol at university.
0:03:37 > 0:03:40She began work at NVC in 2007.
0:03:40 > 0:03:43In less than 13 years, it's come from nowhere
0:03:43 > 0:03:46to be the world's second largest lighting company.
0:03:50 > 0:03:53It's part of the new global order,
0:03:53 > 0:03:56where China and the other developing economies
0:03:56 > 0:04:00make much of what the richer countries, like ours, need.
0:04:00 > 0:04:03At its heart, there's a simple formula.
0:04:06 > 0:04:09TRANSLATION: In terms of my salary,
0:04:09 > 0:04:13I'm paid £15,000 to £20,000 a year.
0:04:16 > 0:04:19Rena is one of China's rapidly growing middle classes.
0:04:19 > 0:04:24She's paid more than her parents and grandparents ever thought possible.
0:04:24 > 0:04:28But it's far less than what she would be paid in the UK.
0:04:28 > 0:04:32The differences are even starker on the factory floor.
0:04:36 > 0:04:39- TRANSLATION: - I earn about £250 a month.
0:04:39 > 0:04:43That's if I work about 30 to 40 hours overtime.
0:04:44 > 0:04:48- TRANSLATION:- As a woman, I would not be able to earn more than £200 a month
0:04:48 > 0:04:51if I worked in the countryside - it's just not possible.
0:04:51 > 0:04:53This job is good experience.
0:04:53 > 0:04:56One day, I plan to go back to my hometown
0:04:56 > 0:05:00and set up a small business. I won't do this job all my life.
0:05:06 > 0:05:09Here it is - the whirring and clicking,
0:05:09 > 0:05:12assembling and manufacturing manifestation of globalisation,
0:05:12 > 0:05:17which lifted hundreds of millions of people in Asia and here in China
0:05:17 > 0:05:20away from the breadline through the creation of jobs. In the rich West,
0:05:20 > 0:05:24we got the things that we wanted and needed much, much cheaper.
0:05:24 > 0:05:26Everybody seemed to be a winner,
0:05:26 > 0:05:29except that the economic system which developed
0:05:29 > 0:05:30contained a lethal flaw.
0:05:34 > 0:05:37The flaw was that we bought vast quantities of consumer goods
0:05:37 > 0:05:41from countries like China with borrowed money.
0:05:41 > 0:05:45We haven't been working hard or smart enough
0:05:45 > 0:05:48against the challenge from China and the other developing economies.
0:05:48 > 0:05:50Households, you and I, borrowed too much.
0:05:50 > 0:05:54Banks that lent to us also became too indebted.
0:05:54 > 0:05:57Now we're concerned that our governments too have borrowed
0:05:57 > 0:06:00more than they - we - can afford.
0:06:02 > 0:06:04We're struggling to pay the money back
0:06:04 > 0:06:07and are beginning to recognise - painfully -
0:06:07 > 0:06:09that we face years of low growth,
0:06:09 > 0:06:13or what we're beginning to think of as a new age of austerity.
0:06:15 > 0:06:17So, how did we get into this mess?
0:06:26 > 0:06:29One clue may be found in Longbridge in Birmingham.
0:06:32 > 0:06:35Rena's company, NVC, exports all over the world.
0:06:38 > 0:06:43And it has a branch in what was once Britain's industrial heartland.
0:06:46 > 0:06:48In the UK, at the moment,
0:06:48 > 0:06:51we are largely an importing and distribution operation.
0:06:51 > 0:06:53We have a large warehouse.
0:06:53 > 0:06:55Product comes straight in from the Far East
0:06:55 > 0:06:58and, for the most part, it goes straight out again.
0:06:59 > 0:07:04This is the higher rated LED version...
0:07:04 > 0:07:09'I'm the marketing and product manager for NVC Lighting. Which means that I'm responsible
0:07:09 > 0:07:12'for marketing activities here in the UK, plus a bit overseas as well.'
0:07:12 > 0:07:15And I'm also responsible for what's in our product range,
0:07:15 > 0:07:18what are the next products we develop.
0:07:19 > 0:07:24'I'm paid between mid-40s to mid-50s thousand pounds a year.
0:07:24 > 0:07:29'It's not a lavish salary, but it's probably the going rate
0:07:29 > 0:07:33'for somebody with my responsibilities in the manufacturing sector.'
0:07:34 > 0:07:37James Hunter Johnston is at the same mid-management level in the company
0:07:37 > 0:07:40as Rena is in Shanghai.
0:07:40 > 0:07:44But he earns three times as much as she does.
0:07:46 > 0:07:49The pay differences are sharp on the shop floor as well,
0:07:49 > 0:07:51which is where Trevor Foster works.
0:07:51 > 0:07:54I'm a production operative at NVC Lighting.
0:07:54 > 0:07:58Basically, we convert standard lighting fittings
0:07:58 > 0:08:00into emergency fittings.
0:08:00 > 0:08:03I normally work a 42-hour week.
0:08:03 > 0:08:06My basic without any overtime is...
0:08:06 > 0:08:09about £1,000 net, that's after tax and everything.
0:08:09 > 0:08:13But, with the overtime, you can earn £1,200,
0:08:13 > 0:08:15£1,300 if you get a good month.
0:08:16 > 0:08:20Trevor's salary is more than FOUR times
0:08:20 > 0:08:23what the people who actually make the lights are paid.
0:08:23 > 0:08:26Kind of lucky that it's a Chinese company, cos at the moment
0:08:26 > 0:08:30China seems to be the place to be, they're doing quite well financially.
0:08:30 > 0:08:33So, you know, we've got plenty of work where I am,
0:08:33 > 0:08:34so I can't complain.
0:08:38 > 0:08:42For the moment, NVC's Birmingham plant is little more than a warehouse to distribute goods
0:08:42 > 0:08:48that are made much more cheaply in China, where the economy is booming.
0:08:52 > 0:08:54It's a pattern reflected across the world.
0:08:54 > 0:08:57Developing countries making things and getting richer,
0:08:57 > 0:09:01many Western countries stagnating. How did it happen?
0:09:01 > 0:09:05We can blame greedy bankers, high-spending governments,
0:09:05 > 0:09:09our own profligacy. But there are also deeper causes,
0:09:09 > 0:09:13and to find the answer, we need to delve back into China's past.
0:09:20 > 0:09:24In 1978, Deng Xiaoping took over the leadership of a country
0:09:24 > 0:09:28devastated by a disastrous economic experiment.
0:09:30 > 0:09:33China was JUST beginning to emerge from
0:09:33 > 0:09:36probably the lowest point in its development
0:09:36 > 0:09:40for several hundred years, possibly for even a thousand years.
0:09:40 > 0:09:47That was the inheritance that Deng Xiaoping took on when he took power,
0:09:47 > 0:09:50and that was really the assignment that he had handed to him -
0:09:50 > 0:09:56how to dig China out of this deep trench of developmental malaise.
0:09:59 > 0:10:03More than 30 million Chinese had starved to death in the 1960s,
0:10:03 > 0:10:07and millions more were left to wander the countryside destitute.
0:10:12 > 0:10:17For older Chinese people, that misery feels like yesterday.
0:10:21 > 0:10:25Thank you very much. Delicious meal you've cooked here.
0:10:26 > 0:10:30Memories of hunger are acute for Rena's parents.
0:10:34 > 0:10:37TRANSLATION: Life in the countryside was very tough.
0:10:37 > 0:10:38We didn't have enough to eat.
0:10:38 > 0:10:41Family life has changed a lot now.
0:10:41 > 0:10:45Almost every family has a telephone, almost everyone has a mobile.
0:10:45 > 0:10:47- TRANSLATION:- And cars.
0:10:47 > 0:10:51TRANSLATION: We could never have dreamed about these things before.
0:10:51 > 0:10:55- Gan bei.- "Gan bei" means "bottom up". - Bottoms up. Gan bei.
