#60. Storm Front, part 5

THE EX-GROWTH ECONOMY: ENERGY, STRUCTURE – OR CHOICE?

This fifth instalment in what began as a trilogy looks at growth, though this is not the intensely statistical analysis of growth originally intended. I think we can get at the growth conundrum more simply.

In summary, there are three factors that can be identified as undermining growth:

– A trend towards an ever higher “energy cost of energy”.

– A long-established switch from “hard” to “soft” output.

– A cultural preference for forms of enrichment that are quick and speculative, rather than gradual and deep-rooted.

This is a rather longer discussion than usual, mainly because it covers a lot of issues. Though the intent is global, the spotlight falls disproportionately on America and the United Kingdom. Both have come to rely on borrowing to deliver “growth”, partly because of structural issues, and partly because of cultures that tend to promote speculation over productive investment.

The movement towards ultra-cheap debt and derisory returns on savings, though a consequence of the 2008 crisis, is also a logical development of these trends.

Ultimately, switching preferences from investment-led growth to the speculative quick-buck creates Ponzi economies.

The growth problem

As you will know, I believe that a new financial crisis is looming. Where does growth (or the lack of it) fit into this perception? Put simply, debts can be supported where incomes are growing, but even pretty small debts can lead to disaster where incomes are declining.
China, with a slowing economy and debts of $28 trillion, is the most conspicuous such problem at the moment, but America and Britain, amongst others, have the structural weakness of depending on borrowing to deliver economic growth. Just as bad, that “growth” tends to be both low-quality and statistically dubious.

Economic output, most commonly measured as GDP, is a measure of “flow”, not “stock”, and is roughly the equivalent of a company’s income statement. Just as no competent investment analyst would assess a company on earnings alone, economists, too, need to look just as much at the balance sheet as at GDP.

Essentially, the world has carried on doing exactly what the banks were doing in the run-up to 2008 – generating “income” by trashing the balance sheet. Therefore, we need to see $17 trillion in nominal “growth” since 2007 in the context of a $49 trillion escalation in debt over the same period.

The world has been borrowing $2.90 for each dollar of “growth” since 2007. That’s even worse than the borrowing-to-growth ratio ($2.20) of the previous (2000-07) crash-building phase.

Statistically, China has accounted for slightly less than one-third ($5 trillion) of all global growth since 2007 ($17 trillion). In reality, that hugely understates a very much larger contribution – for what would have happened to economies around the globe without China’s voracious appetite for commodities and other imports? It might not be an exaggeration to attribute 80% of world growth since 2007 to China.

Where we are, then, is that the locomotive of global growth has hit the buffers, just as debt has reached new heights of absurdity.

Somewhere along the line, we have lost the ability to grow the economy by any means other than mortgaging the future. Why and how did this happen? And can anything be done about it?

Theories of growth

Traditionally, economists thought (pretty logically) that growth was a function of capital investment. Then they added labour as a growth-creating factor – again, this is logical, though some of us think that a broader consideration of energy (rather than a narrow focus on human labour) is required.

Unfortunately, statistical studies seemed to demonstrate that, between them, capital and labour accounted for only about 40% of growth. The concept of total factor productivity (TFP) was devised to explain the “missing” 60%. TFP consists of a wide range of components, including education, infrastructure, communications and other variables such as taxation, law and government. The principal TFP factors are listed usefully in the competitiveness reports produced by the Davos-based World Economic Forum (WEF).

Opinions differ on how well we understand growth, but it seems pretty clear that this state of understanding has not enabled us to boost growth by very much in recent years.

It is, therefore, desirable to consider other explanations, of which three are advanced here, and these can be labelled the “energy cost”, “structural weakness” and “can’t be bothered” theories.

Theory #1 – an energy cost squeeze

I’ve long believed that, ultimately, the economy is an energy equation, and that all forms of economic activity are traceable to energy. Though energy prices have slumped over the last year – and for very good reasons – the fact remains that we have left an era of cheap and abundant energy behind us, and now face an uphill struggle against an escalating “energy cost of energy”. This need not be addressed in detail here, partly because it is discussed at length in Life After Growth.

Theory #2 – weaknesses in structure and pricing

My second interpretation is that, in the West especially, we’ve allowed the economic mix to turn adverse. Theory – and national accounts – both assume that $1m of manicures or takeaway pizzas have the same value as $1m of machine-tools or refrigerators. But there is, I believe, a line to be drawn between “hard” and “soft” output, just as there is between hard and soft currencies.

