#54. “It couldn’t happen here”



It has become customary for investors and commentators to worry about unforeseeable “black swan events”. They might be better advised to note the number of perfectly normal, eminently visible white swans that are circling over us right now. The idea that what has happened in Greece is some kind of freak event that “couldn’t happen here” is simply nonsense.

It could happen here, and, indeed, it probably will.

In a 1968 episode of the radio comedy Round the Horne, a misunderstanding takes place between the Emperor Nero (Kenneth Williams) and a messenger (Hugh Paddick). The messenger arrives with urgent news of Greece – but it turns out to be grease, and it has all been stolen.

It’s a terrible pun, of course, but in today’s context it’s also a terrible fact. Pretty much however you look at it, the wealth and prosperity of Greece have gone. Apportioning blame for this state of affairs, though not wholly pointless, is less important than looking at what might happen next, and at where it might happen.

In my previous article, I looked at whether the Greek crisis was the forerunner of a broader crash, which I’m convinced that it is. Here I take this theme somewhat further, looking at the dynamics of collapse, and at what warning signs we might be able to detect ahead of the event.

Though (at time of writing) we still await the outcome of the referendum called by Alexis Tsipras, it is clear that the choice before the electorate is between bad and worse. Though the most recent offer from creditors is no longer on the table, it’s pretty clear that it will be (in some shape or form) if the Greeks vote to succumb. If they vote no, however, Greece is likely to be a failed state, certainly within weeks and possibly within days. What does this really mean?

An economy in ruins

In the absence of emergency liquidity from the European Central Bank (ECB), the Greek banking system has all but ceased to function. Individuals can draw up to €60 per day from their accounts, but even this may stop within days, as there is reckoned to be only €500m of liquidity in the system (which is less than €50 per Greek citizen). Once this liquidity runs out, no-one will have any money to spend. In reality, that point has now been reached.

Already, the government cannot pay pensions or public sector salaries, but the biggest problem of the lot is that businesses cannot pay their suppliers. This means that the supply chain has snapped.

Once that happens, an economy is dead in the water.

Meanwhile, latest research from the International Monetary Fund (IMF) shows that, over the coming three years, Greece will need further loans of €50bn, in addition to the currently-suspended €7.2bn final tranche of the current bailout programme. Even this estimate looks optimistic, as it assumes Greek compliance with the agreement with its creditors, only modest shrinkage in real GDP, and the availability of funds at extremely favourable rates of interest. As a creditor, of course, the IMF might be scare-mongering, but I doubt it – the calculations used in the report look pretty solid.

Please note – especially when looking at other potential crises – is that what really matters isn’t aggregate debt (of €330bn) but the smaller, but critical, €57bn liquidity imperative.

The choice facing Greece is thus between immediate economic collapse or a long period convalescing in what amounts to a secure hospital, with bars on the doors and guards at the gate.

As of the most recent (2012) census, the Greek population was 10.8 million, so further loans of €57bn equate to almost €5,300 for each man, woman and child in the country, just to keep things ticking over. For comparison, per capita GDP is of the order of €15,000. As a rough equivalent, we are talking about Britain’s 63 million citizens needing to borrow about £560bn just to keep going until the end of 2018.

As we shall see, that figure is well worth bearing in mind.

The anatomy of collapse

The immediate issue, however, is that Greece is at the point of collapse.
You might think that the problem is simply a financial one, and that the “real economy” of goods and services should continue to function even if Greece has debts that it cannot repay.

The reality, however, is that the entire economy is already ceasing to function. With Greek banks effectively bust, money cannot circulate in the economy – workers and pensioners cannot be paid, and neither can suppliers, so there will be nothing in the shops even if you happen to have stored some Euro banknotes in a safe or a mattress.

(In parenthesis, I am amused by the British authorities’ brilliant advice to those holidaying in Greece, which is that everything should be fine if they take enough cash with them. I will be interested to see how far that cash gets them when there is nothing in the shops, no food or staff in restaurants, bars or hotels, and no petrol in buses or taxis. But I digress).

In his book The Five Stages of Collapse, Dmitri Orlov explains that finance will collapse first because it is a house of cards predicated on the assumption of perpetual growth. He also demonstrates, mathematically, that the cost of debt service will always outgrow the economy – something that we can all observe by looking at the ratios of debt to GDP across the world over the last three decades.

What happens next, Orlov explains, is that the collapse of finance is followed by the collapse of commerce. What Greece is showing us, however, is that these collapses are virtually simultaneous. If the banking system ceases to function, so do all commercial transactions, because the supply chain is severed in real time. How, without cash, can Greek businesses pay their staff, pay their suppliers or receive payment from customers? How, without tax income, can the state pay salaries or pensions? Would you, as a supplier, provide goods to a customer who you know has no access to money? Would you supply drugs to a hospital which cannot pay you for them? And, as a foreign supplier, would you export food or energy to a bankrupt customer?

Three sources of false comfort

Of course, there are three reflections that might comfort outsiders that what has happened in Greece “cannot happen here”.

First, there is the patronising belief that the Greeks have somehow behaved extremely stupidly.

Second, there is the observation that Greek debt, at some €330bn, is pretty small stuff in the global scale of things.

