#56. Storm Front – part 1


Though the recent slump in the Chinese equity market should be seen within a limited context, there is a strong and growing likelihood of a major financial crash starting in China before spreading globally.

Since 2007, China has acted like America before the crisis, borrowing $3.90 for each $1 of reported growth. Spending borrowed money, and treating this as “growth”, was a hallmark of the most at-risk economies before the 2008 crash. So, too, were the wasteful use of borrowed funds, and the proliferation of “shadow banking”, both of which now characterise China.

That these risks are being widely underrated by global markets is evidence of immense complacency. In the eyes of many, mesmerised by the country’s past successes, China can do no wrong. This complacency is a “China syndrome”, similar in nature to the “Japan syndrome” of the 1980s. How often do we read that China’s economy is “unstoppable”? How often was that said about Japan in the 1980s?

The Chinese economic transition – from huge exporter to more balanced consumer – is clearly going badly wrong. Debt-addicted China looks increasingly like subprime-hobbled America on the brink of the crisis.


Welcome to the first part of “Storm Front”. We’ve covered a lot of ground on this site, but now I want to address a really critical issue – are we heading for a new financial crisis?

I’m convinced that we are. I have never believed that the 2008 banking crash was a complete, “done-and-dusted” event, and nothing that’s happened since has changed this view.

After all, the 2008 crisis happened because we had been borrowing $3.20 for each dollar of growth in the economy. Since then, this has actually worsened, with each dollar of growth now coming at a cost of $3.40 in borrowed money. Globally, debt increased by $55 trillion between 2000 and 2007. Since 2007, debt has grown by a further $57 trillion.

In fact, if we look at what is known as “real economy” debt – which excludes the banking sector – things are much worse now than before the crash. Prior to the 2008 crash, we had taken on new debt of $38 trillion – or $2.20 for each dollar of “growth” – over a seven-year period. Over the subsequent seven years, that number has increased to $49 trillion, or $2.90 for each “growth” dollar.

From this, you might conclude that we seem incapable of learning from our past mistakes. You would be right, but would need to take into account, too, that global responses to the first (2008) crisis hard-wired the next crash into the system.

As well as huge debts that could never be repaid, the authorities became aware in 2008 that simply trying to keep up the payments on this mountain of debt could, of itself, bring down the system. When cutting “policy” interest rates proved to be insufficient, central banks set out to manipulate market interest rates – bond market yields – as well. This was what the creation of money through “quantitative easing” (QE) was really all about.

To understand where things are going, we need to pose three questions:

1. Why does an event like the 2008 crash happen?

2. Are the conditions in place for a re-run of the financial crisis?

3. Where is the next crunch likely to start?

For those who like to cut to the chase, here are some quick answers.

First, a banking crisis occurs when the system has created more debt than it can cope with.

Second, the pre-conditions for a crash are in place now – this need not mean that a crisis is imminent, but it does surely mean that a crash is extremely likely. The relevant questions now are “when?” and “where?”, and perhaps “how?” – but not “if”.

Third, the likeliest start-point for the next crash is China (a view that is not, by the way, particularly influenced by recent turbulence in the Chinese stock market).

1. Why does an event like the 2008 crash happen?

A multiplicity of causes can be cited for the 2007-08 banking crash, and many of them played some part in what happened. What we need, though, is one key lead-indicator, a single metric that can warn that a financial storm front is looming.

That indicator is an unsustainably rapid increase in indebtedness, measured in relation to economic output. More specifically, it is an excess of private borrowing. Why private (rather than state) debt is the problem is explained later.

Of course, the fact that an increase in debt is a pre-condition for a crisis pretty much goes without saying. Between 2000 and 2007, global debt increased by 63%, from $87 trillion to $142 trillion. In the seven years in which this $55 trillion increase in debt was taking place, the nominal value of the world economy increased by just $17 trillion, meaning that each $1 of growth was purchased using $3.20 of new debt.

This ratio was far worse in some countries (such as America, Britain and, most obviously, Iceland and Ireland), and far more restrained in others. But the overall relationship between debt and growth was inherently unstable.

GDP – the general measure of economic output – can be calculated in three main ways. Two of these are income, and gross value added, but the one to focus on here is consumption. Now, if your annual expenditure increased by $17,000, either because you had added $17,000 to value being created in the economy, or because your salary had increased by that amount, that would be one thing. But if your annual expenditure increased by $17,000, but only because you had taken on $55,000 of new debt, that would not amount to an increase in your prosperity. You would simply have mortgaged the future in order to increase your spending today. This would not be a sustainable state of affairs.

In short, expanding GDP simply by spending the proceeds of borrowing is not really “growth” at all. In the pre-2008 years, growth in Britain and America amounted to nothing more than the recycling of borrowed money.

We can be more specific by dividing debt into three categories. The first of these is financial debt, which is the scale of indebtedness between banks and other financial institutions. This accounted for $17 trillion within the $55 trillion increase in global debt between 2000 and 2007.

If we exclude this banking component, what remains is “real economy” or “non-financial” debt. This increased by $38 trillion – from $67 trillion to $105 trillion – in the seven years before the crash. Therefore, each $1 of growth had come at a cost of $2.20 of new “real economy” debt. Again, this number was far higher in countries like Britain and America than in other, more conservative economies. This virtually ensured that a crash, when it came, would occur in one of a limited number of countries.

To qualify as the host venue for a crisis, a country had to meet two criteria.

First, its economy had to be big enough to matter – a crash in a country like Iceland, Ireland, Dubai or Greece would not have been of a magnitude sufficient to undermine the global financial system.

Second, it had to happen in a country where debt had got out of control, and where a boom had taken place on the basis of borrowing.

So the crash virtually had to happen in one of the few countries which were both large enough to matter and reckless enough to hit problems. It could have started in Britain, but it was always likeliest to occur in America, which, of course, was exactly what happened.

“Real economy” debt in turn divides into two categories – state and private. In the 2000-07 period, private and government borrowing contributed $26 trillion and $12 trillion, respectively, to the $38 trillion increase in debt. Geographically, however, there was a starker division, with the private sector accounting for almost all of the debt escalation in countries like Britain and America, where government indebtedness did not increase.

Logically, economies in which private indebtedness is escalating should also be countries where state debt is not under upwards pressure. For a start, an economic boom – even if borrowed, and thus essentially phoney – should, while it lasts, boost tax revenue. Second, the boom should likewise reduce the cost of welfare to government.