According to this way of looking at it, the relative value of “hard” output is understated in computations of GDP.

The discrepancy between how hard and soft output are measured seems to lie in how they are priced. “Hard” output – be it cars, machine tools, refrigerators, or services exported in the teeth of stiff competition – are priced by the rigour of global markets.

“Soft” output, on the other hand, is infill activity, often of low economic value. As such, it is priced by the much less demanding yardstick of purely domestic markets. Much of our soft output is a residual, something we do with capacity in excess of our ability to produce the hard goods and services saleable on global markets.

The following chart, expressed at constant 2014 values, divides American economic output into three categories:

– Globally Marketable Output (“hard”)

– Internally Consumed Services (“soft”)

– “Statistical” output

The latter is the big chunk of GDP which arises from the value “imputed” to services for which no money actually changes hands. (One example of this is the “value” imputed to homes on which neither rent nor mortgage is paid. Another is the value imputed to banking services provided free of charge). Last year, such “imputations” totalled $2.8 trillion, or 16% of reported American GDP.
US econ structure
As this chart shows, American real GDP expanded by $10.2 trillion between 1981 ($7.2 trillion) and 2014 ($17.4 trillion), but, of this increase, only $1.4 trillion (13%) came from “hard” Globally Marketable Output. The remaining $8.8 trillion (87% of the total increase) came from “soft” growth in Internally Consumed Services, including a $1.9 trillion expansion in the “imputed” component.

If one statistic more than any other demonstrates the rise of “soft” output in place of “hard” in America, it is this – compared with 2007, the US now employs 1.5 million more bartenders and waiters, and 1.4 million fewer manufacturing workers.

Of course, and as the next chart reveals, this changing economic mix relates closely to an escalation of debt in the US economy. Since 1981, the $10.2bn increase in American GDP has been accompanied by a $34 trillion increase in debt, which rises to a $47 trillion increase if we include the financial sector in the total.
US debt & GDP

A very similar swing from “hard” to “soft” output has been happening in the United Kingdom. The next chart – showing selected UK segment output, indexed at constant values since 1997 – needs little comment. Manufacturing output has declined relentlessly, whilst there have been marked increases in the contributions from real estate, private sector “administrative” activities and financial services. The government sector, having grown rapidly until 2010, has since undergone a modest decline.
UK GVA since 1997

The implication seems pretty clear – in an era in which property and other speculative, debt-financed activities have displaced the traditional business growth model, Britain may not be very interested in making things – but the British are pretty good at selling their houses to each other, generating memos and selling each other zero-sum financial products.

In Britain, as in America, the “softening” output mix has gone hand-in-hand with rising indebtedness. To all intents and purposes, Britain is almost as borrowing-dependent today as it was at the height of the Labour government’s “borrowed boom”.

So long as the state continues to favour property markets over productive investment, neither the softening output mix, nor the resulting addiction to borrowing, can be expected to reverse.
UK debt & GDP
In America and elsewhere, then, there has been a tendency to “soften” economic output, displacing goods and services that can be sold internationally with services that can only be consumed at home. This has been accompanied by a rapid escalation in debt.

This implies that debt has been used (a) to acquire “hard” goods and services from overseas, and (b) to fund low-value, “soft” infill activities.

Theory #3 – “can’t be bothered with growth”

There may be a third reason for the lack of genuine (non-borrowed) economic growth. Put simply, and bizarre as it may sound, growth may have stopped because many have lost interest in it.

Historically, businesses have created wealth for their owners – and growth for the economy – through a combination of innovation and capital investment. An entrepreneur starts by inventing – to use a hackneyed phrase – “a better mousetrap”. He then obtains the capital to develop, manufacture, distribute and market his new product or service.

This is what Henry Ford and the other pioneers of motor cars did. It’s what the Wright brothers and their successors did with aviation. It’s what Elmer Sperry did with his gyro compass. It’s what Bill Gates did with Microsoft.

This tried-and-tested route to making money is something that, latterly, and in some countries at least, people seem to have lost interest in doing. The logic here is a simple one – why bother with arduous and uncertain innovation and investment, when you can make money more easily, and at lower risk, simply by riding asset markets?

Much the most common way of doing this is via property markets. Taking the UK as an example, official forecasts show that buying a house today for £200,000 will result in a gain of £35,000 over the coming five years. To be sure, this return (of 17%) may look pretty unspectacular, but it can be leveraged to 117% by borrowing 85% of the invested capital.