Third, of course, we can comfort ourselves that a Eurozone with a GDP of about €15 trillion ought to be able to cope with debt of this magnitude.

If you did draw comfort from these observations, you would be wrong on all three counts.

To be sure, Greeks and their governments have behaved fecklessly, but are we really much different? The Greeks may have been poor men living like rich ones, but walk down any seemingly-prosperous street in Britain or America and ask yourself quite how much debt is represented by the smart houses and expensive cars that you see there. The days when possessions indicated affluence are long gone, and the far greater likelihood today is that possessions indicate indebtedness. Look, next, at how much debt the British and American governments have, how much they are still adding to their debt piles, and how much they have taken on in off-balance-sheet obligations such as public sector pension promises.

If you tot that lot up, and, even before you include unprecedented levels of household debt, you will realise quite how hypocritical it is when Britons or Americans accuse Greeks of fecklessness. In Britain, for example, I confidently expect the Chancellor to find more money for the National Health Service (NHS) whilst further cutting already-inadequate defence expenditures at the outset of what the Prime Minister himself has called an “existential” war.

Feckless is as feckless does.

The second source of comfort – which is the modest scale of Greek debt – is also gravely misplaced. As Zac Tate has explained in an excellent article at CapX, the global banking system is owed $17 by China for each $1 owed by Greece, largely because Chinese household debt has soared from 60% to 200% of GDP in just five years. That, as Tate explains, is a vastly larger debt increase than the subprime madness that crippled the American financial system and triggered the 2008 banking crisis.

Within the Chinese debt mountain, it seems that somewhere between $2 and $3 trillion is already mired in “problem loans”, even before excess debt starts to exert its inevitable downwards pressure on broader debt viability. Again, the scale of British and American debt should reinforce what the Chinese numbers are telling us about the true scale of the problem.

The third comforting illusion – which is that Greece can probably be rescued by someone – is true, but only of Greece. The Eurozone or the IMF might be able to bail out Greece, but no institution exists capable of rescuing, say, America, Britain or China. For the world’s really big debt junkies, there will be no Seventh Cavalry riding to the rescue, not even with General Custer in charge.

The caravan of collapse moves on

As Richard Vague has pointed out, the ramping up of debt in China parallels the situation in Japan in 1991 and the United States in 2007. Far from being an unpredictable, “black swan” event, the crashes that followed in Japan and America were eminently predictable, flagged well in advance (for anyone willing to see the warning signals) in the rapid rise of household debt.

Earlier, I commented that the Greek scale of illiquidity – the need to find €57bn just to keep the system ticking over – equated to about £560bn in the context of the British population and GDP. Actually, this sum is exceeded by property debt downside in the UK. So, in terms of where such a cataclysmic loss could actually show up, we surely need look no further than the bloated housing market, where a one-third fall in paper values would easily wipe that much and more off the balance sheets of mortgage lenders.

Housing values have been ramped up by the stimulus of ZIRP (zero interest rate policy) which was itself taken on to cope with the previous asset bubble crisis. Therefore, even the most modest rise in interest rates could torpedo property values and, by setting off a full-blown crisis in the banking system, could cripple the economy, causing liquidity to dry up almost overnight.

That such a thing could happen is itself made more likely by ZIRP because, whilst making reckless property borrowing affordable, ZIRP has also ushered in the contradiction of a supposedly “capitalist” economic system operating without returns on capital.

So we need to stop worrying about “black swans”, taking note instead of the white ones.

We also need to stop thinking that Greece is some kind of “strange bird” experiencing something that “couldn’t happen here”.

Rather, Greece is the canary in the coal mine.

UPDATE, 6th July 09.52

I love this headline from the BBC – “Markets volatile after Greek vote”.

Nothing to do with China, then. That’s comforting.

Chinese debt to global banks is 17x that of Greece, and no-one can bail out China.

The Chinese authorities seem to have been (a) converting state-owned enterprise (SOE) debt into equity, and (b) stoking up the market for ‘feel-good’ reasons.

Now the hyper-inflated Chinese equity market is in free-fall. China’s brokers have pledged $19bn to stop the market falling, thereby surely qualifying for a Darwin award for self-destructiveness as well as the King Canute Memorial Prize for trying to stop the unstoppable. The authorities are probably looking for messengers to shoot.

And the problem has nothing to do with ultra-relaxed lending policies, or household debt climbing from 60% to 200% of GDP over five years……

72 thoughts on “#54. “It couldn’t happen here”

    • That’s one way of putting it……..do read the linked CapX piece by Zac Tate, he’s one of the more aware commentators around.

    • Yes. A somewhat intemperate reaction to reading your excellent post (again) having spent the afternoon at a garden party in the sunshine on the Moray Firth. I’ve re-read your article just now – and my reaction feels much the same. I’ve been saying to Mrs Moraymint for some time (years) now that the overwhelming majority of our fellow citizens is largely unaware (clueless) of the state we’re in; like really in …

    • It’s also interesting to compare today’s events with how much debt (let alone reparations) were written off to help Germany after WWII – and there was Marshall Aid too, of course. Merkel please note.