The second reason why private rather than state debt flags an impending bust is that excessive private borrowing can be wasteful. Of course, government borrowing can be wasteful too, but it is unlikely to be exposed as such. If, say, the British authorities were to spend too much on hospitals, or schools, or defence, this might be wasteful, but, being in the state sector, it is unlikely to be subjected to financial exposure.

This is where private borrowing is different. Excessive borrowing by the private sector almost certainly means wasteful over-investment. It might amount to pouring too much borrowed money into the housing market, which was what happened in America and Britain.

Alternatively, it might take the form of wasteful investment in capacity of one form or another.

Either way, it is a hostage to exposure.

In Britain, the US and elsewhere, wasteful investment in property markets was exposed when servicing the debt became impossible. This had to result in massive bad debts resulting from property market losses, which is exactly what happened until it was stemmed – probably only temporarily – by governments (a) bailing out the banks, and (b) adopting policies of interest rate reduction and the rigging of market yields. This, of course – and as the Bank for International Settlements noted in a recent report – carries risks of its own.

The other way in which an excess of private borrowing can result in huge losses is where funds are invested in unnecessary capacity. Where this happens, the excess capacity – be it in factories, offices or real estate – will drive returns downwards, making much of the associated debt non-viable.

2. Are the conditions in place for a re-run of the financial crisis?

As we have seen, the financial crash of 2008 resulted from an excess of debt. Looking only at real economy borrowing, global debt increased by $38 trillion during a seven-year period in which nominal GDP increased by just $17 trillion. This meant that each dollar of “growth” had come at a cost of $2.20 in new debt.

In the seven years since the crisis, and far from improving, this ratio has become even worse, with nominal “growth” (again, $17 trillion) happening on the back of $49 trillion of new debt. So the ratio of new debt to each dollar of growth has worsened, to $2.90 from $2.20.

There are several reasons why this has happened. First, central bank policy responses to the 2008 crash have made borrowing much cheaper. Globally, the authorities opted for cheap money as the only – or, at least, the most painless and politically acceptable – response to the mountain of debt that had crippled the system. As we have seen, they accomplished this partly by reducing official rates to zero, but mainly by manipulating capital markets using vast sums of money newly created for the purpose.

This may well have debauched the monetary system as well – indeed, it probably has – but what matters here is that it has resulted in debt growing even more rapidly than in the years before the 2008 crisis.

Second, the world seems to have become incapable of delivering growth by any means other than borrowing. Britain has done better than most at solving this conundrum, reporting growth in real GDP whilst moderating (though not reversing) the accumulation of debt. Even in Britain, however, all is not what it seems. A big chunk of Britain’s growth is attributable to vast sums of compensation paid out by the banks. Even more has been funded by a chronic current account deficit, which last year resulted in the United Kingdom borrowing almost £100bn from foreign lenders, quite aside from being a huge net seller of assets. Borrowing has shifted from the private sector to the British state, and movements within private debt suggest that the emphasis has shifted from investment to consumption, which is precisely the reverse of what the authorities have been trying to accomplish.

3. Where is the next crunch likely to start?

Any objective analysis of the situation must identify China as by far the likeliest venue for the next financial crash. Of the $49 trillion in new real economy debt taken on globally since 2007, $15 trillion – 31% – has been added in China. This amounts to $2.90 of new debt for each $1 increase in nominal GDP over that period. These numbers, by the way, are calculated on a PPP (purchasing power parity) basis, so are not distorted by the official Chinese exchange rate.

There are other ways in which China since 2007 has echoed, in an almost uncanny way, what happened in the US and elsewhere in the years preceding the crisis.

For a start, much of the increase in debt has been associated with real estate, which now accounts for almost half of China’s total debt.

Second, the “shadow banking” sector – critical in creating huge loss exposure in the US and elsewhere before the crisis – has been growing like topsy in China, expanding at an annual compound rate of 36% since 2007.

Third, much of the expansion in debt has been in the private (or quasi-private) sector, which, again, is what happened in the West before 2008. Government debt remains pretty low, but the same could be said of America, Britain, Spain and many other economies before the crisis.

What history teaches us is that state debt ratios tend to expand dramatically after a crisis has taken place, when the government has to assume responsibility for a lot of private, quasi-private or financial sector “toxic assets”.

Of course, some optimistic believers in the ”China syndrome” of irreversible success argue that China’s low state debt ratio will enable Beijing to engineer a soft landing – increasing the state debt ratio to, say, 80% might not be unreasonable, and this would enable China to take on, say, $3 trillion or more of at-risk debt. Those who draw comfort from this observation seem to underestimate the sheer difficulty that China would encounter in trying to raise this kind of money. Likewise, those who believe that China’s huge reserves can be used to fill the gap seem to forget that deploying this would involve selling vast quantities of un-repayable American IOUs to replace equally un-repayable Chinese commercial debt.

One analyst has put Chinese exposure to bad debts in the region $2-3 trillion which, if correct (and it probably is) would inevitably trigger a crisis in which even perfectly viable borrowers could be brought down by the failure of those by whom they, in turn, are owed money.

The indications are that loss exposure in Chinese property already far exceeds the exposure in US sub-prime that triggered the crash in 2008.

Finally, we need to look at what the sheer quantum of Chinese borrowing tells us about the economy. Chinese GDP continues to grow at impressive rates, but indications are mounting that all is not as it seems.

For a start, and like America, Britain and others in the recent past, increments to Chinese GDP are far exceeded by additional borrowing.

Second, an increasing number of multinational corporates are warning of deteriorating volumes in the Chinese market, whilst factory activity is shrinking.

Most important of all, there is increasing evidence that the excess of private borrowing is being reflected in surplus capacity, which is precisely what one would expect given the link between excessive borrowing and wasteful investment. As well as inflating its property market, China seems to have built industrial, retail, housing and office capacity far in excess of realistic demand. We should never forget that GDP includes additions to capacity – but GDP simply records these additions, without warranting their future viability.

As remarked earlier, the gyrations of Chinese stock markets may not be particularly important, but they are very significant in one way that often fails to attract comment – essentially, China’s attempt to convert vast swathes of debt into less systemically-risky equity has undoubtedly blown a fuse.