0:10:58 > 0:11:01Deng transformed a country and, eventually, the world
0:11:01 > 0:11:04by progressively introducing elements of capitalism
0:11:04 > 0:11:06into communist China.
0:11:11 > 0:11:13'He got criticised from many quarters
0:11:13 > 0:11:18'and Deng in his typically pithy, fiery Sichuanese way
0:11:18 > 0:11:21'replied with the immortal phrase,'
0:11:21 > 0:11:25"It doesn't matter if the cat is black or white,
0:11:25 > 0:11:27"as long as it catches mice."
0:11:27 > 0:11:29Which, although it was never explicitly stated
0:11:29 > 0:11:33was understood by everyone to mean, "It doesn't matter if China
0:11:33 > 0:11:37"is capitalist or communist as long as it gets richer and stronger."
0:11:40 > 0:11:43At the same time as Deng was setting China on its course to become
0:11:43 > 0:11:47the world's second biggest economy, and perhaps its most powerful,
0:11:47 > 0:11:51Britain was beginning to go the other way.
0:11:51 > 0:11:53'Rail fares are going up for the third time in 12...'
0:11:53 > 0:11:55'The pound plummeted to its lowest level...'
0:11:55 > 0:11:59'British Leyland shares have been suspended on the Stock Exchange...'
0:11:59 > 0:12:02'..generally unemployment is suddenly a lot worse.'
0:12:05 > 0:12:08The UK's traditional industries had become inefficient,
0:12:08 > 0:12:11often nationalised, and torn apart by strikes.
0:12:16 > 0:12:20In 1979, a leader came to power who, like Deng,
0:12:20 > 0:12:24challenged and destroyed powerful vested interests.
0:12:25 > 0:12:29Very excited. Very aware of the responsibilities.
0:12:29 > 0:12:31'In the most basic terms,
0:12:31 > 0:12:34'Thatcher's vision was to let the market free.'
0:12:34 > 0:12:38She believed that the state had become far too dominant
0:12:38 > 0:12:42and that we should take the shackles off industry,
0:12:42 > 0:12:46take the shackles off finance, cut taxes, deregulate
0:12:46 > 0:12:49and let private business, the private sector,
0:12:49 > 0:12:51drive the economy forward.
0:12:51 > 0:12:55The best way to think about Mrs Thatcher is she was a classic Conservative.
0:12:55 > 0:12:58Classic Tory constituencies were looked after by her
0:12:58 > 0:13:00and classic Tory enemies were taken on.
0:13:04 > 0:13:08Nowhere was economic change felt more keenly than in Longbridge,
0:13:08 > 0:13:11home to the mass market car-maker British Leyland.
0:13:11 > 0:13:13On a vast, sprawling industrial site,
0:13:13 > 0:13:18by the '70s, this motoring giant was in seemingly perpetual crisis.
0:13:18 > 0:13:21We are invincible! CHEERING
0:13:23 > 0:13:26The Chinese company NVC's UK Marketing Manager,
0:13:26 > 0:13:30James Hunter Johnson, started work in 1979,
0:13:30 > 0:13:33the year that Mrs Thatcher came to power.
0:13:35 > 0:13:39Industrial disputes were almost a monthly activity.
0:13:39 > 0:13:44At least every year, there'd be some sort of industrial disruption
0:13:44 > 0:13:47around about the time when wage rates were being renegotiated.
0:13:47 > 0:13:49We actually had a lock-out.
0:13:49 > 0:13:52So, the workforce actually occupied the factory,
0:13:52 > 0:13:56the management was locked out for at least two or three weeks
0:13:56 > 0:14:00and production, of course, just stopped completely while that was going on.
0:14:00 > 0:14:03It's been an extremely bumpy career to have
0:14:03 > 0:14:06over these last 30 years in manufacturing industry.
0:14:06 > 0:14:10I've almost given up counting the number of times I have changed jobs,
0:14:10 > 0:14:13but it must be 10 or 15 times now.
0:14:17 > 0:14:21NVC's premises in the UK reflect the changing of the guard.
0:14:23 > 0:14:28Its warehouse is perched on a hill overlooking the desolate former home
0:14:28 > 0:14:31of the motor manufacturer, where Trevor Foster once worked.
0:14:33 > 0:14:35I've done numerous jobs over the years,
0:14:35 > 0:14:37mostly in the car industry.
0:14:37 > 0:14:40My last job before this one, I ended up at Continental.
0:14:40 > 0:14:44We made petrol pumps for a lot of the big car companies -
0:14:44 > 0:14:48Landrover, Jaguar, Volvo, etc.
0:14:48 > 0:14:52Unfortunately, they had to ship the business off to the Czech Republic
0:14:52 > 0:14:56cos it was proving to be too expensive to produce parts in this country.
0:14:56 > 0:14:59So it all got shipped off to the Czech Republic
0:14:59 > 0:15:01and we all got made redundant.
0:15:11 > 0:15:13In Britain AND in the US,
0:15:13 > 0:15:16manufacturing employment slumped in the 1980s.
0:15:19 > 0:15:22Under Margaret Thatcher and under US President Ronald Reagan,
0:15:22 > 0:15:26a different kind of global economics was taking root
0:15:26 > 0:15:29which would eventually lead to the great unravelling
0:15:29 > 0:15:31we're now experiencing.
0:15:31 > 0:15:35The fundamental problem in both the United States and the UK
0:15:35 > 0:15:40was that beginning with Thatcher and Reagan there was this ideology
0:15:40 > 0:15:43that markets were efficient and self-regulating.
0:15:43 > 0:15:46- How ARE you?- I'm fine. How are you?
0:15:46 > 0:15:49'They thought that the private sector could do no wrong
0:15:49 > 0:15:52'and that we didn't need to have regulation
0:15:52 > 0:15:54'and we could cut tax rates'
0:15:54 > 0:15:58and the economy would produce a lot more revenue.
0:15:58 > 0:16:01A lot of this was just hogwash and ideology.
0:16:03 > 0:16:08In 1986, Margaret Thatcher's love of free markets
0:16:08 > 0:16:12unleashed a financial revolution called Big Bang.
0:16:12 > 0:16:14It spurred the creation of the modern banking system
0:16:14 > 0:16:19which in 2007-08 came close to bankrupting itself and us.
0:16:21 > 0:16:2525 years on from Big Bang, there's still some nostalgia
0:16:25 > 0:16:29for the regimented order of the London Stock Exchange's trading floor -
0:16:29 > 0:16:32gone, along with tight restrictions on what firms could do.
0:16:34 > 0:16:37Although it was very sad that you had this amazing club
0:16:37 > 0:16:40for the last God knows how many years coming to an end,
0:16:40 > 0:16:42it was going to throw up a great, new opportunity
0:16:42 > 0:16:45which actually turned out to be very successful.
0:16:47 > 0:16:52Big Bang allowed big international banks to buy up stockbroking firms.
0:16:52 > 0:16:56High street retail banking was combined with more risky investment banking,
0:16:56 > 0:16:58and vast financial conglomerates were created.
0:17:01 > 0:17:04'Immense money was flowing around at the time.
0:17:04 > 0:17:08'Everything became magnified by a huge amount'
0:17:08 > 0:17:11because of the amount of money that came rolling in.
0:17:11 > 0:17:14And...salaries were going up.
0:17:14 > 0:17:19Certain people were in great, great demand and paid huge salaries.
0:17:19 > 0:17:22Basically, everyone was earning more, whatever you were doing.
0:17:22 > 0:17:24It was sort of Champagne times
0:17:24 > 0:17:28and things were very, very exciting across the board.
0:17:32 > 0:17:36The culture of British finance changed in a fundamental way.
0:17:36 > 0:17:38Banking should be boring.
0:17:38 > 0:17:41I was in banking 25 years ago -
0:17:41 > 0:17:44it was a pretty boring business.
0:17:44 > 0:17:46And then, of course, we had things like Big Bang in the UK,
0:17:46 > 0:17:52where basically banking combined with trading activities,
0:17:52 > 0:17:55with merchant banking, hedge funds and so on.