  1. Tim,
    Though a bit of an aside but you oft mention defence as being short of funds I seem to remember that you were in favour of scrapping Trident and boosting our conventional forces. To my mind we should adjust our forces to a primary role of defence as part of a strategic re-focusing of UK’s role in the world.
    So I would be interested in what you envisage and its budget impact?

    best Peter

    • Trident is fine if it’s affordable, but I don’t think it is. The FT likened the UK with Trident to a poor man in a tatty suit flashing a Rolex – i.e. this doesn’t impress anyone, he just looks like a prat. Nuclear warheads on cruise missiles might be an affordable alternative.

      We are in what DC rightly calls an “existential” war with ISIL, i.e. they would destroy us if they could, we would destroy them if we could, zero possibility of compromise, therefore existential. Meanwhile, that mad woman in Argentina is borrowing a squadron of long-range bombers from Russia.

      Trident is no use against ISIL, or for that matter any other conceivable enemy. We need to restore maritime surveillance. We’re going to use Tornados against ISIL, I assume, but only 6 of our 102 Tornados are serviceable. We need to replace them ASAP, presumably buying strike aircraft from the US. We need to increase, not decrease, numbers of professional soldiers (not part-timers). We are going to need more escort vessels (frigates and patrol craft), again urgently. And we need to put at least two recently-deleted subs back into service.

      My guess here is £5bn cap cost (for all the kit we need urgently) and £2bn annual running cost.

  2. Tim,
    am an expat in Germany,and see the Euro problems at first hand.Good article,all similar to what Martin Armstrong has been propagating for some time.Have any ideas of ways to protect one’s savings/wealth?

    • Douglas, thanks, and I WISH I KNEW how to preserve wealth!

      Many of the obvious things (i.e. farmland, and maybe US dollars) are already costly. Gold has attractions, but only as actual metal in a safe, not paper entitlements. In an emergency, however, governments could nationalise (= confiscate) private gold, as FDR did in 1933. Dmitry Orlov recommends useful things (i.e spades and other tools, also sail craft and spares and fittings for these), but there are limits to this.

      You could also convert some of your money into things that will help you later – a good idea being solar panels, wired into your home rather than into the grid. These will reduce your bills if money survives, or provide warmth and power if it doesn’t.

      An alternative might be “things to back chits”. To explain, think of a small business in Greece, unable to pay its workers. It is likely to give them “chits” (IOUs), a form of money which is basic but is of no use to a thief, i.e. can only be used by the man whose name is on it. Now, if local businesses do this together (the “chit” paid to you by your garage employer can be used in a local cafe) you have the beginning of a bottom-up replacement form of money. That is likely to need some backing in the form of items of inherent value that people can agree on – for instance, you have a wheelbarrow that you don’t need, yoiu can exchange it for “chits”.

      Just my thoughts at this point – but we REALLY need answers to this one.

    • As someone who’s already gone a long way down this path this is probably my cue. However, I’m going to exercise humility and restraint and say we need to define ‘wealth’ first.

      I don’t think, in the future present definitions will be relevant. I’ll open by saying wealth is what can be grown, dug up or made. Maybe that’ s the basis of money and wealth is owning the land on which to grow exchangeable commodities. Or, having the skill to make or repair something.

    • Nigel:

      I think the question as posed is “how do we preserve our money?”, or “what should we turn our money into?”

      You are right that “primary” wealth is natural resources, including labour, land, energy, minerals etc.

      “Secondary” wealth is when these things are converted into things we can use – food, machinery, buildings, refined fuels etc.

      “Tertiary” wealth is the monetary value that we convert this “secondary” wealth into.

    • Yes.

      Primary wealth is from the earth.

      Secondary wealth is primary wealth converted into things.

      Tertiary wealth is the money value we attach to primary and secondary

      For a farmer, say, land is primary – a tractor or barn is secondary – equity in the property is tertiary.

      Not my definition of wealth, but I’ve never heard a better one.

    • So, blurring your two most recent excellent articles that wealth has probably already gone for the vast majority! We’re just waiting for a swan to come swooping down and stamp its foot to make it official. That leaves ‘things’ (cars and so on) and savings. Again, the vast majority are in debt so savings might just represent future repayments.

      Hmmmm… there isn’t that much wealth about… (I hate being negative)

    • There’s plenty of wealth about – but we are used to thinking of “wealth” as “money” – and money is losing its value because govts have played fast and loose with it.

    • There is no “real wealth” definition. It’s ephemeral, fleeting, because it depends on what a group of people value at a given time. Once upon a time “wealth” was measured in Tulips!

  3. I was going to say I’m not convinced because tertiary wealth has been valued too highly but then I think I see what you mean, I’m thinking of wealth in monetary terms whereas it’s wealth awaiting a value, Perhaps it’s those who think of it as money who are in for the biggest bump when this all resets.

    • There are two economies, Nigel. There is the “real” economy of labour, resources, goods and services – and the “financial” economy of money and credit.

      The financial economy requires the real one to deliver never-ending growth. The real economy is no longer doing this. So the two have moved apart. Tertiary wealth – money etc – is going to fall through the gap in between. Money has to lose value in one way or another so that the financial economy shrinks. Hyper inflation is one way of shrinking monetary “wealth”, but default is another, and now looks the likelier of the two.

  4. If the world is full of debtors, who are the creditors? And how do we tax them…

    • Various answers to that, depending on how you view money.