43 thoughts on “#56. Storm Front – part 1

  1. Hi Tim, good to see your contributions again. But I have a few queries, particularly about debt.
    Maybe you have answers? If so it would be welcome.
    Sovereign Government debts are the government’s sovereign debt plus the government’s non sovereign debts, that of component states and municipalities. The sovereign debt is really just a form of savings accounts held at the Central Bank. No money changes hands. They are not spent.
    So repayment is simply a matter of reversing the accounts. Non sovereign debts are different. They are like our debts, we spend and then have to find ways to repay interest and capital.
    I have never seen the separate amounts set out for any nation., so it begs the question of how big the loan debt really is. For example is the US $17 trillion just composed of T-bonds held in the Federal Reserve bank or does it cover non sovereign bonds as well? It should, but I don’t know.

    If it just the “savings accounts” T-bonds then the whole debt picture is very different. It means the more central bank debt the stronger will be the economy as it is replete with non government savings.
    The bank debts are another matter and can be a serious issue. Banks can lend by Credit Creation nowadays, Not by fractional reserve lending or intermediation. So they create credit in the same way as the FRB, BoE, ARB etc do. The difference is it’s a transitory money, tied up with loans. It has to be repaid, or marked down in the accounts if there is a default [or a jubilee].

    Banks are conning us though. We have to repay with real earnings, sales etc for a loan conjured out of thin air. It’s not equitable but even many sovereign governments are fooled. In the final analysis Bank debt can be written off without destroying the banks’ bottom line if just the interest is received. Interest is the only real money the bank can use for its bottom line.The principal vanishes.

    I think all the talk about a crash is distorted by the misunderstanding of how banking finance works.
    In China’s example we see a huge amount of wasted money in empty cities etc. However IMO, China could easily pull down all those empty cities and rebuild them. Paying for it is no problem. China can never go broke in their Yuan. It’s not without consequences. China has to do all this without making their Yuan look weak. But the party has other priorities. No1 is to keep work up to the population, so demolishing and rebuilding cities is OK! They eventually will pay for it but not financially so much as in wasted resources.

    Nate Hagens calls this time a “Global deflationary depression”, because of the continual money machine creating principal out of thin air, which is supposed to be paid back[but won’t, IMO]
    There is evidence of declining energy use, since 2005. It’s due to declining marginal utility. Eventually it just won’t pay its way. Our civilization is a mature one drifting towards unproductive activity. We are consumers not creators, dissipating the wealth provided by past work.

    Whether or not it’s going to be in finance, who knows? But something has got to give.

    • A lot of good points, John.

      As you know, I’m less convinced than you by MMT, but here’s my take on it.

      Government debt is “real” in the sense that it is owed to somebody, be it a person or an institution. A lot of US government debt is owed to other parts of the US government, principally Social Security (but this is NOT included in reported US debt numbers, BTW, which are just “debt owed to the public”). So really you have to ADD social security holdings to the reported number to compute total US govt net debt, especially now SS has a deficit instead of a surplus, so is steadily selling its Fed paper to meet its spending needs.

      Govt has to pay interest on this debt, which it does – in cash, out of tax receipts. It also has to redeem debts as they fall due. So the UK DMO (debt management office) has an annual “gross mandate” – it needs to sell gilts to raise (a) the deficit + (b) repayments of maturing gilts.

      Issuing money to repay debts is possible, but prohibited by many agreements and treaties, i.e. Maastricht. (Otherwise the ECB could simply have created money to pay off Greece’s debts). More than this, “monetising” debts in this way is frowned upon – any state doing this could expect to see both its bonds tumble and its currency weaken. This would amount not just to using but abusing monetary power.

      Now some – including me – believe that UK QE did break this rule, i.e. did “monetise” HMG debts. 99% of QE was used buying gilts. These were bought at arms length, i.e. from investors, not directly from government. But they were bought from institutions which HAVE TO hold gilts – i.e. pension funds, which operate under rules requiring ownership of risk-free assets, effectively meaning UK gilts. So the institution sells gilts to the Bank – in return for newly-created money – and then immediately buys more gilts, usually making a small profit on the transaction. To me (and to many others), this may not technically be “monetising” debt, but it is perilously close to it. Under MMT, govt could simply print its debt, but monetising debt in this way is a taboo where markets (and treaties) are concerned. Both the BIS and the World Bank would go ape if a government did this.

      Now, China, if facing $3 trillion of bad debts (which is the number I’m hearing) could simply print it – but faith in Chinese government bonds, and in the RMB, would suffer – the market would wonder “what is going on if China has to print debt?”

      It could fall back on its US bond holdings – but to do this it would have to either sell these (thus swamping the market), or give them to indebted Chinese banks or corporates – but these would then have to sell them to meet their obligations.

    • Hi Tim

      I rather think the government did break the rule on debt monetization, not least because they’re still doing it! We hear a lot of hype about Mark Carney raising interest rates some time later this year but surely a precursor to that would be for them to stop QE.. In a letter from February this year from Carney to Osborne we find that QE has become a permanent feature of the economic landscape.

      “From 2009 to 2012, the MPC purchased £375 billion of assets financed by the issuance of central bank reserves, and the Committee continues to reinvest the cash flows associated with all maturing gilts held in the Asset Purchase Facility in order to keep the total stock at £375bn.”

      http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/cpiletter120215.pdf – (Last para page 4)

      If the average maturity of bonds purchased was 6 years then we will effectively see all those bonds repurchased in that period which means that QE would be currently running at about £60 billion per year. None of this has been reported in the MSM and I have heard no reports to suggest that this policy has since ended. Nor do we know what balance of maturities they are currently buying as they could move the majority of the portfolio into shorter term paper which would effectively increase the QE rate higher still. To date at least, the government has monetized 25% of the national debt. When the next crisis strikes no doubt we will see QE at least double again.

      Not so long ago I remember Jeremy Warner in the Telegraph writing that it would be unthinkable that the UK government could pay itself the interest and profits from QE but when that happened markets didn’t even blink. Debt monetization may have been taboo in the past put in the new economic normal of perpetual crisis then governments and central banks seem to be able to get away with anything. The actions of the BoJ are a particularly good case in point.

      As long as they get their money, investors do not seem to care where it comes from, in fact they seem to be rather happy with all the QE and debt monetization going on as its the only thing keeping delusional markets afloat. Japanese investors are just happy to see ETFs rising and don’t worry about the fact that the market for ETFs is the BoJ. Similarly, people seemed perfectly happy to sell London property to Chinese and Russians without worrying about what the source of those funds was. In the right crisis circumstances I’m sure the BIS and World Bank would be totally OK with governments monetizing the debt away more openly.