One reason for the popularity of the speculative rather than the investment route to gain is that, in some countries, it has the unmistakable support of the state. In Britain, for example, property gains are likely to be tax-free, and in some instances the interest payable on the mortgage can be tax-deductible.

In the UK, government support for the speculative rather than the investment route to prosperity is quite explicit. Whilst the entrepreneur faces both regulatory and fiscal obstacles, successive British governments have intervened to support property market investment. They have done this by cutting interest rates to protect borrowers (at the expense of savers), and by making large sums of cheap money available for the specific purpose of either buttressing or boosting property markets.

Official projections show how central property market inflation is to British economic policy. The OBR (Office for Budget Responsibility) projects growth in nominal GDP of £500bn over five years, but assumes that this will be accompanied – in reality, made possible – by an £830bn increase in household indebtedness. Of this, £500bn is expected to be mortgage borrowing, the remaining £330bn being unsecured consumer credit.

These two components are linked, because unsecured borrowing is underpinned by the assurance that inflated property equity provides to borrowers and lenders alike.

The high cost of the speculative economy

Considered rationally, a British-style government preference for speculative rather than organic economic growth seems extremely ill-advised, for a multiplicity of reasons.

First, of course, borrowing £830bn in order to boost the consumer spending component of GDP by £330bn simply doesn’t add up. Second, driving national indebtedness upwards seems unwise in itself. Third, the speculative route to wealth very probably weakens the capability of the economy to generate genuine growth based on innovation, investment and exports.

Furthermore, the types of consumption encouraged by inflated property values fall emphatically into the “soft” category described earlier.

The ultimate irony, of course, is that the aggregate value of the property market is purely notional, and incapable of being realised, because the only people to whom the owners of these inflated assets can sell them are themselves.

So property market inflation creates purely paper “wealth” at huge expense, including both opportunity cost and vulnerability.

Of course, property speculation is by no means the only alternative that has been preferred to more traditional growth. The paper-chase of financial services has become equally speculative, and it is instructive that many of the brightest products of higher education now move into finance rather than industry.

It is arguable, too, that a shift from the productive to the speculative reinforces a “quick buck” mentality detrimental to the integrity required in “normal” forms of commerce.

The nature of the resulting “growth” in the British economy is instructive. First, reported GDP is flattered both by “imputed” rental income (of £125bn last year) and by the contribution made by foreign creditors through the UK’s alarmingly wide current account deficit (£106bn). Adjusting for these factors reduces current GDP by 13%.
Moreover, it means that there has been no real growth at all since 2007 – against the £71bn increase in real GDP over that period, current account deterioration has contributed £58bn, and increases in imputed rent a further £22bn.

The debateable nature of reported growth since 2007 has not stopped Britain from taking on a further £500bn in debt.

The following table summarises the position. Between 2000 and 2007, the British economy expanded by £273bn, or 21%, after adjustment for imputed rent and the current account deficit. This was achieved at a cost of £1.4 trillion in additional debt, or £5.14 of debt for each 31 of underlying growth. The latter calculation cannot be made when comparing 2014 with 2007, as there is no underlying growth number to divide into the £500bn further increase in debt.
UK GDP-Debt table
Answering the growth conundrum
Though the exact reasons for the disappearance of growth must to some extent remain conjectural, I think we can arrive at some reasonably indicative conclusions.

First, the world has developed a penchant for borrowed rather than organically-generated growth. Debt has now risen much more rapidly than GDP for more than a decade.

Countries such as America and Britain have led this trend, suggesting that it might be a by-product of the “Anglo-American economic model”. Since state-directed China has now fallen into the same “borrow for growth” trap, we may be nearing the end of both the ultra-liberal and the state-controlled economic orthodoxies. If what results is a more conservative model based on sound money, the mixed economy and the favouring of investment over speculation, the post-crisis outcome could even have a lot of positives.

Second, there is reason to suppose that non-borrowed growth has disappeared for three main reasons – the growing scarcity of cheap energy; an adverse change in the mix between “hard” and “soft” output; and an increasing preference for seeking gain through asset market speculation rather than the “traditional” route involving innovation and investment. The latter clearly involves the complicity of government.