      But the creditors aren’t necessarily lenders as such. They are anyone whose relationship with the financial system is positive. If you have (say) cash in the bank, you are a creditor of the banking system.

      For example, slashing interest rates, and using QE, really hurt savers – the last figure I saw for the UK alone was that savers were poorer by £400bn because of policies designed to rescue borrowers. The victims didn’t think of themselves as lenders, but were effectively such because they were creditors of the banking system.

  5. All Greece has to do is limit itself to repaying the loan interest sum, set at today’s referendum news. Remember the loans were fiat, electronic book entries in Gree’s account at a bonk. The funds were “thin air” money.
    Any capital repayments are just entered electronically to extinguish the loan, bit by bit. In the end there is no loan and the banks have no money from the capital. They earn interest and to be a good national citizen they pay interest and leave the baks as well off, or close, to what would have been the original end result.

    It’s a much more realistic scenario for everyone in the circumstances. But Greece should leave the monetary union, particularly as it’s monetarist stronghold, a discredited notion. IT can remain in the eurozone , like the UK.

    • Yes. But I think we’re going to start hearing about our old friend “moral hazard” again soon – remember that one from 2008?

      Basically, the Greeks have raised two fingers to the system. If they “get away with it”, what’s to stop others doing the same?

    • “Basically, the Greeks have raised two fingers to the system. If they “get away with it”, what’s to stop others doing the same?”

      Surely the moral hazard element is primarily that the French & German governments have taken the Greek related debt off of their banks’ hands? It’s not really a case of Greece “getting away with it”, since the borrowed cash has been spent, there’s no economic return, and the borrower (whether Greek government, corporations, or individuals) cannot repay the debt.

      Italy and Portugal could go the same way – but I don’t think that will be “they did it, so we will”, more likely that international creditors will be unable to deny the underlying economics?

      Surely all of this comes back to the problem of botched construction of the Euro, and the fact that either the Germans need to pay off other countries’ debts (in cash or through money printing), or they can refuse, and the system collapses?

    • Exactly so, Badger. It is quite impossible successfully to run a single currency with multiple budgets:

      #1 Monetary and fiscal policy needs to work in tandem
      #2 No ‘non-central’ authority should be able to borrow on the assumption that others will help it pay the money back and pay interest on it (just imagine if London agreed to provide an unlimited guarantee for the debt of an independent Scotlan)
      #3 There are no automatic stabilisers, which are vital. If one region of Britain was doing worse than the rest, at least taxes collected in that region would fall, and benefits spending would increase. There are no such automatic stabilisers in the EZ.

      The Greek insistence on the referendum as “democracy” is amusing, since apparently the 300 million (or so) voters in the rest of the EZ don’t get a say on this.

      If Greece does get an improved offer, I can see (for instance) Podemos gaining ground in Spain ahead of the general election late this year.

  6. Those that are convinced by MMT (they have gone a bit quiet lately) will say ‘Greece’s debt can ,with a few keystrokes, be reduced or entirely wiped out of existense and NO taxpayers will be affected’. Well if that is the case why hasn’t it happened if it’s that easy?.
    Perhaps there is a fundamental flaw in MMT theory that has blind-sided followers to the dangers of a ‘loose’ policy on money and helped bring us to the brink of collapse…

    • Well, one of my favourite gurus is Yogi Berra. He once said that “In theory, theory and practice are the same. In practice, they aren’t”.

      In other words, the theory of MMT looks pretty convincing, but I get the feeling there’s something about it that we’re missing. This isn’t because I can fault the logic (as far as I can follow it, I can’t). It certainly isn’t because the world’s governments and central bankers don’t buy it (such people can certainly all be wrong at the same time). It’s just that intuitively it doesn’t quite work for me. Maybe it’s just too easy?

      Also, most of the most prominent economists nowadays are “monetary economists”, but I’m not. If there are two things economic that I’d “bet the farm on”, they are (i) there are distinct “real” and “financial” economies, the latter being the servant which has become the master; and (ii) that the real economy is about energy, not money.

    • Thanks Dr Morgan,

      I think if anything the lesson to be taken from the last few years is that so called ‘experts’ cannot be trusted to make the right calls – people need to think for themselves.
      That’s if they can stop rabbiting on about football/watching Coronation street/fiddling with their phones for long enough to really think…
      The ‘expert’s seem to follow whatever the default ‘group-think’ position is.
      Great work your doing here stimulating debate and presenting some much needed fresh thinking.

  7. Depressing and more depressing. Agree that Greece could be a side show to China.
    Are there any lessons to us from history? Interesting recent interview on the radio with a couple of classicists talking about 6th century BC Greece, the problems of a plutocracy, massive debt and Solon’s reforms – we seem to have been there before and probably lots of times. Significantly, people with this sort of classics background seem increasingly rare among today’s politicians who mostly seem to have come out of the same stable.

    • David:

      I think lessons from history abound, even though history never actually repeats itself. One of the ones that I sometimes think of writing about is the respected theory that the Roman Empire was brought down by a slump in EROEI…

      What we’re witnessing is the triumph of funny money over any sense of reality – we really seem to be no wiser than Dutch investors at the time of the tulip disaster, or (perhaps more aptly) British investors and the South Sea Bubble. Then there’s the railway boom and “railway king” George Hudson, well worth reading about.