0:17:55 > 0:17:58And so now your bank is just as likely to be spending
0:17:58 > 0:18:02quite a lot of its time, and maybe even more of its money,
0:18:02 > 0:18:04on Delta One trading.
0:18:04 > 0:18:06If you can define what that is, you're doing better than
0:18:06 > 0:18:09chief executives of a number of the banks.
0:18:09 > 0:18:13With the arrival of impenetrable complex financial concepts,
0:18:13 > 0:18:16such as Delta One trading,
0:18:16 > 0:18:20London became the world's leading international financial centre.
0:18:20 > 0:18:22Totally took away the character of the City.
0:18:22 > 0:18:26All of a sudden, we're all sitting behind television screens
0:18:26 > 0:18:30and talking on telephones, and very soon, one doesn't know
0:18:30 > 0:18:34who one's talking to at the end of that telephone.
0:18:34 > 0:18:37I'm sure it has been very, very good for the City, yeah.
0:18:37 > 0:18:39I mean, it's been marvellous for the City.
0:18:39 > 0:18:41The numbers that are around now.
0:18:41 > 0:18:44The trade that takes place on a daily basis is absolutely colossal.
0:18:49 > 0:18:52The rise of financial services in the 1980s and '90s,
0:18:52 > 0:18:57as manufacturing shrank seemed to be the answer
0:18:57 > 0:19:00for a country struggling to compete in the world.
0:19:00 > 0:19:03But it was to create an economy that now seems unbalanced
0:19:03 > 0:19:06and unable to grow.
0:19:10 > 0:19:13While Britain was embarking on its financial revolution,
0:19:13 > 0:19:16in America, the emperor of all free marketeers
0:19:16 > 0:19:20was ascending his throne to become the world's most powerful central banker.
0:19:20 > 0:19:23Alan Greenspan was appointed by Ronald Reagan
0:19:23 > 0:19:26to be Chairman of the US Federal Reserve.
0:19:26 > 0:19:30'Greenspan was somebody who believed very passionately
0:19:30 > 0:19:33'in the primacy and efficacy'
0:19:33 > 0:19:35and morality of free markets.
0:19:35 > 0:19:39This wasn't just a technician, a man who understood central banking.
0:19:39 > 0:19:41This was a man with an ideological commitment
0:19:41 > 0:19:44and that ideological commitment had consequences.
0:19:46 > 0:19:49One consequence of the triumph of the free market was
0:19:49 > 0:19:52an astonishing surge in the pay of those at the top.
0:19:52 > 0:19:57Banks and financial firms took bigger and more dangerous risks
0:19:57 > 0:20:00to generate bigger profits and huge pay packets.
0:20:00 > 0:20:03And when the bosses of our mainstream companies
0:20:03 > 0:20:07saw the spectacular rewards that were going to bankers,
0:20:07 > 0:20:10hedge fund managers, private equity partners,
0:20:10 > 0:20:14they too demanded and got absolutely enormous pay rises.
0:20:14 > 0:20:19The gap between the very richest and the very poorest widened
0:20:19 > 0:20:22at a pace we hadn't seen since the Victorian era.
0:20:26 > 0:20:30When you look at the multiples of an executive pay
0:20:30 > 0:20:33to the median, or middle, of the workforce,
0:20:33 > 0:20:38they're broadly stable throughout the 20th century
0:20:38 > 0:20:42until you get to the 1980s, and then you get the take-off.
0:20:42 > 0:20:47The multiple of top pay to the middle was about 25 to one.
0:20:47 > 0:20:49Today it's over 150 to one. It's gone up six times
0:20:49 > 0:20:52in just over 25 years.
0:20:54 > 0:20:57That's a breakdown of basic morality.
0:20:57 > 0:21:00These CEOs don't deserve these compensations.
0:21:00 > 0:21:02Typically, the highest-paid ones
0:21:02 > 0:21:04lose the most money for their companies.
0:21:04 > 0:21:06So it's really...
0:21:06 > 0:21:08corporate theft.
0:21:08 > 0:21:09Pure and simple.
0:21:11 > 0:21:14Overwhelmingly, the benefits went to the top people,
0:21:14 > 0:21:16the most sophisticated people, the managers,
0:21:16 > 0:21:20the people who were plugged into the benefits of the global economy,
0:21:20 > 0:21:22whose companies were making very high profits.
0:21:24 > 0:21:27But what about the rest of us? How did we do?
0:21:27 > 0:21:30Real wage growth, in terms of take-home pay,
0:21:30 > 0:21:33of the typical American worker,
0:21:33 > 0:21:36has been zero since the mid-'60s.
0:21:37 > 0:21:41As Britain deindustrialised, over the same period,
0:21:41 > 0:21:45you had the service sector expand and high-end skills
0:21:45 > 0:21:47were better rewarded and valued.
0:21:47 > 0:21:49So that meant that, of course,
0:21:49 > 0:21:51if you were not a high-skilled worker,
0:21:51 > 0:21:53your income would have fallen
0:21:53 > 0:21:55cos the work that you previously did
0:21:55 > 0:21:58would have been done by developing countries
0:21:58 > 0:21:59who could do it more cheaply.
0:22:02 > 0:22:06What was happening was incomes were going down.
0:22:07 > 0:22:10People would have been very unhappy
0:22:10 > 0:22:15if their standard of living went down as their incomes went down or stagnated.
0:22:15 > 0:22:18So, in effect, we came up with a solution.
0:22:18 > 0:22:19We said...
0:22:21 > 0:22:24.."Consume as if your income was going up."
0:22:24 > 0:22:28Well, now, how do you consume as if your income is going up
0:22:28 > 0:22:32when your income is going down? Only one way - debt.
0:22:33 > 0:22:37- Are you sure you've got everything, Money?- Let me see. Wine, Camembert...
0:22:37 > 0:22:41The financial revolution spawned a debt revolution.
0:22:41 > 0:22:44In the new, deregulated world,
0:22:44 > 0:22:47everyone could have a loan, a credit card.
0:22:47 > 0:22:50- I'm so glad you came along, Access. - That's what friends are for.
0:22:50 > 0:22:55Our incomes may have been rising relatively slowly,
0:22:55 > 0:22:59but we could boost our living standards by borrowing to buy.
0:22:59 > 0:23:01Debt changed from a risk to a must.
0:23:01 > 0:23:04Suddenly you had a society in which
0:23:04 > 0:23:07the ruling elite increasingly were obsessed with money
0:23:07 > 0:23:11and that fed down through the media in all sorts of ways.
0:23:11 > 0:23:14Barclaycard! You're not in Macclesfield now, Bob.
0:23:14 > 0:23:18'It became the case that we were absolutely obsessed
0:23:18 > 0:23:21'with the pursuit of money, possessions, appearances, fame.'
0:23:21 > 0:23:25Crucially, if the people at the top are offering that as a model,
0:23:25 > 0:23:28the people at the bottom are going to be influenced by it.
0:23:28 > 0:23:32- It's a Barclaycard, Latham.- Yes. - 'Our values had completely changed.
0:23:32 > 0:23:34'We wanted more, we wanted better.'
0:23:34 > 0:23:37We were encouraged to spend, spend, spend
0:23:37 > 0:23:39and we borrowed, borrowed, borrowed.
0:23:45 > 0:23:48This is part of the house that was added, I think,
0:23:48 > 0:23:52in Victorian times. This is maybe about 100, 110 years old.
0:23:52 > 0:23:54But really this is why we bought it,
0:23:54 > 0:23:57because we just wanted somewhere to bring up the children
0:23:57 > 0:24:00which gave them more space, somewhere to play in the garden.
0:24:00 > 0:24:06James Hunter Johnson bought his dream house in the early 1990s.
0:24:09 > 0:24:13In those days, it wasn't difficult to borrow money to buy property.
0:24:13 > 0:24:18I think everyone was confident property values would go on rising.