      In these respects economic and geopolitical crisis and fear have been essential elements in keeping perceived safe haven economies such as the UK and US in far better shape than they should have been. The only question for a long time now has been how long central banks can keep this economic twilight zone on the road. Its already been a lot longer than many of us anticipated but gravity must inevitably take hold at some point.



    • Simon

      Thank you very much indeed – I hadn’t looked at it that way, and I doubt if many others have, either.

      There’s a continuous theme of sustaining unrepayable debt using irresponsible money – and China might just be where this charade gets called.

      My friends at CapX have just run an article on support for Jeremy Corbyn, asking why large numbers of otherwise sane people would prefer socialism over capitalism. But I think they’re choosing socialism over corporatism, with real, honest capitalism not on offer. After all, capitalism surely requires honest money. The connection is that I think the lunatics are running the asylum already!

      P.S. I have an article in CapX tomorrow – on China.

    • Thanks for the reply. Tim. I forgot to tick the Notify box so only saw it now.

      Government debt is a debt instrument indeed, but T-Securities, which so far as I can tell – even after asking Warren Mosler, are what comprises Sovereign Government debt, are not owed to anyone except the investor bank [they can be traded after]. The investor’s bank will have its fed account debited by the amount invested at the auction. [The fed cannot buy bonds directly] This sum is credited to a savings account of the federal reserve and receives interest, usually 6 monthly.
      At maturity the bond sum is debited from the fed savings account and credited along with any unpaid interest to the investor or successor, bank cheque account. Thus the deal is closed and no money, bar interest, changes hands. It means having government “debt” is a wealth creating transaction, not a debt transaction.
      The transfer is only the interest credited to the lender. The principal is, like with a bank loan, ephemeral and just vanishes back into the thin air whence it came.

      State and municipal bonds are another matter as they raise money and the principal is spent, necessitating using real wealth to repay it and the interest.
      The bank lender still only gets to keep the interest portion. The principal vanishes here as well. However, in a bind, the borrower can ask the CB to credit their repayments as new money. This is what the ECB is prohibited from doing.

      It’s never just money for jam, or a magic pudding. The limit is what inflation can bear, what unmonetised potential value there is in the entire economy. Usually spending for full employment pays for itself in improved GDP, raising the value against which the advance was made. Same for a “living wage”. Recipients enter the money economy and again, boost GDP. Because the economy has more customers. The government HAS to deficit spend to grow the economy.

      Government pays absolutely zero out of tax receipts. Tax money cancels created money, a way of keeping a lid on spending. It has other purposes, but not for government expenditure, which only emanates from Treasury via the CB [BoE in UK] When you pay your tax your account is debited. That is all. there is no corresponding credit. CB money is net credited to boost spending power and there is no accounting debit. A unique feature of a CB in a monetary sovereign nation.

      All the gilts etc you talk about would have to relate to non sovereign debt. All governments have non sovereign debts as well, say municipal bonds etc which are subject to the same limits as our own debts. They are not counted in the “Government Debt” statistics I believe.

  2. “In the seven years in which this $55 trillion increase in debt was taking place, the nominal value of the world economy increased by just $17 trillion, meaning that each $1 of growth was purchased using $3.20 of new debt. This ratio was far worse in some countries (such as America, Britain and, most obviously, Iceland and Ireland), and far more restrained in others.”

    What both intrigues and irritates me, Tim, is when I read articles like the one below in the mainstream press. The Daily Telegraph’s Jeremy Warner, “one of Britain’s leading business and economics commentators” [sic] tells us that “the financial crisis [of 2007/08] is over, so let’s focus more on growth”. Presumably Mr Warner means more of that ‘let’s borrow $3.20 and create $1.00 of output’, sort of growth, does he?

    I do find it fascinating that commentators such as you, Tyler Durden over at ‘Zero Hedge’, Chris Martenson at ‘Peak Prosperity’, Gail Tverberg at ‘Our Finite World’ to name but a few, appear – from the evidence that you all present – to be saying that, if anything, since 2007/08 things have been getting worse, not better. Moreover, the global economic trajectory is – without wishing to put too fine a point on it – heading towards oblivion.

    Meanwhile, people like Jeremy Warner, Robert Peston, that idiot Paul Mason, that other even bigger idiot-charlatan Jim, now Lord, O’Neill et al keep spouting fantastic nonsense about the economic state we’re in and how, sooner or later, fingers crossed, let-the-banks-rip, we’ll all be languishing in bright, sunlit economic uplands. Hmmmm.

    I’m convinced that the fundamental problem is that orthodox economists (see the list above to name but a few) simply cannot get their heads around the concept of surplus energy economics.

    ‘The crisis is over, so let’s focus more on growth’: http://tinyurl.com/o979xwg

    Incidentally, here’s a neat synopsis of the energy-economics relationship, worth a read too …

    ‘Energy, the repressed: paging Dr Freud’: http://tinyurl.com/nrlnmsh

    All the best …

    • Good thoughts as ever, MM.

      Actually, though without going through your list, I’d make a case for Robert Peston, and not just because he’s a former colleague. Given where it’s posted – i.e. the BBC! – his blog does raise some good and worrying issues. Also, Jeremy W did write recently than Britain is living on “borrowed time and money”.

      But the general point is true. There are levels of complacency beyond a doubt. In government, I find this sort of acceptable – if a senior minister said “our economy is stuffed”, it would become self-fulfilling prophecy, so they have to guard what they say. Commentators, though, should tell it as they see it – and, quite difficult, if they’re not sure or don’t know, say so!

      This is what in my book I call “flat earth” economics. The surplus energy case is out of the spotlight right now, but only because oil prices are weak due to (a) the oscillating trap (see book), and (b) irrational investment. But NONE of the conventional economists has answered these questions satisfactorily:-

      “Why is there little or no growth – and no usual big bounce-back after a slump?”

      “How can a capitalist economy operate with zero returns on capital?”

      In the present context, I think my “China crash” thesis holds water – time will tell…..

  3. “Likewise, those who believe that China’s huge reserves – variously put at around $4 trillion – seem to forget that deploying this would involve selling vast quantities of un-repayable American IOUs to replace equally un-repayable Chinese commercial debt.”

    Another mind-blowing piece, Dr Tim, but did you mean “those who believe IN China’s huge reserves”? Anyway, that sentence is eminently quotable and shows the sort of cloud-cuckoo land that finance has evolved into these days. It makes me very, very scared. I recently read somewhere about China’s “ghost cities” being equipped with everything except the people to live in them!