      You’re right about politicians – the problem, I think, is lack of prior experience, most of today’s politicians seeming to go straight into politics from school, via “party researcher” or “a career in PR”.

  8. Thanks Tim,

    Wasn’t it that people who ignore history are doomed to repeat it?

    But are there any historical precedents for the rise of funny money or tertiary wealth – agreed not in today’s quantity but as an example. The Dutch tulips and South Sea were classical investment bubbles but are there historical parallels where money (whether paper/stone/sea shells and the like) became disengaged from the real economy so that there was massive rise in wealth without corresponding inflation and devaluation. Or is this no different from the Dutch tulips? And on top of this I’m not sure that I really understand money & inflation – economists talk about velocity of money which seems to me to be rather nebulous.

    • Oh, there are plenty of examples. One is John Law (1671-1729), a very clever Scottish economist (and gambler, and duellist) who created the first French central bank, and had a hand in the Mississippi Bubble and the ensuing financial collapse of France. Oddly enough, some of his economic theories make a lot of sense. Then, sticking with Scotland, there’s the Darien disaster in the 1690s, a colonial project that bankrupted Scotland and contributed to the Act of Union with England.

      A famous Arab (I think) leader, of fabulous wealth, went on a pilgrimage, taking a vast amount of gold with him. Such was his generosity that he endowed cities and mosques with lavish gifts of gold at each stopping-place – and left a trail of ruined economies behind him.

      That gentleman, like Law, has a lot to tell us about money versus the real economy.

      More recently there’s Russia in the 1990s, rolling over public debt at ever higher rates of interest, which reached 300% before the scheme collapsed. There was Long Term Capital Management (LTCM), which thought it had an algorithm for eliminating risk, and was bailed out in 1998 by the Fed and others at a cost of $3.6bn.

      There’s the Nigerian cement fiasco – a development scheme for which so much cement was ordered that the harbours couldn’t unload the cement, which set rock-hard in their holds. There are other cases (such as the groundnut – peanut – scheme) which are similarly droll with hindsight.

      The Chinese equity market may be about to join this list…..

    • Actually, I missed out the biggest money disaster of the lot – the flow of gold and silver into Spain, which had horrendous effects (loads of money, no additional economic activity).

  9. Tim, is there a link between China and what’s happening to oil right now?

    • Ahhh, I’ve just seen ZH article and looks like it could be China- interesting times….

    • Indeed. I am staggered at how much more attention is being paid to Greece instead of China. China is a classic case of Canute trying to order the tide not to go in or out. If a market is going to fall, you cannot stop it by throwing money at it – ask Norman Lamont (ERM, 1992)! Suspending dealing in half of all stocks merely delays and worsens the eventual fall. Does Beijing really understand markets?

      And, has China’s growth reflected investment in far too much surplus capacity? I suspect so.

  10. Tim,

    A bit off the main topic but I think your point in another comment about the “lack of prior experience” of our politicians is spot on. I wonder if you follow the writing/blogging of Dominic Cummings at all? He has blogged about this a lot and it’s also discussed in his brilliant essay: https://dominiccummings.files.wordpress.com/2013/11/20130825-some-thoughts-on-education-and-political-priorities-version-2-final.pdf

    Highly recommended to all and he’s also putting out some great blogs on EU referendum issues at the moment.

    • Thanks for the lead – I’ve been reading this with great interest. With some exceptions – David Cameron, George Osborne, Eric Pickles, Frank Field and David Davis come to mind – most of our politicians are pretty unimpressive.

  11. I have been self educating myself about economics since 2008 in an effort to understand what is happening to the world and most importantly me!

    I’ve been following Mr Morgan since reading his Tullett Prebon reports culminating in ‘The Perfect Storm’

    If I try to discuss these subjects socially people treat me as if I’m discussing a recent alien abduction experience, they look at me as if I’m on drugs or something!

    Seeing as the conclusion to the international financial disaster seems to be taking forever to be reached I’m torn between self doubt about my total misunderstanding and terror at not having taken concrete actions to safeguard myself when I’ve had so much warning.

    The only practical solution that has occurred to me based on the likely scenario’s predicted is to purchase freehold, with cash, a small holding outside of the areas of population density, Wales or the West Country,and begin working towards living ‘off grid’ and semi self sufficiently whilst working part time in the real economy to maintain a revenue stream.

    I’m not a dippy hippy but this just seems logical, to be as self reliant for food, shelter and energy outside of the mainstream system as possible.

    I’m debt free and have a certain amount of capital at my disposal, would a mortgage free home, some chickens and a big veg patch, a woodburner with backboiler and solar panels and a wind generator be a better investment for retirement than a traditional ‘pension pot’?

    laughter and ridicule is welcome or alternatively any interest in expanding on the idea/project?

    • You’ll get no laughter or ridicule from me, or anyone here. I thinbk those of us who recoigniuse these issues are in the minority, but I’m not bothered about that.

      First point – yes, a crash seems inevitable. Second, we can’t know when – as Keynes said, “markets can remain irrational longer than you can remain solvent’. In other words, the seemingly-illogical can persist for a surprisingly long time. We’re not that far off my first “target timing” for this, but trying to call the crunch is a tricky one.