The absence of growth, together with the escalation in debt, brought the global financial system close to collapse in 2008. Because nothing much has changed since then – and because the authorities have bought time in which to try the illogicality of borrowing our way out of a debt problem – the occurrence of a second crash seems probable. This time, the tools used before are unlikely to work, with interest rates already at virtually zero, and state balance sheets already extremely stretched.

Some observers have even started to speculate that the Fed might contemplate a strategy of acceptance this time around. There does seem some logic for such a plan, not least because the only choice on offer might be that between a controlled or an uncontrolled implosion.

A controlled explosion would see interest rates rise, and collapses in the prices of property, equities and bonds.

But would this be the end of the world? After all, houses do not cease to exist because their purely nominal prices have collapsed, and a dramatic fall in the share price does not necessarily destroy a robust quoted company.

Such a strategy would destroy huge amounts of paper value, but the effect on the economy, though severe, might be better than the option of hazarding the future of fiat currencies by trying yet more monetary manipulation – which, in anything other than the very short term, is likely to prove futile anyway.

45 thoughts on “#60. Storm Front, part 5

  1. Thanks Tim, I really enjoyed this! Here’s a really annoying ear worm from 1995:

    entitled “Uh oh, we’re in trouble something’s come along and it’s burst our bubble”.

    • Good point, horrid song (IMO)!

      I prefer “Won’t Get Fooled Again”, by The Who…….

      Or, for certain economies, another old song – “Past The Point Of Rescue”?

  2. Hi Tim,
    Do you see the likes of Google and Facebook as innovative hard economy companies or frothy soft economy constructs?
    I do see them as innovative but can’t convince myself of their ultimate social value.

    • Good point, and I must try to answer objectively!

      To start with, both earn virtually all their revenues from advertising. Advertising is an old-world industry, and is linked to an “ever greater consumption” model which I think is becoming out-dated.

      Google is undoubtedly innovative – credit where it’s due. First, however, its income dependency on advertising means it is not a “tech” company in the aerospace, science or pharma sense of the term. (Please note – most of the stocks in the so-called “tech bubble” weren’t tech at all, but were merely using the internet to do old-economy things).

      Second, it has a huge market share – too big, perhaps. Third, I find it a bit intrusive. I agree with the EU on “right to forget”, and I’m not an admirer of the Big Data industry.

      Facebook is hard for me – I dislike it, in fact I think it promotes the puerile. In fairness, though, millions DO like it, and it’s extremely innovative. Again, though, it’s tied to the “old economy” revenue stream of advertising, a dimension of the “maximise consumption” model.

      “Socially useful” is difficult – OK, doctors and scientists are socially useful, we’re told, and “casino bankers” are not – but it’s hard to draw the line without becoming subjective. For instance, are “short sellers” socially useless – or do they provide a valuable market “early warning” system? If we’d listened to those who short-sold bank shares, could we have intervened more quickly and more effectively? I suspect we could. What “social value” is generated by advertising or gambling? Not a lot, I would have thought.

  3. Hi Tim

    In addition to the problem of debt there are also issues in the assessment of the value of ‘collateral. For example, in 1975, 83% of the assets of SS&P 500 companies were tangible or hard assets and 17% were intangible soft assets. Now we see the complete inverse situation. 84% of their assets are soft or intangible and only 16% are hard assets that could be sold in the event of bankruptcy. The value’ of a logo or brand is somewhat spurious to creditors. As we saw when MFI went bust, there was nothing much to be sold off. Not only is there a problem with debt there is also a problem with collateral and the value of assets across the board.

    http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/

    Regards

    Simon

    • Simon

      You’re right, of course. Pre the Rowntree Mac takeover, no-one realised the value of brands. Since then, we’ve swung to the other extreme. I suppose this is a corporate version of the “paper” or “notional” value of property prices, bond markets and so on. Ultimately, most assets are notionally valued – even with physical assets, could one really sell all of, say, Shell’s refineries for cash at book or above?

      Ultimately, whilst debt is “factual”, asset values are “conjectural” – but the more intangible they are, then the more “conjectural” they are too.

  4. Tim,

    Many thanks for part five of the trilogy, which to me summarises so many of the widening holes in the short-term, quick buck, Anglo-American business model.

    Your mention of ‘stock’ and flows’ indicates your systems thinking training. And with the global economy really being a fantastically complex system powered by oil (energy), I am therefore having trouble squaring your conclusion that a collapse in UK property, equity and bond prices alone will alleviate some our problems.