0:24:18 > 0:24:22So taking on a big mortgage - which we did in order to buy this -
0:24:22 > 0:24:25didn't seem to us to be a great risk.
0:24:25 > 0:24:28I think we were just generally confident
0:24:28 > 0:24:30that salaries would continue to creep upwards,
0:24:30 > 0:24:33that would give us the money that was necessary
0:24:33 > 0:24:35to either make improvements or to,
0:24:35 > 0:24:39in due course of time, pay off the mortgage.
0:24:41 > 0:24:43I think people felt themselves getting richer
0:24:43 > 0:24:46because their houses were becoming more and more valuable
0:24:46 > 0:24:49and that gave them the sense of confidence to borrow more
0:24:49 > 0:24:51for consumption, for credit,
0:24:51 > 0:24:54and that kept the whole thing bubbling,
0:24:54 > 0:24:56the whole machine turning.
0:24:56 > 0:24:59WORKERS SING IN MANDARIN
0:25:05 > 0:25:10Meanwhile, China was building new factories and selling more overseas.
0:25:10 > 0:25:14Vast amounts of cheap and initially low-quality Chinese goods
0:25:14 > 0:25:17were making their way to Western markets.
0:25:21 > 0:25:24But the road towards liberalisation stalled,
0:25:24 > 0:25:26in 1989, when the Chinese authorities
0:25:26 > 0:25:30ruthlessly suppressed students demonstrating for democracy
0:25:30 > 0:25:33in Tiananmen Square.
0:25:40 > 0:25:42The whole country froze.
0:25:42 > 0:25:44And economic work of all types
0:25:44 > 0:25:48was put onto a backburner and many of the economic reforms
0:25:48 > 0:25:52that had begun in the 1980s were effectively stalled.
0:25:52 > 0:25:56With resentment building inside the country,
0:25:56 > 0:26:00the Communist Party realised something drastic had to be done
0:26:00 > 0:26:02to accelerate growth and boost living standards.
0:26:02 > 0:26:05In the summer of '92, Chairman Deng
0:26:05 > 0:26:09went on a historic tour of China's southern economic zones.
0:26:09 > 0:26:12'The situation was getting so bad
0:26:12 > 0:26:16'that eventually the leadership in Beijing realised'
0:26:16 > 0:26:20that if they didn't do something to generate economic growth,
0:26:20 > 0:26:24they perhaps would not be able to create enough jobs
0:26:24 > 0:26:26to keep the population acquiescent.
0:26:26 > 0:26:29And it was then that Deng Xiao Ping -
0:26:29 > 0:26:33by this time an old and frail man, hard of hearing -
0:26:33 > 0:26:36decided to take matters into his own hands.
0:26:42 > 0:26:46- TRANSLATION:- I remember he gave a speech on his southern tour.
0:26:48 > 0:26:53Obviously, he encouraged us to be open-minded.
0:26:53 > 0:26:56He wanted us to try new things...
0:26:59 > 0:27:02..to move fast and not be afraid.
0:27:08 > 0:27:10Wu Changjiang is the founder
0:27:10 > 0:27:13and chief executive of Rena's company, NVC.
0:27:13 > 0:27:17'19 years ago, he was a penniless student.
0:27:17 > 0:27:20'Deng's tour changed his life.'
0:27:24 > 0:27:26- TRANSLATION: - It was a big encouragement
0:27:26 > 0:27:28for college students like me.
0:27:28 > 0:27:32That was the reason I moved to Guangdong at the end of 1992.
0:27:33 > 0:27:37The things that he said lit a kind of prairie fire
0:27:37 > 0:27:39under the Chinese economy
0:27:39 > 0:27:43that really got it moving in the second half of 1992.
0:27:43 > 0:27:45The whole country just wanted to get going
0:27:45 > 0:27:49and he'd given them the permission to engage in, as it were,
0:27:49 > 0:27:52capitalist economic activity.
0:27:53 > 0:27:57As China's growth accelerated in the 1990s,
0:27:57 > 0:28:00Wu scraped together the £1,500 he needed to start his own company.
0:28:00 > 0:28:04Today he's worth over 300 million.
0:28:06 > 0:28:10There are literally thousands of such industrial success stories
0:28:10 > 0:28:11across a country whose economy
0:28:11 > 0:28:17has expanded six-fold in the 20 years since Deng's famous tour.
0:28:17 > 0:28:20- TRANSLATION: - My success is not a big deal.
0:28:20 > 0:28:23My generation just had more opportunities than my parents'.
0:28:23 > 0:28:25Reform and the Opening Up policy
0:28:25 > 0:28:28gave us the opportunities which they didn't have.
0:28:28 > 0:28:32MUSIC: "Alive And Kicking" by Simple Minds.
0:28:32 > 0:28:36While Mr Wu was scrimping to create and build his business,
0:28:36 > 0:28:39Britons had begun spending in earnest.
0:28:39 > 0:28:42The era of big money and big consumption
0:28:42 > 0:28:44was epitomised by our national game.
0:28:48 > 0:28:52The Premier League was launched in 1992 and back then,
0:28:52 > 0:28:54the average wage of a Premier League player
0:28:54 > 0:28:57was six times that of most fans.
0:28:58 > 0:29:02Today, our top stars are paid around £200,000 a week,
0:29:02 > 0:29:06- an incredible- 400- times what a typical British fan earns.
0:29:09 > 0:29:12The 1990s spending spree was the start of the longest period
0:29:12 > 0:29:16of rapid uninterrupted economic growth in our history.
0:29:16 > 0:29:19But in a way we were cheating to win,
0:29:19 > 0:29:22although the ref didn't notice till the game was over.
0:29:27 > 0:29:29Under normal circumstances,
0:29:29 > 0:29:32the carefree spending of the 1990s would have led
0:29:32 > 0:29:34to sharply-rising household inflation
0:29:34 > 0:29:38and interest rates would've shot up to hold inflation in check.
0:29:38 > 0:29:42But, in the 16 years before the crash of 2008,
0:29:42 > 0:29:43none of that happened.
0:29:43 > 0:29:46And if that was a good thing, we have the Chinese to thank.
0:29:46 > 0:29:48The prices of the things we wanted to buy,
0:29:48 > 0:29:53many of them made in China, became cheaper and cheaper.
0:29:53 > 0:29:56Every one of our pounds bought more of the stuff we coveted
0:29:56 > 0:30:00thanks to the industry of the Chinese working 18-hour shifts
0:30:00 > 0:30:03and earning just a few dollars a day.
0:30:08 > 0:30:11I came here to talk about the economy today with Mr Greenspan.
0:30:11 > 0:30:14If he wants to express his opinion on that subject,
0:30:14 > 0:30:17- I'll be glad to hear it. - LAUGHTER
0:30:17 > 0:30:19Western leaders of all persuasions
0:30:19 > 0:30:23didn't worry whether rapid growth fuelled by debt might be dangerous.
0:30:23 > 0:30:24No surprise there -
0:30:24 > 0:30:28elections are easier to win if we're all feeling richer.
0:30:30 > 0:30:32'Even politicians of the centre left -
0:30:32 > 0:30:36'the Tony Blairs, the Bill Clintons - embraced globalisation.
0:30:36 > 0:30:38'In fact, that was one of their badges of modernity
0:30:38 > 0:30:40'that they weren't bad old lefties,
0:30:40 > 0:30:43'they were people who "got it", who got the modern world.'
0:30:43 > 0:30:46They wouldn't, er... accept the argument
0:30:46 > 0:30:50that actually competing with Chinese workers
0:30:50 > 0:30:54would have a deleterious effect on the incomes of people in the West.
0:30:54 > 0:30:57That was regarded as backward, old thinking.
0:30:57 > 0:31:01I think the most that Clinton or Blair and their advisors said is,
0:31:01 > 0:31:03"Yeah, there'll be a transitional problem."
0:31:03 > 0:31:07Of course you can see, you know, if a factory closes here
0:31:07 > 0:31:11and reopens in China, there's a pretty clear cause and effect.