    • Thank you. The piece about China’s reserves was badly phrased, so I’ve updated it. Basically, some think that China’s big reserves will enable it to bail out troubled borrowers and lenders, but I cannot see how – trying to sell US debt paper (which is what the “reserves” consist of) would simply crash the US bond market………….

      …………..which is a classic instance of contagion.

      You are right about Chinese ghost cities (and ghost shopping centres, etc etc), not unlike Spain’s ghost airports and Italy’s “roads to nowhere”. Ireland had about 350 housing estates with nobody living in them, many of which have since been demolished. Valencia had a Grand Prix circuit and an Americas Cup harbour, neither of them in use….

      Chinese provincial governments get most of their revenue from granting building permits, and builders can get loans from banks which have access to cheap funds, and are encouraged to lend.

      So yes, it is very scary. Of course, the consensus seems to remain that China is fine. Well, back in 2007-08, the banks were fine, too – until the day when they weren’t…….

    • I think you are right in highlighting China as the most significant concern. China reminds me very much of those opaque AIM companies like Quindell and Worthington where its hard to work out what they actually do and how they make their money or indeed, whether they actually do make any money at all as their accounts are completely untrustworthy. I think that in 2012 the Chinese financial system generated something like $25 trillion in credit. That’s a huge largely unregulated amount. Much of it found its way into the London property markets and much of the UK recovery can be booked out to inflows of funny money flowing in via gobal QE or by massively lax credit creation abroad. All those MSM reports of Christmas and New Year sales in Oxford street showed predominately Asian shoppers which left me thinking where is all this Chinese money coming from when the average wage is so relatively low?

      One of the problems with this kind of massive credit creation is that the collateral base remains the same. This leads to worries as to how many times this scanty collateral has been rehypothecated or indeed whether in China, much of it exists at all as I have read many stories of the collateral of warehouses full of copper and iron ore which were in fact empty.

      In such circumstances it is very difficult to assess quite how many competing claims there are on the thin collateral base in order to calculate the real size of this inverted credit pyramid and the actual stability of its construction. I would be very surprised if this turned out to be any kind of sound or reliable structure given the lack or transparency and adequate regulation. As with the original financial crisis we have no idea of the real scale of the risks out there and to be sure, nothing in the mean time has been fixed, if anything risk globally has increased significantly.

      The same goes for leveraged equity purchases by Chinese investors, Fine when the market is going up but as soon as it starts falling and the margin calls come in then things get very ugly very quickly. It has taken extreme actions from the government and PBoC to keep those markets from tanking completely and one gets the feeling that their battle is far from over. Not least because I have read that Chinese companies are trading at over 60X earnings.

      I wonder how far we are from the time that the Chinese government makes it illegal to sell shares for less than you paid form them? We seem to have reached the time now where as soon as markets start falling they either break or trading is suspended until central banks can get their plunge protection teams into action. So much for free markets.

    • Thanks. This situation reminds me of Japan. Book gain on property? Leverage into into equities. Book gain on equities? Leverage it into property (plus art works, overseas assets, etc etc). Japan was an over-collateralised debt pagoda, and China seems to be following the blue print.

      Another thing that concerns me is, how will China seek to respond? Deny that a crisis has happened? Bang up anyone who sells any investment? At times, I wonder whether China is being run by a latter-day Canute.

  4. I was getting a bit desperate of my next fix of Dr Morgan, but here it is, and it’s a belter, thank you!

    One question about government debt: You say that between 2000-2007 government indebtedness didn’t increase, but was that a global aggregate? I’m just thinking that was the period when the fool Brown was busy working to double the UK national debt, and my recollection is that the US was doing the same, with the subtle difference that the British government frittered the borrowing in a multitude of pointless ways, whereas the American government’s spending was dominated by “investing” in vastly expensive wars in Iraq and Afghanistan? Surely nobody was reducing debt by similarly extreme figures at the same time?

    • Between 2000 and 2007, government debt – globally – increased, from $22 trillion to $34 trillion. But that’s the global total. In the US and the UK, I think, there were very small increases (in Britain, Brown thought the borrowed boom was real, not a bubble, so increased public spending accordingly). Against this, other countries were saving – in fact building big sovereign wealth funds.

      But the big increases at that time were in private debt, especially in countries like Britain and America. Globally, we took on $2.20 for each $1 of “growth”, but the numbers in Britain and America were very much larger than this. Govt debt in the UK only really increased in the aftermath of the banking crisis, when revenue slumped and banks were rescued – from recollection, the UK deficit leapt from £30bn to almost £160bn.

    • I overlooked this comment of yours, Tim, from several days ago, but you are misinformed about government debt, I fear. Government debt is just the total sum of Treasury securities held in the Central Bank [not treasury] These are debt instruments but are really not debts. They are in fact savings accounts. When treasury sells bonds they are taken up in the non government sector. The CB debits it’s reserve cheque account with the sum and credits the investor savings account held also at the reserve bank. This then attracts interest paid by credit creation at regular intervals. At Maturity the transaction is simply reversed. The bond sum is not spent so both the debt and its opposite are held in the reserve at the same time. That should not sound like a debt!
      The bigger this “debt”, the more wealth is stored in the CB!
      As you can see it’s not what you are saying.

      Sovereign wealth funds are a seriously stupid idea, purely motivated by ignorance regarding finance. A sovereign government can pay any and all costs at any and every time. To save means borrowing in one’s own currency, an idiotic idea!
      All sovereign wealth funds achieve is a banquet in fees and charges by banks.
      The government is never constrained in paying for things.

  5. Hello Dr Tim.
    I used to follow your output on the TP website. I am very pleased to see you are still active and publishing your thoughts and ideas.

  6. Tim,

    You have produced another piece of fine, rational analysis and persuasive and convincing argument, and I have to say that I enjoy reading the comments from other observers who clearly are far more knowledgeable and erudite than I am. I hope that you – and they – will excuse the simplistic commentary that I now offer.

    I was reassured to read your statement ‘A big chunk of Britain’s growth is attributable to vast sums of compensation paid out by banks’. The idea that compensation is a key driver of growth was initially rejected by many members of the national commentariat yet it always seemed to me that such compensation was significant economically. After all, it was a direct injection of cash into households, and more to the point would be perceived by recipients as an unexpected windfall – the vast majority of people would spend most of it, or all of it; and then some. In short some of the money would be used as collateral for supporting additional debt. One may even venture to suggest that such compensation has been a form of ‘People’s Quantitative Easing’. This may be stretching the point, but I hope that you get my drift so-to-speak.