    My understanding is that both real wage growth (declining since the 1970s) and private debt (massively increasing since 1970s) together allow the system to continue to extract increasingly (energy) expensive oil and other resources.

    Given the monetary and energy cost of extracting energy (oil & other resources) remain on trend: How will a collapse in asset values and matching debt allow any system vaguely recognisable to the current system to continue without a correspondingly massive increase in real wages?

    My own opinion is that sovereign states will absolutely destroy their fiat currencies in a bid to avoid any kind of system redesign or reset.

    Once again, thanks for your expert commentary.

    Dan.

    • Dan, thank you.

      First, I agree that even hazarding the currency is a risk that those in power may take rather than facing the need for fundamental reform. This could indeed destroy sovereign states.

      Here, though, I think we may need to distinguish between countries. I do not necessarily think that America cannot make the transition. I see virtually no likelihood of the UK doing the same. The US economy looks almost as knackered as the British one, but I think that the US might pull through, courtesy of very different values and a very different society. One leading European bank has suggested recently that the US may be preparing to face up to these issues through what it calls “controlled demolition”. Somebody once said that “a country is more an idea than a place” – well, I think the American idea is healthier than the British one.

      The current system – or, at least, the Anglo-American variant – has run out of road. We have never recognised the impossibility of infinite growth in a finite environment.

      The Chinese version doesn’t look much better. I’ve seen numbers suggesting that, by early August, China had already thrown $1.8 trillion at its problems, in vain. You may be aware of the “Fed put” and the “dollar carry”? The latter is now unwinding, causing huge losses, and triggering a panic cascade of capital out of China and the other EMs. The crash in Chinese equities is a by-product of that capital flight.

      Asset values are a confection – to put it most obviously, work out the theoretical value of all UK private housing stock, and then think about how this could be monetised – obviously, it couldn’t – so it is simply paper or “notional” value. But the debt it is based on is all too real. Next, what happens if markets force interest rates up – some analysts are forecasting a rise of 4-6% in rates. That’s what happens if faith in capital markets goes up in smoke – which could happen very quickly, given how inflated bond and stock values have become. This over-valutation could be exposed by the implications of a global economy without a growth engine. I note that the “great and the good” are already talking up India as the replacement for the Chinese growth engine. This just shows desperation.

      I think that carrying on with today’s status quo for more than a year or so may not be possible. If so, it could make sense to plan for that. Let house, bond and stock prices collapse. Convert under-water mortgages into rentals. The value of direct and indirect investment in markets would crash. We can match off a lot of this damage. This might be the subject for a future article.

      Apologies – very long answer!

    • I wonder what a ‘controlled demolition’ + ‘law of unintended consequences’ will actually look like! It’s all going to get very messy.

      I look forward to the article.

      Thanks,

      Dan.

  5. It takes quite some time to absorb what you have written, Tim, but it’s a very perceptive article.
    You would have heard of Debt Jubilees? The idea seems to be gaining traction lately, Steve Keen suggests a Modern Debt Jubilee for private sector debt reduction. This would entail the central bank directly injecting funds int private bank accounts to cancel mortgages etc. Those not in debt would get a cash injection instead. Then restructure banks to reduce ponzi lending. IMO the derivatives market should be abolished, without compensation for banks and players a full Jubilee.
    By getting rid of the financial economy distortions money could revert to being for just hard and soft assets.
    I fear that when we do have the inevitable implosion governments will be caught unprepared. It’s really crucial plans are in place to mange food supplies and essential services. The CB will have to pay benefits to everyone needing them and do it with complete disregard for the niceties of inflation. maybe 70% will be unemployed as the growth we rely on goes into reverse. We will need banks to pass on funds from the Reserve bank so the Jubilee has to allow banks to work in a s customer support administration role, free of bets and wagers.

    • Thanks John.

      Yes, a rather complicated discussion, but I couldn’t see how to cover it more briefly and clearly. In one of my replies I put a link to “controlled demolition”, an article I think you would find particularly interesting from a monetary perspective.

      A debt jubilee would make a lot of sense, though how this could be managed equitably, and across borders, I don’t know. If you have a debt of $10,000, and your neighbour’s debt is $100,000, and both are written off, does that seem unfair?

      This is something I need to think through. It is certain that the global debt mountain can never be repaid, and certain that we cannot go on inflating asset values forever. Getting from A to B is the problem!

      Politicians will want to (a) preserve the system, (b) stay in power, and (c) – cynically on my part – protect the wealthy. Tricky!