0:31:11 > 0:31:14But the argument was, "You can't stand in the way of that.
0:31:14 > 0:31:16"That's standing in the way of progress."
0:31:16 > 0:31:17CHEERING
0:31:17 > 0:31:21Our leaders insisted that consistent growth of around 3% a year
0:31:21 > 0:31:23was no more than our right.
0:31:23 > 0:31:28High inflation was gone for good. Boom and bust had become boom and boom.
0:31:28 > 0:31:31The good times would go on and on.
0:31:32 > 0:31:35Borrow only for investment,
0:31:35 > 0:31:37hold debt down,
0:31:37 > 0:31:39earn before you spend,
0:31:39 > 0:31:40don't live on tick.
0:31:41 > 0:31:45I want this to be the New Labour government
0:31:45 > 0:31:50that ended Tory boom and bust forever.
0:31:57 > 0:31:59But the year Tony Blair came to power
0:31:59 > 0:32:02was actually to witness the first cracks in globalisation.
0:32:02 > 0:32:04Some emerging economies of the East,
0:32:04 > 0:32:09the so-called Tiger economies like Thailand, South Korea and Malaysia,
0:32:09 > 0:32:12had borrowed heavily from overseas to finance their development.
0:32:12 > 0:32:15The markets took fright.
0:32:15 > 0:32:17Could they repay those debts?
0:32:20 > 0:32:22Countries that had been saving quite a bit,
0:32:22 > 0:32:25that had run reasonably responsible governments,
0:32:25 > 0:32:28hadn't run up large budget deficits
0:32:28 > 0:32:30but had borrowed to finance their growth,
0:32:30 > 0:32:33suddenly found the banking sector under attack,
0:32:33 > 0:32:35the currency under attack...
0:32:35 > 0:32:39wholesale unemployment without unemployment insurance.
0:32:39 > 0:32:43As Western investors began to dump local currencies
0:32:43 > 0:32:46and call in what they were owed,
0:32:46 > 0:32:48the Asian Tiger economies slumped.
0:32:48 > 0:32:51'The IMF marched in, took away their sovereignty,
0:32:51 > 0:32:55'converted downturns into recessions, recessions into depressions.
0:32:55 > 0:32:59'The result of that, as one of the prime ministers of one of the countries said to me,'
0:32:59 > 0:33:03"Never again. We were in the class of '97.
0:33:03 > 0:33:05"We will never let that happen to us again."
0:33:05 > 0:33:07And many of them said, "Never again.
0:33:07 > 0:33:10"Never are we going to get into a position
0:33:10 > 0:33:14"where outside financial markets have this kind of sway over us."
0:33:17 > 0:33:21Western protesters saw the crash of the Tiger economies as evidence
0:33:21 > 0:33:23that globalisation was a new way for the rich West
0:33:23 > 0:33:26to exploit the developing world.
0:33:26 > 0:33:30But if they were right, the tables were about to be turned.
0:33:30 > 0:33:32Those emerging economies of the East,
0:33:32 > 0:33:37burned by the experience of borrowing money on world markets,
0:33:37 > 0:33:41pledged never again to be dependent on Western speculators.
0:33:43 > 0:33:47Across Asia, governments vowed to generate growth from resources,
0:33:47 > 0:33:52to save and invest, to export far more than they imported.
0:33:52 > 0:33:56And nowhere did the cult of thrift become stronger than in China,
0:33:56 > 0:34:00at the level of the state and of the individual.
0:34:02 > 0:34:04'Rena may earn a third of her British counterpart,
0:34:04 > 0:34:07'but she still manages to save.'
0:34:10 > 0:34:15TRANSLATION: I usually spend at least half of my salary on my family,
0:34:15 > 0:34:18including education fees for my daughter Lin Lin.
0:34:20 > 0:34:24I manage to save £6,000-£7,000 a year.
0:34:27 > 0:34:30I save the money for my parents' healthcare.
0:34:30 > 0:34:33They are getting older and China's healthcare system
0:34:33 > 0:34:35is still not good enough. On top of that,
0:34:35 > 0:34:39I want to send Lin Lin to study abroad in the future.
0:34:39 > 0:34:42So I need to start saving for her as early as possible.
0:34:47 > 0:34:49The high savings rate in China
0:34:49 > 0:34:53really comes down to the lack of social welfare.
0:34:53 > 0:34:57People fear that when they get old, they won't have a pension,
0:34:57 > 0:35:02when they get ill, nobody will be able to pay for them in hospital
0:35:02 > 0:35:06and so they save like crazy at the moment for that rainy day.
0:35:08 > 0:35:11Under the umbrella of an expensive welfare state
0:35:11 > 0:35:14and national health system,
0:35:14 > 0:35:17we seem less worried by rainy days.
0:35:17 > 0:35:19So how much do WE save?
0:35:19 > 0:35:21I save about...
0:35:21 > 0:35:23Zero. Absolutely none of it at all.
0:35:23 > 0:35:26Hardly anything. Nothing much at the moment, unfortunately.
0:35:26 > 0:35:29Very little at the moment. Yes.
0:35:29 > 0:35:33Most of my salary is taken from me before I even get it, to be honest.
0:35:33 > 0:35:35I'd say probably about 10%.
0:35:35 > 0:35:38- Not a lot, to be honest. - Nothing at the moment.
0:35:38 > 0:35:40Fraction-wise?
0:35:42 > 0:35:43About a sixth.
0:35:43 > 0:35:45- None.- None.
0:35:47 > 0:35:50And what are they saying about their saving habits
0:35:50 > 0:35:52on the streets of Shanghai?
0:35:54 > 0:35:59TRANSLATION: I save at least 50% of my salary. It's true!
0:35:59 > 0:36:01How could I survive?
0:36:01 > 0:36:05I have to save money to buy a house and for my children's education.
0:36:05 > 0:36:06About 50%.
0:36:06 > 0:36:09My husband and I, we both earn our living,
0:36:09 > 0:36:12so we spend one salary and save the other.
0:36:12 > 0:36:15About 30%.
0:36:16 > 0:36:18About 40%.
0:36:20 > 0:36:24I save for a rainy day, in case something comes up.
0:36:24 > 0:36:28Saving is a safe and stable way to manage my money.
0:36:34 > 0:36:37The Chinese consume half as much as we do,
0:36:37 > 0:36:39relative to the size of their economy.
0:36:39 > 0:36:42They save much, much more.
0:36:42 > 0:36:44What's more, in the decade before the crash,
0:36:44 > 0:36:47the great producing and exporting countries -
0:36:47 > 0:36:49China, Japan and Germany -
0:36:49 > 0:36:51leant their vast savings or surpluses
0:36:51 > 0:36:55to the consuming economies - the US and much of Western Europe -
0:36:55 > 0:36:58at a rate of a trillion dollars every year.
0:36:58 > 0:37:03The global economy was becoming dangerously, grotesquely unbalanced.
0:37:04 > 0:37:07The West was saying,
0:37:07 > 0:37:10"Let's encourage consumption. That will encourage growth."
0:37:12 > 0:37:15China says, "Yes, we are a high-savings economy.
0:37:15 > 0:37:18"We have a trade surplus. We are a developing country.
0:37:18 > 0:37:21"We want to sell a lot overseas."
0:37:21 > 0:37:24This is how you grow, this is how you catch up.
0:37:24 > 0:37:27And so you had a meeting, in some sense, of minds here.
0:37:27 > 0:37:30The developing economies, especially in Asia, saying,
0:37:30 > 0:37:33"We want export-led growth.
0:37:33 > 0:37:35"We are going to produce for consumers elsewhere."
0:37:35 > 0:37:40And consumers in countries like the United States, the UK, Spain,
0:37:40 > 0:37:43increasing the consumption fuelled by credit,
0:37:43 > 0:37:46some of that credit coming from these very exporters,
0:37:46 > 0:37:49who are now saving much more and willing to finance.