      I think your basic self-sufficiency idea sounds good. Of course, this depends on your circmustances, and what you describe calls for a lot of hard work. I’m sure you know that.

    • Matt
      I have come to the completely same conclusions you state after also having studied up courtesy of Tim , Gail @ ourfiniteworld etc and have recently done what you describe, albeit on the other side of the planet. Interestingly, I get the same reaction when discussing with others…although people here in NZ are starting to finally suspect China might be about to cause us some issues.

    • Matt, whilst I’m in broad agreement with Tim, a total collapse requiring each individual to be energy self sufficient (energy measured in terms of food and fuel) will not happen until natural resources are completely exhausted, so not even in the life time of an infant born today, but things will get steadily worse with fuel, food and shelter becoming progressively more expensive and consuming a larger percentage of people’s incomes.

      If you’re hell bent on being heat and light self sufficient have you considered a geothermal heat pump? – https://en.wikipedia.org/wiki/Ground_source_heat_pump – once installed it’s very “Green” too.

  12. Tim, good piece, I notice how comments are very much centered on Britain, some of mine:

    – when considering the €57bn liquidity imperative = €5.300/capita you are reasoning on means, like the £560bn for each Brit, weakness of this is the monodimensionality: the distribution of money can matter a loot (if we kenw it…) but also the toristic money inflow can make a difference as well as the informal economy. The non monetary transactions can take place in an agricultural/informal context where people “credit” others…simply. Rich greeks can bring back money too.

    – “In parenthesis, I am amused by the British authorities’ brilliant advice to those holidaying in Greece, which is that everything should be fine if they take enough cash with them. I will be interested to see how far that cash gets them when there is nothing in the shops, no food or staff in restaurants, bars or hotels, and no petrol in buses or taxis. But I digress”
    you can inverse the direction of causality

    – “Greece is the canary in the coal mine”
    GREAT POETRY! Really and I tell you more, Greece can tip the balance either toward a different €uro(pe) or toward a southern Europe/Mediterranean economy including Spain, with more nationalized banks & Tobin Tax. Such system can have privileged relationship with Latin America, Tunisia, Algeria, Morocco and some “easy” Russian Gas/Oil. In the meantime some “I can pay” can keep the exchange going..without denying € currency. And (some) debt undergoes the “DELETE” button. Frau Merkel

    • Thank you. Things do tend to centre on the UK, but that’s largely accidental – my book actually says more about the US than the UK. My specialties in the City were energy and the US, which broadened out when I became first a strategist then head of research. I’ve done a lot of work on the eurozone. It’s a constant learning and updating process – my current “learn more” tasks are China and Islamic fundamentalism.

      I think Greece needs to devalue – I think of myself as a European, but I’ve never believed the Euro could work. The question for Greece is how to get from A to B with the minimum of pain and disruption. Greece really does need to tackle corruption, and make the wealthy pay their taxes.

      Tourism isn’t a huge part of Greek GDP, but is capable of growing enormously with devaluation – especially since, I fear, fewer tourists are going to visit Tunisia, Egypt etc. in the future.

      I try not to take sides on north-south, Germany-Greece. One can make a perfectly good pro-German or pro-Greek case!

    • HI Tim
      I was interested to read on Gail Tverberg’s latest post (on Greece and the high % of oil in their energy mix) a comment about an inherent problem with Greece devaluing in that they will struggle to afford imported Oil – obviously crucial for tourism… This seems to be a difficult dilemma to solve.

    • Yes indeed – though importing food could be just as difficult and vital.

      It seems today that Tspiras is going to capitulate – which frankly makes the referendum look pointless and Tsipras’s rhetoric about democracy look fatuous. He keeps telling us that “democracy” is a Greek word – but so is “hubris”.

  13. When I pointed out the lack of a fiscal union to a pro-euro person, he responded:

    “It is utterly wrong to state that the EU has no financial re-distribution mechanism. The machinery is collectively known as the structural and cohesion funds:


    These funds’ joint spending is more than 50% of the EU budget.”

    What is your take on that, Dr Tim?

    • These are selective – policy, discretionary – redistribution funds. I was referring to automatic redistribution, which is quite different.

      These policy funds make transfers based on decisions.

      Here is an example of automatic distribution. If – say – the north of England is doing badly, but London is doing well, less tax is collected in the north, more tax is collected in London – and more benefits are paid in the north, less benefits are paid in London – so there is a net transfer from the stronger to the weaker, WITHOUT government deciding to do it. So this happens without lobbying, political trade-offs, policy decisions, etc, just as a normal matter of funds flows. This is what happens under a single budget.

      This doesn’t happen in the EU.

    • So the EU’s after-the-event response is also ham-strung by politics. I’ll see what my pro-euro colleague says to that!

    • Don’t get me wrong, I think of myself as European – but the Euro has always been a case of politics trumping economics, and a disaster waiting to happen!

  14. Pingback: La crisi e l’energia – Un legame tra il Minotauro e Prometeo | L'occhio di Romolo

    • Thanks – interesting, if extreme. Forward commitments – “quasi-debt” – in the US are indeed huge, as I explain in my book. They are quasi-debts, mind, not quite the same as debt.