    • As has been mentioned, wouldn’t a debt jubilee create moral hazard and so ultimately just kick the can down the road once again? After getting the jubilee money people wouldn’t just stop wanting to borrow again, they’d borrow again in the hope that asset inflation will resume no?

      Surely, ultimately, we can’t get away from the hard truth, that there is no easy way out?

      If we have a system that not only allows, but pushes people to borrow and lend, with money that banks can create from nothing, no amount of debt jubilees can hide you from bubbles can they? Might jubilees just exacerbate the bubbles?

      Or am I missing something? One thing I know for sure is how complicated economics is.

      On a slightly separate point, I wonder if a black swan is hiding somewhere that even people like yourself haven’t seen coming? China seems like the kind of place that black swans would flourish?

      For instance, politically is it beyond reason to think that the Chinese elites could get so scared of losing power that they start to do some unforeseen and unexpectedly crazy things? I include war both military and economic as examples? Maybe I need to calm down though!

  6. The zerohedge ‘controlled explosion’ article is an eye opener.

    If I understand even remotely:
    The deliberate ending of current ‘easy’ money policies financing carry trades in order to crash stock markets as precursor to ‘easy’ money policy number four – a tax cut funded by money printing that people will in likelihood end up saving (not spending) in anticipation of future tax increases (assuming no raging inflation.)

    My preferred portfolio mix: Gold (10%), Farmland (40%), Snack pots & Corned beef (50%)

    • As I understand it – though conceivably I don’t! – they seem aware that “extend and pretend” won’t work again. Each tranche of US QE has had less effect than the last one, and rates can’t be cut further. If the economy can’t cope with a 0.25% rise in interest rates, it must be extremely weak. So we may need to deflate asset bubbles and consider debt write-offs to reset the economy.

    • And the USA is better placed to come motoring out of the wreckage, a la post war Germany and Japan. The assets of a country are its culture, knowledge and ability to do. Hence why ancient culture built giant monuments to show to themselves what they could achieve…

    • “they seem aware that “extend and pretend” won’t work again” – Yes, they are aware but this time I believe that they are what they say on their tin, i.e. they will begin tightening (increase rates) when they feel the US economy is strong enough to stand it – NOTE US ECONOMY ! NOT FINANCIAL MARKETS!

      They may be intending to realign (controlled demolition) financial markets with the real economy (probably a 33% reduction required but markets will over correct as they always do). I don’t think this is any where near as bad or unavoidable as you think it is. However, if the Fed gets it’s analysis or timing wrong it will be as bad as you/Zerohedge thinks. The salient question is “How much confidence do you have in Yellen??”

  7. Dear Dr Morgan
    I love the way you are finding your own vernacular post Tullett Prebon (“trashing the balance sheet”) :).
    Just another thought around the adverse move from hard to soft outputs. I am seeing a fundamental shift in the psyche of people around ownership. The young generation are streets ahead of us older people in terms of car sharing, house sharing, data sharing ….. everything moving open source and open ended (including sexuality if the latest polls are to be believed). Although in my 50s I am experiencing the same phenomenon – I simply don’t acquire “things” anymore, I aspire to “experiences”. I think this phenomenon is a convergence of a number of trends: reduction in real terms disposable income, technology, societal changes (structure, composition), etc. The bottom line is that I believe the demand for “things” in the West may have reached its high point? As someone else has pointed out, whether it follows that Facebook, Google et al represent productive contributions to society is a completely different issue. Unfortunately I see technology being used to create 1984 (a view of the world).

    I also fundamentally agree with your reply that governments want to stay in power, preserve the status quo and protect the elite of which they are a part. However, history shows us that all empires ultimately fail. I believe in cycles and we are now due a major global upheaval having simply delayed the Soveriegn Debt Crisis of 2007/8. All obfuscation has simply made the problem harder to fix as debt has exploded exponentially. Somewhere along the continuum of bank accounts being frozen overnight, capital controls implemented (£50/day from ATMs), negative interest rates applied to said accounts (assuming the money hasn’t been confiscated), and the ultimate goal of a cashless society introduced surely the sheeple will rise. The problem is that Cyprus showed them they could get away from it; the people acquiesced. When one considers that the height of the US empire was 2013 (more cycles), the migration of power east in the coming decade conflating with economic woes can only make the future a very uncertain thing indeed.