    The return to debt-fuelled consumption in the UK is highly likely to exacerbate the already chronic trade deficit, and result in an acceleration of the selling of our nation – assets – from under our feet. I really do fear for our future, yet this matter receives very little attention in the mainstream media.

    One would have thought that the economic and financial crisis that emerged in 2007 would be a wake-up call to policy makers and the citizenry at large. Yet here we are eight years later seemingly having learned very little indeed.

    I rarely mention any of these thoughts in polite company as I find that most people think that I am ‘strange’ and either talking nonsense or worrying unnecessarily.

    So the question that I pose is this: Is it me?

    Thank you for reading my comments.

    Kind regards


    • Kevin

      Thank you. There is no doubt that compensation from banks has been a significant factor. Likewise, this year’s “pensions freedom” will be significant, for the ecoonomy and also for tax revenues (if someone is daft enough to draw down their whole accumulated pension fund to buy a Ferrari, the money drawn out is taxable as income).

      The problem (not just in the UK but globally) has been putting things off rather than tackling issues like excessive debt. Figures used in this piece (from an impeccable source) show that global borrowing has actually increased since the crisis. The UK has done some of the right things, but weaknesses remain. As Robert Peston has pointed out, UK growth is basically increases in restaurant, hotel and pub turnover – fine so far as it goes, but what we really need is growth in (a) high added value industries, and (b) in things we can export.

      The other worry is the current account, which has two main components. First, there is trade in goods and services, which has long been negative, with imports exceeding exports. But the second part has historically been positive – Britain gets more income from businesses and investments overseas than foreigners get from investments in Britain. So many British assets are now owned by overseas investors, however, that dividends and interest going out now exceed those coming in.

      So, together, trade plus flows of interest and dividends are both negative. This gap has to be filled, and is, by borrowing, and by selling assets (such as businesses) to overseas investors. This just makes things worse, of course, because it means more interest and dividends will be paid out next year.

      This is one problem, and depending on borrowing for consumption is another. The solutions are (a) increase exports, and (b) make our economy more productive. This is why the PM spends so much time travelling to promote UK exports, and why there is so much focus on productivity.

  7. Hi Tim, thanks for another impressive piece.

    In June 2014 I watched in puzzlement as the oil prices sank and the correlation between Middle East ‘troubles’ and oil price evaporated, of course we now know why but I felt a little bereft of compass at that point. So, I watched gold and all seemed logical as flights to safety seemed to correlate and now that’s gone too. I now keep an eye on government bond spreads (all through the excellent markets data pages of the Financial Times) and there’s Greece, Oz and New Zealand all doing as expected but I still don’t feel confident that these will give me much warning of the impending crash. So, my question is: What indices should I be looking at?

    • Oh, I should point out that I only have a minimal understanding what a bond spread is….

    • It’s a moot point as to what a bond spread is.

      Generically (which you probably already know) a spread is the difference in yields between bonds with different credit ratings.

      One example would be the difference in yoeld between a Government 5 year bond and a corporate bond but the comparison can be made between any types of bonds.

      I have no idea which indices will foretell the impending crash but I would hazard that the impending crash (if your’e thinking of total collapse) is some decades away whlsy if your’e thinking of a further significant fall in economic activuty/financial markets then imo it’s really narrow money supply, the housing market, employment and unemployment levels along with equity and bond markets, but the precursor will be the housing market. A better safe haven came alonmg called the US $ as the US recovered, so investors left gold as gold and the $ are inversely related.

    • That chart is somewhat related to my comment above, there are two beautiful correlation periods and two periods where it’s just plain bonkers. Although, I suppose there is a logic there between cheap raw materials and production, and if the pattern holds then you’d expect a spike in commodities in the late 2020’s and a major fall in S&P about 2030. Personally, I’ll be pushing up the daisies by then…

      Incidentally, what does S&P stand for?

    • Standard & Poo,r I believe but that’s not particularly enlightening in itself.

  8. You know, this is probably going to sound ridiculous but if you introduce the concept of reverse correlation the chart does begin to make sense.

    • Or simply acknowledge that central banks have globally managed to dislocate stock markets entirely from economic fundamentals and it makes a lot of sense.

  9. Here’s a bit more grist to the mill.

    Much of China’s development (of real estate, shopping centres, offices etc) is undertaken by arms-length entities run by local government. In aggregate, these are huge.

    I’ve just seen some research showing that these local government development vehicles are on average paying 6% interest on their debts.

    But they are only earning 2% returns on their assets! (Clear evidence of surplus capacity and excess investment).

    One way out of this would be to turn them into quoted companies. Float them on the stock market, selling shares to optimistic/gullible investors and using the proceeds to pay off debts. Now they don’t have to pay interest, but pay dividends instead. These can be much less expensive – globally, equity yields are low, and investors would probably be buying them not for dividends but for capital gain.

    To do this, though, you need a buoyant stock market………………mmmm

    • The only valid response to central bank and government interventionism is complete and utter incredulity! I know that you Tim and many of us have been labelled as doom mongers but it is only the most extraordinary actions and manipulation by central banks that have stopped our predictions from coming true. The fact that the BoJ can be buying ETFs and that the chinese government/central bank have their own agency dedicated to buying stocks to keep the markets buoyed would have beggared belief just a few years ago.

      We know what the BoE and FED have done in official capacities but there are large questions as to how they may have acted and continue acting in unofficial capacities under the secrecy of national financial security.

      The saddest part is that with all the trillions in printed money and credit creation they still can’t buy any growth, just pump the illusion of wealth in markets.

    • Simon – thank you for this.

      Some thoughts.

      I’m used to being labeled a prophet of doom – and not just, though memorably, by Jeremy Warner in the DT. I’ve been called “terrifying Tim” and “Dr Gloom” in the media. So be it. But this is a judgment based on economic growth and my negativity thereon, the assumption being that growth is de facto good, and anyone who predicts less of it is a killjoy. Hmm.

      I’ve had a fair amount of experience of politicians. They will do anything they can to protect the status quo, and their own positions. This isn’t so much a criticism as an observation.