0:38:02 > 0:38:05The painful legacy of all that lending by the producing countries,
0:38:05 > 0:38:08such as China, is the millstone round our necks
0:38:08 > 0:38:11of record personal indebtedness.
0:38:11 > 0:38:14Our mortgages, credit card debts,
0:38:14 > 0:38:19personal loans and overdrafts have soared from £177 billion
0:38:19 > 0:38:24at the time of Big Bang to £1.5 trillion today
0:38:24 > 0:38:29that's more than the value of everything the UK produces in a single year.
0:38:29 > 0:38:32And here's what's particularly worrying.
0:38:32 > 0:38:37If interest rates return to anything like normal levels, well,
0:38:37 > 0:38:42the interest burden for millions of families would be crippling.
0:38:44 > 0:38:48On average, every single British adult owes £30,000 -
0:38:48 > 0:38:53or a burdensome 165% of after-tax income.
0:38:53 > 0:38:57That has come down a bit, but our personal debts
0:38:57 > 0:38:59are still the biggest they've been in our history
0:38:59 > 0:39:01and unaffordable for many.
0:39:06 > 0:39:10My attitude towards debt is I try not to worry.
0:39:10 > 0:39:12I suppose, at times, we have to live beyond our means now
0:39:12 > 0:39:16because the way prices are going,
0:39:16 > 0:39:19it's a struggle to keep afloat, if you like.
0:39:19 > 0:39:21As regards to our bills, and our credit card,
0:39:21 > 0:39:24we try to pay the card off as quickly as possible.
0:39:24 > 0:39:27We are getting squeezed from every direction.
0:39:31 > 0:39:35I like to live in quite a large, spacious house
0:39:35 > 0:39:37with a large and spacious garden
0:39:37 > 0:39:40and that always seems to need something to be done to it.
0:39:40 > 0:39:42Unfortunately, the house is mortgaged.
0:39:42 > 0:39:44I'd much prefer if it were not,
0:39:44 > 0:39:48but our monthly outgoings to service the mortgage
0:39:48 > 0:39:51is of the order of about £500 per month.
0:39:51 > 0:39:56There were times when, really, one went to the hole in the wall
0:39:56 > 0:40:00and I wasn't quite sure if any money was going to come out.
0:40:00 > 0:40:03It absolutely got to that stage.
0:40:03 > 0:40:06That's not the situation we're in at the moment but, even so,
0:40:06 > 0:40:10with the mortgage payments and the children, it's pretty close to the bone.
0:40:10 > 0:40:12There is really very little spare at the moment.
0:40:18 > 0:40:22But it wasn't just consumers who took on excessive debts.
0:40:22 > 0:40:25Western banks borrowed recklessly to lend to us,
0:40:25 > 0:40:29taking dangerous risks to inflate their profit and pay.
0:40:32 > 0:40:35On the face of it, the story that was told
0:40:35 > 0:40:39was of these institutions having achieved
0:40:39 > 0:40:43a much greater level of profitability
0:40:43 > 0:40:46than ever previously seen.
0:40:47 > 0:40:50Almost all of that increase was driven
0:40:50 > 0:40:54not by banks having miraculously discovered
0:40:54 > 0:40:56a money-making machine,
0:40:56 > 0:41:00but rather by them gearing up their balance sheet.
0:41:00 > 0:41:02If you go back just 10 years,
0:41:02 > 0:41:06the UK banking system had almost no external borrowings.
0:41:06 > 0:41:09By the end of 2007, it had £800 billion or so.
0:41:09 > 0:41:12So the banks went on their own borrowing binge
0:41:12 > 0:41:15in order to finance consumption in the economy generally.
0:41:15 > 0:41:17They should not have done that.
0:41:17 > 0:41:20For the UK and other banks,
0:41:20 > 0:41:24a large chunk of that borrowing came from overseas.
0:41:24 > 0:41:28So it was global imbalances
0:41:28 > 0:41:32that were providing the fuel for this money-making machine.
0:41:32 > 0:41:36It was debt, borrowed from overseas,
0:41:36 > 0:41:38that was providing the fuel for this machine.
0:41:41 > 0:41:44People, banks, governments and companies all borrowed
0:41:44 > 0:41:48while money was cheap and plentiful.
0:41:48 > 0:41:52If you add all that debt together, it's equivalent to almost five times our national output,
0:41:52 > 0:41:55more than for any other big economy, except possibly Japan.
0:41:55 > 0:41:59Capital, money, was surging to those parts of the world
0:41:59 > 0:42:03where mainstream economic theory said it shouldn't be going.
0:42:04 > 0:42:08Money was flowing not to those parts of the world
0:42:08 > 0:42:13where investment opportunities were greatest - the East -
0:42:13 > 0:42:17but instead it was flowing uphill
0:42:17 > 0:42:22to finance not investment, but consumption in the West -
0:42:22 > 0:42:24in the US and in the UK.
0:42:25 > 0:42:30It's both a deficit problem and it's a surplus problem.
0:42:30 > 0:42:34These big, emerging economies have fixed exchange rates.
0:42:34 > 0:42:37To keep their currencies cheap, they buy up dollar assets.
0:42:37 > 0:42:39What does buying dollar assets do?
0:42:39 > 0:42:42It pushes down borrowing costs in the United States,
0:42:42 > 0:42:45making it cheaper for the Americans to borrow,
0:42:45 > 0:42:47even though they're really indebted.
0:42:58 > 0:43:01The endless flow of cheap credit from the producing countries -
0:43:01 > 0:43:05not just China, but also Germany and Japan
0:43:05 > 0:43:11meant that consumers in the UK, the US and much of Western Europe
0:43:11 > 0:43:16could keep on spending, even though we were not paying our way.
0:43:16 > 0:43:19We were not producing enough of the goods and services
0:43:19 > 0:43:23that the rest of the world wanted to buy.
0:43:31 > 0:43:34And every time our consumption-dependent economies
0:43:34 > 0:43:36hit a bump in the road, the policy response -
0:43:36 > 0:43:40led by the free-market prophet Alan Greenspan -
0:43:40 > 0:43:43was to cut interest rates so that we could borrow even more!
0:43:46 > 0:43:48Let's be clear -
0:43:48 > 0:43:52things in the West seemed pretty good. OK?
0:43:54 > 0:43:57We had growth around trend and inflation around target.
0:43:57 > 0:44:01OK, we were spending a bit more than we were earning
0:44:01 > 0:44:03and that meant a current account deficit.
0:44:03 > 0:44:05That meant borrowing from overseas,
0:44:05 > 0:44:10but we could do that at spectacularly low global interest rates
0:44:10 > 0:44:14because the East was saving so much.
0:44:14 > 0:44:17So I think it was perhaps understandable
0:44:17 > 0:44:19that the global imbalances,
0:44:19 > 0:44:21that these deficits, that excess borrowing,
0:44:21 > 0:44:27wasn't being taken as that much of a problem during the go-go years.
0:44:28 > 0:44:29By the early 2000s,
0:44:29 > 0:44:33lending and borrowing was going into overdrive.
0:44:33 > 0:44:36Everyone wanted a piece of the action.
0:44:36 > 0:44:39Houses weren't places to live in, they were investments -
0:44:39 > 0:44:41our pension pots.
0:44:42 > 0:44:45So you had a tremendous housing boom picking up,
0:44:45 > 0:44:48across industrial countries.
0:44:48 > 0:44:51The ECB? No, kept interest rates low.
0:44:51 > 0:44:52The Fed kept interest rates low.
0:44:52 > 0:44:57No wonder Ireland went on a spending spree,
0:44:57 > 0:45:01building tonnes of housing. Spain went on a spending spree.
0:45:01 > 0:45:03You can correlate it to the interest rates
0:45:03 > 0:45:05that people faced in those countries.
0:45:07 > 0:45:11And the housing boom added further fuel to the consumer boom.
0:45:11 > 0:45:15People who are borrowing against rising house prices
0:45:15 > 0:45:17didn't actually feel they were going into debt -
0:45:17 > 0:45:20they were just taking out the home equity.