      But the really big issue highlighted by Rickards is the threat to what I call the “petro-prop” to the dollar. Indeed, I’ve speculated that Saddam’s real sin in US eyes was his plan to start pricing oil in euros. As things stand, anyone buying oil has first to buy dollars – take that away and the ability of the US to issue dollars without crashing the exchange rate would be in real jeopardy.

    • Thanks for the link.

      At a first glance there is some good stuff here, but I cannot yet see anything that challenges the biggest problem of the lot – corporatism. This said, I applaud the living wage policy – something I’ve been calling for for ages.

      My approach to productivity would involve the following combination:

      1. Getting away from the “low-wage, high-consumption, borrow-the-difference” model. Britain can never be the lowest-cost player in world markets – quality, not price, needs to be UK plc’s pitch.

      2. Improve quality of goods and – critically – services. This is very much an ethical problem. The spivvy, quick-buck, “hide behind terms and conditions” approach has to be ditched – a matter of pride, ethics and pragmatism.

      3. Investment, based on equity instead of debt – boost returns for equity investors, limit or remove tax relief on corporate debt interest – and stop adding to the huge capital locked away in an overvalued, zero-sum property market.

      4. Reform of financial services – separate state-insured retail banking from risk-taking investment banking, so that the latter is free to innovate but, critically, also free to fail.

      5. Reform public services – bosses should not get away scot-free when things go wrong.

      As you might have guessed, I’ve thought of writing about this, either here or as a guest article elsewhere.

      But I’m more interested in the global issues right now…………….

    • And motivation?

      I live in an area (Herefordshire, UK) where there are many seasonal and full time employees from East European countries. They come with a work ethic much like I remember 50 years ago. They do all the fruit picking and as far I can see many of the caring jobs. We have a son in a care home and the (slim) East Europeans do so much that the (mostly fat) local Brits – lifting, driving, cleaning – are unwilling or unable to do. I am told that the road surfacing work done by a gang of 5 roadmen with a lorry in the 60s today requires at least 10 men with umpteen lorries and mechanical kit and endless waits for managers to turn up to make decisions which used to be taken by the foreman labourer.

      I don’t believe that the UK work ethic can be “put right” by any Government – the whole system has to be replaced (re-structured?) which will only come after a collapse of the present system

    • Fair point, Barry. I think I should have stressed that it was the “transaction” ethic that I had in mind, though of course the work ethic is a big weakness too. Perhaps George would say that if work pays more than now, and benefits pay less than now, people will re-discover a desire to work?

    • Thanks for your thoughts. I smell a change in the air now the government is not a coalition http://www.dailymail.co.uk/money/buytolet/article-3157536/State-banks-prime-buy-let-timebomb-BoE-fears-surge-loans-landlords-shake-economy-rates-RBS-TRIPLED-lending-2014-Lloyds-took-total-53bn.html

      “Mark Garnier, Conservative MP for Wyre Forest, said the Chancellor’s changes should bring private landlords’ tax relief more in line with the rates of relief companies could claim, currently 20 per cent.

      He added: ‘Buy-to-let has massively distorted the property market, resulting in rises in prices. We also don’t particularly want the nation’s working capital in non-productive assets. When you have a buy-to-let you don’t employ people to create widgets or manufacture aircraft engines.’”

      Whilst I remain cynical (to avoid disappointments), if I were to break eggs to make omelette, I would do it at the beginning of a fixed electoral cycle.

    • Well said. I’ve never liked buy-to-let, and would have clamped down on it by treating it as a business – including business rates (for as long as we have this toxic system) and reporting requirements.

      Unless this is done, I can see no case for allowing any BTL interest to be tax-deductible. Ordinary people cannot offset their interest costs (mortgage, credit etc) against tax, yet are taxed on interest receipts on savings as “income”. Whilst I’m on this subject, corporates can shelter interest against tax, but not dividends, which introduces a bias in favour of debt over equity capital. This whole area is a mess.

      Prior to the banking crisis, net rental income seldom covered interest costs, so the whole thing was predicated on eventual capital gains, which is a very bad business model. Since the crisis, low interest rates have “rescued” the BTL model, but it’s still predicated on capital gains. Therefore, any material fall in property prices will create a lot of bad debt. I know some supporters claim that loan-to-value ratios are conservative, but I doubt if they remain that way. Back in 2008, one multiple BTL-er had £3m of mortgages with only £60k of equity.

      BTL drives house prices upwards, to the detriment of “genuine” residential buyers. It also increases Britain’s debt and, just as bad, ties up even more capital in the “capital sink” of unproductive property. House prices are simply too high in relation to incomes. Young people are already the victims of generational imbalance, and BTL just makes this worse.

      Seeing property values as “investment” is a national blind spot – how would the economy perform if just some of the £ billions tied up in property could be put instead into infrastructure and productive capacity.

      Well, you get my drift!

  15. I’ve thought that the real cause for the distortion in the housing market was housing benefit and that ‘buy-to-let’ was more a symptom.

    • Housing benefit is a distortion, but I doubt of most tenants of BTL are HB recipients. The real problem is that the number of households has been allowed to increase without increasing our house-building. Last time I looked there were over 1 million households on the waiting list for housing.

    • Anecdotally, BTL in my area is a contagious disease. I know about 30 BTL landlords and they all have the same business model – check the Housing Benefit Rules and purchase/extend new/existing properties to minimum size allowed to enable them to charge for maximum tenancy occupation, all paid for by Housing Benefit claimants.