      Now, put yourself in govt for a moment. You are given a choice. The system is stuffed. You can accept that, come clean on it and let it happen. Or you can “extend and pretend”, manipulate markets (QE, bond yields, interest rates, etc etc)., in the hope that “something will turn up”. It’s a brave man who will do the former. In recent times, only the President of Iceland has done so, to my knowledge. Or you can say, like Juncker famously did, “when things get serious, you have to lie”.

      There’s little room for morality in politics (though loads of scope for moralising). We penalise savers to bail out the reckless. It’s not much different from taxing the hard-working to pay for the feckless.

      Marx was wrong about most things, but maybe right that politics is a function of economics. Lenin said that America will consume itself to destruction, and Britain will tax itself to death. The calibre of politicians has hit new lows, maybe because the economic context, longer term, is so distorted.

    • Thanks for that Tim

      Some time soon I’d like to get into a deeper debate. For the moment though I would like to address the Jeremy Warner thing. I read your perfect storm study when you first released it and I have to say that since the financial crisis it has been the best, most concise and honest appraisal of the global economic situation I have read. I try to read widely and have been trained in philosophy to be able to fairly appreciate myriad different viewpoints. Neither you or I are doom mongers we are merely calling it as it is and it is central banks who are mainly proving us wrong in the short term. Although I am wary of the term, a lot of this should be common sense

      With regard to JW then he is what I have dubbed a schizoconomist on the DT web site. He is against QE one minute, for it the next, the economy is recovering one minute and in the next article everyone is fooling themselves and there is too much debt etc etc. AEP is the same.

      We have to be true to ourselves, which is my main rule and I imagine is yours, I wouldn’t pay any attention to Warner and AEP, at least we are consistent in our views.

      Kind Regards and carry on the good work


    • Simon

      We have indeed to stick to the reality as we see it. I must say that that is difficult in Britain, which, to me, seems an increasingly bizarre place.

      For example, the official view is that the economy is growing, and that the budget deficit is being brought under control.


      According to an interesting analysis reported recently, official economic forecasts assume (and rely on) households borrowing a further £360bn between now and 2020. Add to that any reasonable figure for government borrowing and you arrive at a number for new borrowing which far exceeds the forecast “growth” number – so growth will be far exceeded by borrowing again, quite apart from the current account deficit (now over £100bn annually). Living on tick is one way of putting it.

      Even this presupposes tight public expenditure targets. I’m one of those who deplored Brown’s spending, but even I accept that spending cuts are not without their costs – police who cannot afford to attend burglaries, and very inadequate defence provision, are two examples. (I know that the police have found the resources for multiple inquiries into Ted Heath, who – being dead – cannot be prosecuted, but I digress…..)

      So, if you weigh up “growth”, the national balance sheet and the provision of essential services, we’re deteriorating.

      And this is “good”?

    • Hi Tim

      Two devaluations in two days. Looks like your timing is fairly prophetic.



    • Thank you Simon. It’s interesting, especially given how undervalued the RMB has long been.

      To an extent we’re seeing a “race to the bottom” in devaluations, especially in Asia and arguably triggered by Japan. There are growing concerns in the US about the strength of the USD.

      Ironically, the one country that really needs a devalutation can’t have one – Greece.

      On timing, I have a “gut feel” – but no more than that – about September-October. There has been surprisingly little comment about the apparent drying-up of liquidity in bond markets, especially in NY.

    • October is when the value of US shale producers assets are revalued and that should have a significant knock-on effect in junk bond markets leading to a cascade of bankruptcies and defaults. Looking at the share prices of these companies the carnage has already been horrific. Continental Resources, one of the darlings of the shale world has lost over 50% of its share value over the last 12 months which is a loss of Market Cap of over $12 billion. its a similar tale for pretty much all of them. Hess Corps announced losses of over $500 million for the last quarter and those figures are only going to get worse as all the hedges and 3 way collars expire. Especially seeing that oil futures are only ranging fro $45 now to $60 in 2020. Even BP managed to announce losses of over $6.3 billion last quarter which is about 10% of their market cap.

      One gets the feeling that the perfect storm or knockout will come from a combination of punches. A few into the body from US shale and junk debt, a combination of left hooks from China, a rabbit punch from the Greece debacle and the fighters legs going then the markets realize that ECB QE is not doing anything like what was expected in order to step into the FEDs shoes. Thrown in more possible geopolitical tensions and lower oil prices still as Iran weighs in and we may yet see central banks throw in the towel.as their punch drunk economies hit the canvas.

    • Simon:

      Very well put, if I may say so, and very convincing. I guess that if you and I can see this, so can the authorities – or maybe not? – and might take preventative action. The authorities generall baffle me sometimes, lurching between inspiration and idiocy.

      I think the drying up of liquidity in bond markets (reported yesterday on CapX) may be an extremely important lead-indicator. Back in the late 80s, I think, this was the first warning sign about Japan. More recently and more pertinently, we had the drying up of liquidity in 2007 – the so-called “credit crunch” – as a lead indicator for the banking crisis.

      What is being observed is the tendency for sizeable “sell” orders in US bonds to force prices down sharply, indicative of a lack of appetite for buying, a relatively recent trend over the last month or so. This is leading an increasing number of US analysts to talk about a bond market “bubble”. I find this somewhat droll, in that I’ve been saying for several YEARS that the authorities’ main use of QE was to inflate bond markets in order to depress yields!

      September-October also has form historically – 1929, 1987, 2008 – though this may be just coincidence.

      With these thoughts about timing in mind, I might write something about a possible autumn crunch – though I’m working on a UK topic just now.

    • Hi Tim

      A bit more information on shale as I know its an interest of yours and your were an oil analyst in a previous incarnation.

      Its amazing how the story told by markets is utterly divergent from the narrative we get from the main stream media and the CEOs of the shale industry. Take Chesapeake the second largest shale gas producer in the US. Since July 2008, the S&P 500 taking in the market crash has since recovered and thanks to global QE has gained 65%


      In utter contrast, Chesapeake to this day has lost 85% of its value from that 2008 peak.


      Taking in the lost opportunity cost of investing in an index, a long term investor solely invested in Chesapeake over that period has effectively lost 145% of their money in 7 years.

      This is not uncommon. I did a study of all the shale gas producers in 2013 and found that whilst the DJI had gained 20% over the preceding 5 years, on average the US shale gas producers had lost 70% and that was a period where oil prices had recovered. Talk about mal-investment.

      Although you don’t hear about it in the MSM the shale bubble first burst in 2012. At the height of the bubble in 2011 shale gas acreage was changing hands at $25,000 – 30,000 per acre. Within a year that price had collapsed to $4,000 – 5,000! If that’s not a bubble bursting what is?