0:45:20 > 0:45:24And so, you know, I borrow to buy another car
0:45:24 > 0:45:26or borrow to take a vacation,
0:45:26 > 0:45:30but it's my money because my house went up in price.
0:45:30 > 0:45:32And, of course, the financial sector was saying,
0:45:32 > 0:45:35"House prices are never going to fall across the board.
0:45:35 > 0:45:37"Don't even worry about it.
0:45:37 > 0:45:39"It hasn't happened since the Great Depression."
0:45:39 > 0:45:43Well, it did happen, and that's when the party came to an end.
0:45:46 > 0:45:50Lehman Brothers has filed for bankruptcy after billion-pound losses.
0:45:50 > 0:45:55'5,000 staff at Lehman Brothers' London office had no work to do, except look for another job...'
0:45:55 > 0:45:58The property crash, the paralysis in financial markets,
0:45:58 > 0:46:02huge losses incurred by bloated banks, like Lehman Brothers and RBS,
0:46:02 > 0:46:07led in 2008 to the worst global financial and economic crisis
0:46:07 > 0:46:09since the 1930s.
0:46:11 > 0:46:15But the collapse of the banks was when our problems began, not when they ended.
0:46:21 > 0:46:25The crash was the moment when it became clear that our golden age
0:46:25 > 0:46:26was based on an illusion -
0:46:26 > 0:46:31the illusion that sustainable prosperity could be built on debt.
0:46:31 > 0:46:35When the economies seized up as banks stopped lending,
0:46:35 > 0:46:38governments filled the breach by continuing to spend
0:46:38 > 0:46:41despite collapsing tax revenues.
0:46:41 > 0:46:43So, as banks repaid their debts,
0:46:43 > 0:46:46the indebtedness of governments exploded.
0:46:46 > 0:46:47And in that sense,
0:46:47 > 0:46:51banking sector debt was simply shuffled off to the public sector.
0:46:51 > 0:46:54That's why today's anxiety
0:46:54 > 0:46:57is about whether governments, especially in the eurozone,
0:46:57 > 0:46:59can repay all they owe.
0:47:05 > 0:47:07Public sector borrowing surged in Britain,
0:47:07 > 0:47:09the US and the eurozone
0:47:09 > 0:47:12as governments kept spending to keep the economy going
0:47:12 > 0:47:15when tax revenues were collapsing.
0:47:15 > 0:47:19The great fear of investors is that some of those governments,
0:47:19 > 0:47:23especially in the eurozone, won't be able to repay their debts.
0:47:25 > 0:47:27Western consuming companies
0:47:27 > 0:47:31owe trillions of dollars to the great producing nations.
0:47:31 > 0:47:36The crash of 2008 began to topple an unbalanced global economic system.
0:47:39 > 0:47:41The fact that there are imbalances
0:47:41 > 0:47:45is not itself a concern.
0:47:45 > 0:47:48The concern is the direction of the imbalances.
0:47:48 > 0:47:51A country like the United States, a rich country,
0:47:51 > 0:47:56ageing population should have a surplus to save for
0:47:56 > 0:48:01as the older people come to retirement age.
0:48:01 > 0:48:04Developing countries like China should have a deficit.
0:48:04 > 0:48:08They should be borrowing to finance their infrastructure,
0:48:08 > 0:48:11their housing and so forth.
0:48:11 > 0:48:13The problem is it's just the opposite.
0:48:15 > 0:48:18In the new global free market,
0:48:18 > 0:48:20the rich developed countries of the West
0:48:20 > 0:48:22believed everyone would be a winner.
0:48:22 > 0:48:25But they - we - have become the victims
0:48:25 > 0:48:30of what is perhaps the world's first truly global economic crisis.
0:48:31 > 0:48:33I think that in the aftermath of 2008,
0:48:33 > 0:48:37in the aftermath of the financial crisis, there's a fear,
0:48:37 > 0:48:39a growing sense among politicians,
0:48:39 > 0:48:43that maybe this isn't just a transitional problem,
0:48:43 > 0:48:46and that we're going to be stuck with a large part of our population
0:48:46 > 0:48:48that can cope in a globalised world,
0:48:48 > 0:48:51but also a fairly large part of our population
0:48:51 > 0:48:53that can't cope in a globalised world.
0:48:53 > 0:48:56That doesn't have, er...
0:48:56 > 0:49:01the skills to move upmarket to find this fantasy technology job,
0:49:01 > 0:49:06but that cannot work at the wages that a Chinese worker will work at,
0:49:06 > 0:49:09and therefore they're sitting there on the dole
0:49:09 > 0:49:13because the dole in Britain is a lot higher than the wage in China.
0:49:15 > 0:49:20We realised too late that it was time to get back to work.
0:49:20 > 0:49:22The party went on and on.
0:49:22 > 0:49:26Growth was unsustainably stimulated by a frenzy of borrowing
0:49:26 > 0:49:31as regulators failed to stem reckless lending by banks
0:49:31 > 0:49:35and central bankers kept interest rates far too low.
0:49:35 > 0:49:39Few wanted to see what was really happening.
0:49:39 > 0:49:44I can remember having Christmas lunch with the Prime Minister in 2006
0:49:44 > 0:49:47and saying, "Nobody looks at the money supply any more.
0:49:47 > 0:49:49"You say inflation is only 2%, but the money supply
0:49:49 > 0:49:52"is going up at 12% per annum. What's it going into?"
0:49:52 > 0:49:54Of course it was going into an asset bubble.
0:49:54 > 0:49:56Many of us were complicit.
0:49:56 > 0:50:00No-one forced us to binge on spending and borrowing.
0:50:00 > 0:50:04Perhaps naively, we didn't question whether we could afford it all,
0:50:04 > 0:50:07whether the growth in our economy and living standards
0:50:07 > 0:50:09was real and sustainable.
0:50:11 > 0:50:15How much of that growth was, in your view,
0:50:15 > 0:50:17due to unsustainable increases in borrowing?
0:50:18 > 0:50:20A lot of that growth was unsustainable.
0:50:20 > 0:50:23It was to some extent a bit of a fool's paradise.
0:50:23 > 0:50:25The government went round claiming
0:50:25 > 0:50:28we'd got the best growth since the year of Hanoverians,
0:50:28 > 0:50:32but it was actually based on very, very insecure foundations.
0:50:32 > 0:50:35And when you get an enormous build-up of people
0:50:35 > 0:50:39borrowing way beyond what they can sustain on the basis of cheap capital -
0:50:39 > 0:50:42you know, house prices were getting out of control,
0:50:42 > 0:50:44the banks were not properly managed -
0:50:44 > 0:50:47and all this was going to come to a very sticky end.
0:50:47 > 0:50:49As indeed it did.
0:50:51 > 0:50:54One of our most senior bankers, Sir Philip Hampton,
0:50:54 > 0:50:57concedes the role played by banks in pumping up our debts.
0:50:58 > 0:51:01People can only consume as people did consume
0:51:01 > 0:51:04because they were able to borrow and borrow very cheaply,
0:51:04 > 0:51:06either to buy homes, to buy consumer goods,
0:51:06 > 0:51:09all the things that they were enjoying
0:51:09 > 0:51:10without necessarily earning.
0:51:10 > 0:51:13I would say the banks were at the heart of it
0:51:13 > 0:51:15- as the key transmission mechanism. - What's your view about
0:51:15 > 0:51:19why we just didn't see the risks that we were taking?
0:51:20 > 0:51:25I think we became convinced that markets would always find a solution
0:51:25 > 0:51:29and that if we let markets operate, they would be self-correcting
0:51:29 > 0:51:32and that turned out to be the wrong judgement.
0:51:35 > 0:51:38In some respects, we should've seen this coming.
0:51:38 > 0:51:42Why didn't we? Well, there is this psychological phenomenon
0:51:42 > 0:51:47called disaster myopia, which means that the further away
0:51:47 > 0:51:50you are from a disaster, the more you discount it.