    Just some thoughts

    • Interesting thoughts too. Your view about ownership (and the younger generation) perhaps contradicts a stereotype which says (as I read it expressed recently) that there is a British obsession with “celebrity and money”.

      I’ve just read an article – http://www.capx.co/consistent-2-4-uk-growth-is-a-fantasy/ – which touches on some of the weaknesses of the UK economy. In my discussion here, I noted (almost in passing) that UK “growth” since 2007 can all be explained as statistical stuff – the current account deficit (which means that 6% of GDP is consumption-on-tick), plus the increase in “imputed rent” (the latter, BTW, being a function of house prices).

      Any country which borrows £100bn (and rising) annually, and has sold a vast swathe of assets to foreign investors, and now owns only 46% of its own-domiciled quoted companies (down from 70% in 1998), has problems to face up to. The model seems to consist of “boost house prices, borrow ever more against this dubious collateral, borrow from abroad, sell assets, and live on the proceeds of borrowing and asset sales”. This is not sustainable. I don’t know what happens if any of the following eventuates – rises in interest rates, a global financial crisis, or a foreign disenchantment with UK assets and/or sterling. Are there contingency plans?

      Globally, a faltering economy does suggest social and political change. China might be the catalyst for zero growth and a financial crash. I think that the ability to cope might lie only partly in economic resilience, and partly in social resilience as well. Governments around the world seem to have only very limited willingness to accept change. What France in 1789 demonstrated was that a combination of financial crisis and an ossified, self-serving political structure can result in upheavel.

  8. One other thing to consider. Maybe as the incumbents of 2007, die, retire and move on from non-ivory tower jobs in the BoE, the Treasury etc, they are replaced by younger renters, who don’t see things the same way and don’t care for the vested interests they have no stake in.

    Interesting times – a cleansing fire is needed in this knotted forest. It will be the most adaptable that survive.

    • The UK needs drastic reform to make its economy sustainable. I’m not sure how we get that reform with, for instance, probably the only nominated (non-elected) upper house in the developed world.

  9. I don’t know if this has been used as an economic indicator before (or if it has any relevance!) but it made me think about my day-to-day consumables differently…

    Today’s spot price of silver/oz (£9.54) is less than a packet of cigarettes.

  10. Tim,
    A slight aside ….would it be reasonable to consider that the need for hard investment/output is proportional to the need for essential imports ; so that an economy could support a higher level of soft investment/output if it limited the need for imports to an essential only level? So that most of the “money” remained in the country economy? [ simplistically a bit like the Totnes pound ; keeping money within the local economy]

    Obviously if implemented this would lead to a significant reduction in consumer based well being and a need for significant change in our thinking of what every day life is for.

    Best Peter

  11. Hi Tim

    I come a bit late to this but many thanks for a very perceptive analysis of where we are.

    I agree with you 100% and what really surprises me is that, as you say, the OBR projects this debt situation in its forecasts so it is there for all to see.

    Regrettably I think that the “get rich quick via BTL et al” mentality does have a tremendous cultural grip on the UK certainly and also the USA and it will need a major bust to enable a reset of this.

    However, as I’m sure you would concede, the reset will be quite difficult and will have to take place over a number of years ( I don’t mean 5 or 10) in order to implement the changes you suggest and I agree with. I think it will need a political shock which may well come from a non economic source ( changes in Europe; migration; geo political issues) in order to shake up the system and lay the foundation for the sort of changes which will be needed. Even if we had a bust I cannot see the Tories, for instance, other than doubling down on speculation and privatisation which will simply send us into the third crisis.

    • Briefly, the UK is on a road to nowhere. Borrowing, spending the proceeds and calling this “growth” is not sustainable. The structure of the economy is adverse, and asset sales plus borrowing from abroad are time-limited solutions to a huge current account imbalance which keeps getting worse. Attitudes are perhaps the biggest problem of the lot.

      In some respects, Britain actually looks like it’s falling to bits. If this wasn’t a global-facing blog, I would probably spell this out in a discussion.

    • Thanks for the link. Had intended to listen for a few minutes but ended up turning off the TV and listening to the whole thing.
      I remember some time ago posting on Facebook the jaw dropping stats on How much concrete China had poured in just a few years.
      The figures on construction underway both resi and commercial were staggering too.