      During this time Chesapeake flipped a load of their acreage onto companies like BHP Billiton who by 2012/13 had to write down losses of $2.8 billion on the deal. Frances Egan from Caudrilla was with BHP at the time and I assume he was connected with this disaster as he must have had shale experience on his CV to get the role at Cuadrilla..

      Amazing to think that this is the man who appears to be David Cameron’s chief energy adviser who fills the government’s heads with the lure of a pot of billions in tax payer revenue somewhere over the shale rainbow. If they think that shale is any credible alternative to conventional fuels n the UK or that it is going to get them out of jail on debt with bumper tax revenues in the future then that is government by wishful thinking and they have not looked at the market facts.

      When you look at what has happened in Poland where every US player has pulled out due to poor results and the nationalized gas company is sitting on huge losses from the venture, you’d have to be a complete idiot to think there is any future for the shale industry in the UK. Investor capital has been flared off massively to keep the US shale zombie stumbling along, with our geology the losses would be worse by orders of magnitude.

      I think a lot of these problems come from the fact that because a lot of shale CEOs tend to be engineers, there is a tendency to accept everything they say as pure scientific and objective truth and that they have no other game plan in making the statements they do. This means that the speech acts of shale CEOs are not submitted to any rigorous critical examination or questioning.

      There are some classic examples of this in an article from April this year by AEP at the DT below.

      “We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days,” said Scott Sheffield, head of Pioneer Natural Resources.”


      Such statements are not subjected to any critical analysis. Sheffield’s statement is only meaningful if one believes that it is possible t o drill the same well twice!

      The geology in one’s back garden differs from area to area and one can easily dig a hole in one area twice as fast as another. As you know well having been an analyst of the oil business, the same is true for shale plays and oil fields in general. Wells within the same pad will take different drilling times and produce different amounts of oil and gas. Oil & gas drilling is not a ‘manufacturing’ process where the same results can be repeated everywhere regardless of geology although that is what these CEOs would like to imply.

      There is no substantiation or explanation behind the cost cutting claims in that article, yet AEP and the reader automatically extrapolate a conclusion that Pioneer has halved its drilling time and hence its costs. There are statements of cost cutting of 20-60% going into 2106 but no qualified explanations as to precisely what is involved in this cost cutting. We know that much of it is down to lay offs (expected to total 120,00 – 180,00 jobs this year) and lower CAPEX from reduced drilling activity. But was always an easy short term saving to make because earlier this year there was a ‘fracklog’ of over 3,800 wells in the US that had already been drilled and which were awaiting completion before they could come online. The falling rig count only comes into the equation in the long term and will not even start to impact until the fracklog has been cleared. These companies can save costs in the short term but there will be extreme pain later on when the fracklog is cleared and the high depletion rates in shale wells start to make themselves apparent. As I mentioned in an earlier reply, Hess Corps were making all sorts of claims in April 2015 about improved efficiencies yet in the last quarter posted a loss of over $500,000.

      This has been disguised to date by the fact that a lot of these companies were losing money hand over fist with oil at over $100 a barrel and spending more on CAPEX drilling like crazy funded by yield starved investors duped year in and year out into believing that somewhere over the rainbow these companies will have enough production to make a massive profit which like government debt reduction never materializes.

      When one looks at the market performance of the shale players then it tells an entirely different story from the narratives peddled in the media. Our bubbleicious markets yapping at historic highs are not a accurate representation of economic fundamentals in general thanks to QE, cheap credit and leverage, but in comparison the share performance of the shale companies is a complete disaster. Can you imagine what kind of shape these shale companies would have been in the absence of QE and cheap credit? Actually they would never have been funded in the first place and we wouldn’t have the oil glut we currently have. QE has had all sorts of nasty unintended consequences and this is one of the worst. I think that in 2013 17% of junk bonds were issued to energy companies and that close to 30% of national CAPEX was diverted into the oil and gas industries. That was always entirely unbalanced in the first place as mining as a general category only accounts for 1.5% of US GDP.

      With oil futures set at low prices for the next 5 years its hard to say quite how bad things will get for these companies but if Hess is anything to go by its going to be an absolute bloodbath for investors. As we know from our experience, the only thing that can avert such a catastrophe is if the FED did some real research, saw the problem and then printed billions more and secretly enters the oil markets as a buyer of last resort to bid the price back up over $100 a barrel. That would not surprise me, but it doesn’t change the underlying economics of shale or that the bust thesis is not a question of doom mongering. It will just be yet another case of a predictable economic outcome being thwarted by the most extraordinary central bank market interventions which are becoming more and more outrageous and more and more common.

      Food for thought anyway.

      Best Regards


    • Hi Tim

      as a further note, you will be interested in this piece by Wolf Richter which reports that the second most asked for speciality in financial institutions looking to recruit is “distressed debt analysts”.


      Firms are positioning themselves for a junk bond meltdown. Can they get such specialists on board quick enough?

      Wolf Richter has also covered the shale debt bubble pretty extensively on his site.


    • There are a few things going on, one of which is Shale producers state they can produce profitably at circa $60.00/barrel. If this is true then Shale isn’t too bad and other companies will pick up the insolvent companies fields very cheaply as you point out in your piece.

      I doubt China will devalue much more as they are keen to have the Yuan included as a Special Drawing Rights basket currency for the IMF which the US may decide to veto if China continues it’s devaluations. Moreover, I guess the Chinese authorities will be wary of devaluing too much and causing a loss of confidence in China as that will surely crash China and probably the world, which they don’t want.

      There’s no doubt China is a shambles with real estate debt, business debt collateralised against commodities like iron ore whose value in turn is falling but the authorities will intervene if collapse looks imminent both in China and globally in ways that we may not have anticipated which is why I don’t share yours and Tim’s view that the end will come this Autumn. Indeed, I think it is many years away, but if it were left to the markets with no Government interference then I would find myself in agreement with both of you.

  10. “Something will turn up”, I remember the jaw drop moment when they announced that was going on to the new £2 coin!

    • Did they really?

      I remember a friend of mine showing me the first 20p coin, which was very light in weight – he said “this is nice but I can’t work out how to get the chocolate out”. Another friend called the first pound coin “the Thatcher” – “it’s cheap and brassy and thinks it’s a sovereign”.

  11. Pingback: #57. Storm Front – part 2 | surplusenergyeconomics

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