0:51:50 > 0:51:52I think this disaster myopia
0:51:52 > 0:51:57was a core cause of us turning a blind eye
0:51:57 > 0:51:59to what with hindsight
0:51:59 > 0:52:03were very obviously over-leveraged balance sheets
0:52:03 > 0:52:05across all spectrum of society.
0:52:07 > 0:52:10We started to consume without doing the work.
0:52:10 > 0:52:12And consumption without the work means borrowing,
0:52:12 > 0:52:15and we all had a part to play in that,
0:52:15 > 0:52:18I think, if we're honest with ourselves.
0:52:18 > 0:52:22We have become a big consumer society and not a big producing society.
0:52:27 > 0:52:29China's model is the opposite -
0:52:29 > 0:52:33they produce SIGNIFICANTLY more than they consume.
0:52:33 > 0:52:36And for the Li family and for hundreds of millions of Chinese,
0:52:36 > 0:52:39globalisation has delivered real rewards.
0:52:43 > 0:52:47TRANSLATION: There has been a huge change in our lives.
0:52:49 > 0:52:52It's like heaven now.
0:52:54 > 0:52:55We eat better,
0:52:55 > 0:52:58we have enough money, you can wear any clothes you like.
0:53:01 > 0:53:04In the past we didn't have enough to eat,
0:53:04 > 0:53:08and the clothes were all black or white, very few were colour,
0:53:08 > 0:53:11and we couldn't afford them anyway.
0:53:17 > 0:53:21Perhaps Rena's 15-year-old daughter Lin Lin shows the attitudes
0:53:21 > 0:53:25we'll need if we're to win in the global economic race.
0:53:29 > 0:53:32- TRANSLATION:- I've heard that in the West, people chase their dreams.
0:53:32 > 0:53:35But it's difficult to do that in China.
0:53:37 > 0:53:40Most people are quite busy with their daily lives.
0:53:40 > 0:53:43They need to work and make money.
0:53:47 > 0:53:50In the past, you could beat your fellow students
0:53:50 > 0:53:52by studying very hard.
0:53:54 > 0:53:57Now you put the same effort in just to keep up.
0:53:57 > 0:54:02So you have to study harder, harder and harder to stand out.
0:54:07 > 0:54:09Rena is optimistic as she looks ahead.
0:54:13 > 0:54:17- TRANSLATION:- China has changed a lot over the past few decades,
0:54:17 > 0:54:20but it's not such a big shock to me.
0:54:20 > 0:54:23I believe China will be stronger in the future,
0:54:23 > 0:54:26but this strength is only for itself
0:54:26 > 0:54:29and it won't be a threat to other countries in the world.
0:54:36 > 0:54:40What about Rena's colleagues in the UK, NVC's British staff?
0:54:41 > 0:54:45I think it's a shame a lot of industry in this country
0:54:45 > 0:54:48seems to be going down the pan or being shipped abroad,
0:54:48 > 0:54:50or being owned by foreign countries.
0:54:50 > 0:54:52It's as if we're becoming a giant warehouse,
0:54:52 > 0:54:55just distributing to the rest of the world,
0:54:55 > 0:55:00and not actually making, creating, which obviously brings jobs.
0:55:01 > 0:55:04It seems as though the children are going to face
0:55:04 > 0:55:06a much tougher future,
0:55:06 > 0:55:09but I always try to put a positive spin on things,
0:55:09 > 0:55:12and no-one's got a crystal ball.
0:55:12 > 0:55:14It might pick up. It looks dire at the moment,
0:55:14 > 0:55:17and if you listen to what they're saying out there,
0:55:17 > 0:55:19it most probably will be dire.
0:55:19 > 0:55:23But I'd like to think that there might be a chink of light at the end of the tunnel.
0:55:23 > 0:55:25We might go through a rough patch,
0:55:25 > 0:55:28but we'll come out on the other side, fruitful.
0:55:30 > 0:55:35James Hunter Johnston sees the bad and good of globalisation.
0:55:36 > 0:55:40'The children are going to have to compete their fellow villagers
0:55:40 > 0:55:43'in Shanghai or Beijing or Mumbai, no question about it.
0:55:43 > 0:55:46'But there's another side to the coin.
0:55:46 > 0:55:49'The global economy has brought them'
0:55:49 > 0:55:53lower cost and higher quality goods
0:55:53 > 0:55:57than I or my parents could ever have dreamed of possessing.
0:55:58 > 0:56:00# Turn out the lights
0:56:02 > 0:56:04# The party's over... #
0:56:05 > 0:56:08Whatever the benefits of globalisation,
0:56:08 > 0:56:12there can be no return to debt-fuelled capitalism in the West.
0:56:13 > 0:56:15We've reached the end of the road -
0:56:15 > 0:56:19I mean, the particular way of doing capitalism for kind of 30 years
0:56:19 > 0:56:22has actually proved to be dysfunctional and has failed.
0:56:22 > 0:56:25And now we have to ask ourselves big questions
0:56:25 > 0:56:27about how to how to do better capitalism.
0:56:27 > 0:56:30What we didn't pay as much attention to
0:56:30 > 0:56:33was the possibility that the cheap money
0:56:33 > 0:56:36flowing into industrial countries
0:56:36 > 0:56:40was actually making the financial sector more fragile.
0:56:40 > 0:56:45The same lesson the emerging markets learned in the 1990s
0:56:45 > 0:56:49is something the industrial countries have to learn now,
0:56:49 > 0:56:52which is you cannot push
0:56:52 > 0:56:56your own demand fuelled with credit too strongly.
0:56:58 > 0:57:02Modern financial markets, even for strong industrial countries,
0:57:02 > 0:57:05- are unwilling to tolerate that. - I think many people in the West
0:57:05 > 0:57:08are seeing the downside of globalisation
0:57:08 > 0:57:12that many people in the emerging markets saw before.
0:57:12 > 0:57:16The principle of globalisation, international trade,
0:57:16 > 0:57:20was that when it is managed well, everybody could benefit.
0:57:23 > 0:57:25Increasingly, particularly in the West,
0:57:25 > 0:57:30the growing inequality that has often been associated with globalisation
0:57:30 > 0:57:33is actually undermining social cohesion.
0:57:37 > 0:57:41When you consume far more than you earn, as we did for many years,
0:57:41 > 0:57:43eventually there's a reckoning.
0:57:43 > 0:57:47The best way of seeing the crash of 2007-08
0:57:47 > 0:57:50is as that reckoning, the moment when the penny dropped
0:57:50 > 0:57:52that much of the rich West
0:57:52 > 0:57:56had borrowed far more than it could ever repay.
0:57:56 > 0:57:58The global economic system,
0:57:58 > 0:58:00which had seen the producing countries,
0:58:00 > 0:58:04many of them relatively poor, lending to the consumer countries,
0:58:04 > 0:58:08which in its heyday had produced record amounts of growth,
0:58:08 > 0:58:10well, that system was bust.
0:58:10 > 0:58:12The party is over.
0:58:16 > 0:58:18In the next programme,
0:58:18 > 0:58:21I'll be look at what this economic crisis
0:58:21 > 0:58:23means for us over the coming decade.
0:58:23 > 0:58:26If we are going to build a sustainable economy,
0:58:26 > 0:58:28what kind of sacrifices will we have to make?
0:58:28 > 0:58:31What does it mean for our living standards?
0:58:33 > 0:58:38And can we respond properly to the challenge of China?
0:58:38 > 0:58:39# Turn out the lights
0:58:42 > 0:58:43# The party's over
0:58:45 > 0:58:47# They say that all
0:58:49 > 0:58:51# Good things must end
0:58:52 > 0:58:54# Call it a night
0:58:56 > 0:58:57# The party's over... #
0:58:57 > 0:59:00Subtitles by Red Bee Media Ltd
0:59:00 > 0:59:02E-mail subtitling@bbc.co.uk