  12. Dear Tim

    We now know the Fed has dodged the bullet and that a 25bp rise in rates would be too harmful to the economy.to contemplate. I was also surprised to see the reported comments of our own Andy Haldane effectively admitting that the shot locker is dry. It is worrying that a senior figure in the BoE could be advocating negative interest rates and the abolition of cash. Not only a frank admission that policies to date have not worked but also suggesting the remedy involves a new policy that would involve such fierce Government intervention.

    I had previously thought Andy Haldane was a voice of reason in the upper echelons. These comments indicate a degree of panic that very urgent and radical actions now have to be considered to avoid very dire consequences. I’ve said elsewhere that capital controls and a move to a cashless economy would likely be the nuclear last resort, I just didn’t expect it so soon!

    I’d appreciate your thoughts on this development and why Haldane appears to have changed his tune so dramatically.

    • Like you, I have a high regard for Andy Haldane, and I, too, was surprised by what he had to say about rates.

      He warns about global developments, and says that we could be entering phase three of the crisis – banking, the eurozone, now emerging markets. I don’t argue with that, except that I see the sequence differently – the first crisis (caused by excessive debt) countered irrationally (by borrowing even more) in ways that make a second and bigger crash inevitable.

      But also, I do not think you contemplate rate cuts if your domestic economy is in rude health. I have my doubts about the UK economy, and have had all along – there seems too much dependency on rising house prices and an accompanying rise in household borrowing. Second, the current account deficit is serious, and cannot be funded indefinitely by selling assets and borrowing from overseas.

      The Yellen decision is disappointing, but not surprising. What is happening now is the panic unwinding of the “dollar carry” – ‘borrow cheaply in dollars, invest in higher return emerging markets, and leverage your gains in forex as the dollar falls in response to ZIRP’.

      Already, ZIRP notwithstanding, the rising dollar is causing a panic unwind, and capital is pouring out of emerging markets – so even a small rise in Fed rates would turn this into a rout.

    • These people are fools. House prices are too high, and the debt is being foisted on the young. http://bankunderground.co.uk/2015/09/18/a-lifecycle-story-of-housing-debt-in-blighty/#more-558

      Either houses are assets and their prices must drop, or we must recognise that houses are no more assets than food… Otherwise expect support for old socialists to rise.

      How can they talk about price stability with a straight face, when housing costs i.e. The biggest single cost, has increased more than fourfold in areas of high employment. 0 credibility.

    • Many thanks and I can’t fault any of that, however I am deeply suspicious of the cashless plan!

      Haldane’s reasoning for the abolition of cash is that richer families would hoard cash reserves rather than retain them in the banking system under a NIRP scenario. At face value his plan could therefore be sold as a method to prevent a total collapse of the banking system. However, it also reveals his unstated position that NIRP would be with us for the long term.

      Maybe I need to take off the tin-foil hat, but NIRP is being used as an excuse to legitimise the abolition of cash – which IMHO would be the central planners’ ultimate target. By extension, family A (richer) could then be charged more for their commodities than family B at the point of sale, via some means-testing algorithm. With that level of state intervention, they might be able to keep the system going – albeit risking a pitch-fork revolution further down the line.

      Utopia for the centrists – but 1984 for the little pigs.

    • Basing economic well-being on going ever further into debt is not exactly wise. Based on the OBR report accompanying the budget, borrowing (including mortgage borrowing as well as unsecured credit) remains a central assumption for the economy going forward.

      Each country has its “idiocy of choice”, and the British version is the property market. House price rises are wrongly seen as “a good thing”, but actually exclude the young, encourage the idea of unearned gains, and tie up vast amounts of capital unproductively. Ideally, we would drive property prices gradually downwards, reduce the incentives for investing in property, and increase the incentives for investing in business. It is depressing when government actually support house prices, by maintaining low rates and underwriting mortgage lending.

      The problem, of course, is tied up in politics and the public mind-set. Ideally, we might consider one interest rate for general purposes, and a second (higher) rate for mortgage lending. Increases in house prices might be treated as gains for capital gains tax purposes. Higher taxes on housing would be used to slash or abolish business rates (the biggest single obstacle to business in the UK), and to restore pension funds’ tax-free receipt of dividend income. We need making money through investing in business to be MORE (rather than less) attractive than simply sitting on property.

      But can you really see voters buying any of that?

      Of course, when assets are over-valued, there are only two possible outcomes – in this case, gradually managing property prices downwards, or waiting for them to crash.

    • I’ve looked at your site and cannot find a “contact” tab or way to get in touch with you? I also can’t find “about”, which usually tells readers about the purposes of the site. Am I missing these?

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