      Building more houses is no longer an option, we’ve run out of buildable land, unless you want to start making inroads into the National Parks?

      Many structures and indeed, whole towns have been built in flood plains and then the authorities wonder why these structures, on the flood plains, are, er, being flooded!! So they blame global warming!!

      I’m afraid the answer is population control and that requires means testing all child related benefits with said benefits only being payable for the first child in a family to encourage parents to have the number of children they can support financially.

      If this leads to a collapse in the birth rate, then a new immigration policy would have to be crafted allowing immigrants with the skills the UK is looking for and in the “right” age groups to enter the country with a view to at least halving the population over the next 100 years whilst keeping the demographic spread even to enable comfortable retirements.

  16. Ahh, that’s because it’s called Local Housing Allowance in the private sector. Up to £417.02p a week, for a 4 bedroom home!

    • Good point. The whole thing is a mess.

      Speaking of which, I applaud George Osborne’s moves over wages and benefits – watch this space (and CapX)…….

  17. “Already, the government cannot pay pensions or public sector salaries, but the biggest problem of the lot is that businesses cannot pay their suppliers. This means that the supply chain has snapped.”

    In fact I have friends working in Greece and they tell a completely different story whereby the Government and businesses found themselves flush with funds as citizens rushed to pay outstanding tax bills and supply bills in order to prevent a feared bail in (or funds confiscation) to the bank bust.

    The economy started becoming a cash economy a few months ago as immense withdrawals were made, some “value” was actually locked into prestiege cars like new Mercedes and then driven out of the country. Traders, themselves worried about confiscation of bank holdings have been keeping their cash at home, “forgetting” to bank it.

    Thus, we have a cash economy which, whilst not functioning perfectly isn’t far off the way it was functioning a couple of months ago.

    “largely because Chinese household debt has soared from 60% to 200% of GDP” funny that, I thought it was China’s Government, Corporate and house hold debt – http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level

    On China, look at it’s narrow money supply trajectory since end 2010, coupled with credit advanced by brokers (in fact if you want a really scary number note that Chinese margin debt now sits at circa 300% of GDP) fuelling a runaway market who then panicked making margin calls and you have your answer re the market falls – a normal correction to a vastly overvalued market. A 150% market increase in 6 months with median P/E ratios of 40?? Cmon!!

    • Thanks for this.

      Re. Greece, the use of hoarded cash in this way makes perfect sense, but could only be a short-term expedient.

      On China, my source for this household debt number was clearly wrong, though household debt has soared. Total debt as of mid-2014 was about 280% of GDP, government debt being 55% within this.

      Even so, what matters is not so much the total amount of debt in China but the rate at which it is being accumulated. Chinese debt has increased by about $28 trillion since 2007. This far exceeds nominal GDP growth since then, meaning that China, like much of the west, is now in the business of using borrowing to buy “growth”. About 35% of this has been added through the shadow banking system, and there are issues, too, about the reliability of published data. Also, much of China’s growth has been investment in capacity which may be superfluous.

      At the moment I’m researching an article on China. On the plus side, public debt is low, and China does have huge holdings of US debt paper. On the negative side, much of China’s debt is real-estate related, shadow banking has ballooned, and exposure to potential losses is about $3 trillion – bigger than the actual losses on US sub-prime.

    • Yes I agree, in case you thought I was saying “everything’s OK”. My concern is actually about all stats because I wonder how much more “accurate” western stats are over Chinese ones too, remember UK “growth now has a CPI deflator applied to it as opposed to the old RPI deflator which, as a rough rule of thumb is usually about 1% greater than CPI.Although I have a few issues with RPI, I believe it to be a far more accurate measure on inflation than CPI (housing costs?), so at a keystroke the UK increased it GDP by 1% the day it adopted CPI as an official measure and don’t get me started on the double counting of R & D alongside the inclusion of a guestimate of proceeds from illegal drug dealing and prostitution (Coke & Hookers) which they won’t be getting any tax revenue from!!

      I think China’as biggest problems are:

      1. Unproductive empty brand new cities constructed on debt.

      2. Shadow banking and it’s use of bizarre collateral – iron ore and copper etc as we all know what’s hapening to commodity prices opening the opportunity for a type of “margin call” from the shadow bankers as the value of their “collateral” falls on loans advanced.

      3. A very slow transition to a consumer and services led economy which whilst they are making the transition, they desperately need to do it much more quickly.

    • Thanks. Actually, the GDP deflator isn’t the same as RPI or CPI, but you are right nonetheless. Like the other inflation/deflator numbers, it has significant inaccuracies, discussed at length in my book. The tendency has always been to understate inflation.

      I agree with all your points about China. In some ways, the China situation reminds me of Japan in the 80s – there was something almost mystical about Japan then, and if someone (like me) argued that Japan was not unstoppable, but was in fact an over-collateralised credit pagoda, many saw that as tantamount to heresy. I think there is a similar mystique now attached to China – “growth will never stop”, “the Chinese have cracked it”, blah blah….

      China is now borrowing a lot more than $1 for each $ of growth, and you are right about unproductive assets, i.e. stranded investment.

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