#105: Anticipating the next crash

THIS TIME IT COULD BE MONEY – NOT BANKS

Because the global financial crisis (GFC) was caused by a collapse of trust in banks, it can be all too easy to assume that the next crash, if there is one, must take the same form.

In fact, it’s more likely to be different. Whilst the idiocy-of choice before 2008 had been irresponsible lending, by far the most dangerous recklessness today is monetary adventurism.

So it’s faith in money, rather than in banks, that could trigger the next crisis.

Introduction – mistaken confidence

Whenever we live through a traumatic event, such as the GFC of 2008, the authorities ‘close the stable door after the horse has bolted’. They put in place measures that might have countered the previous crisis, if only they had they known its nature in advance.

The reason why such measures so often fail to prevent another crash is simple – the next crisis is never the same as the last one.

That’s where we are now. We might be slightly better-placed to combat a GFC-style event today than we were back in 2008, though even that is doubtful. But we are dangerously ill-prepared for what is actually likely to happen.

Put at its simplest, the GFC resulted from the reckless accumulation of debt over the previous 8-10 years. Debt creation has continued – indeed, accelerated – since 2008, but the new form of recklessness has been monetary adventurism.

So it’s likely to be money, not debt, which brings the house down this time. Where 2008 was triggered by a collapse of faith in banks, a loss of faith in currencies could be the trigger for the next crisis.

And, judging by their actions, the authorities seem not to have spotted this risk at all.

Unfinished business?

Where the likelihood of a sequel to 2008 is concerned, opinion divides into two camps.

Some of us are convinced that the GFC is unfinished business – and that another crisis has been made more likely by the responses adopted back then. That we’re in a minority shouldn’t worry us because, after all, change happens when the majority (‘consensus’) view turns out to be wrong.

Others, probably the majority, believe that normality has now been restored.

But this is view, frankly, is illogical. To believe that what we have now is “normality”, you would have to accept each of these propositions as true.

1. Current monetary conditions, with interest rates that are negative (lower than inflation), are “normal”

2. It is “normal” for people to be punished for saving, but rewarded for borrowing

3. It is also “normal” for debt to be growing even more rapidly now than it did before 2008

4. Buying $1 of “growth” with $3 or more of borrowing is “normal”

5. QE – the creation of vast sums of new money out of thin air – is also “normal”

6. Vastly inflated asset values, and extremely depressed incomes, are “normal”

7. Policies which hand money to the already-wealthy, at the expense of everyone else, are another aspect of “normal”

8. It is quite “normal” for us to have destroyed the ability to save for pensions, or for any other purpose.

To be sure, Lewis Carroll’s White Queen famously managed to believe “six impossible things before breakfast”, but even she would have struggled to swallow this lot with her croissants and coffee.

When we consider, also, the continued stumbling global economy – which, nearly a decade after the crisis, remains nowhere near “escape velocity” – the case for expecting a second crash becomes pretty compelling.

But this does not mean that we should expect a re-run of 2008 in the same form.

Rather, everything suggests that the sequel to 2008 will be a different kind of crisis. The markets won’t be frightened by something familiar, but will be panicked by something new.

This means that we should expect a form of crisis that hasn’t been anticipated, and hasn’t been prepared for.

2008 – a loss of trust in banks

We need to be clear that the GFC had two real causes, both traceable in the last analysis to reckless deregulation.

First, debt had escalated to unsustainable levels.

Second, risk had proliferated, and been allowed to disperse in ways that were not well understood.

Of these, it was the risk factor which really triggered the crash, because nobody knew which banks and other financial institutions were safe, and which weren’t. This put the financial system into the lock-down known as “the credit crunch”, which was the immediate precursor to the crash.

Ultimately, this was all about a loss of trust. Even a perfectly sound bank can collapse, if trust is lost. Because banks are in the business of borrowing short and lending long, there is no way that they can call in loans if depositors are panicked into pulling their money out.

This also means – and please be in no doubt about this – that there is no amount of reserves which can prevent a bank collapse.

So – and despite claims to the contrary – a 2008-style banking crisis certainly could take place again, even though reserve ratios have been strengthened. This time, though, banks are likely to be in the second wave of a crash, not in the front line.

Coming next – a loss of trust in money?

The broader lesson to be learned from the financial crisis is that absolute dependency on faith is by no means unique to banks.

Trust is a defining characteristic of the entire financial system – and is particularly true of currencies.

Modern money, not backed by gold or other tangible assets, is particularly vulnerable to any loss of trust. The value of fiat money depends entirely on the “full faith and credit” of its sponsoring government. If that faith and creditworthiness are ever called into serious question, the ensuing panic can literally destroy the value of the currency. It’s happened very often in the past, and can certainly happen again.

Loss of faith in a currency can happen in many ways. It can happen if the state, or its economy, become perceived as non-viable. In fact, though, this isn’t the most common reason for currency collapse. Rather, any state can imperil the trustworthiness of its currency if it behaves irresponsibly.

Again, we can’t afford to be vague about this. Currency collapse, resulting from a haemorrhaging of faith, is always a consequence of reckless monetary policy. Wherever there is policy irresponsibility, a currency can be expected to collapse.

In instances such as Weimar Germany and modern-day Zimbabwe, the creation of too much money was “route one” to the destruction of the trust. But this isn’t the only way in which faith in a currency can be destroyed. Another trust-destroying practice is the monetizing of debt, which means creating money to “pay” government deficits.

So the general point is that the viability of a currency can be jeopardized by any form of monetary irresponsibility. The scale of risk is in direct proportion to the extent of that irresponsibility.

The disturbing and inescapable reality today is that the authorities, over an extended period, have engaged in unprecedented monetary adventurism. As well as slashing interest rates to levels that are literally without precedent, they have engaged in money creation on a scale that would have frightened earlier generations of central bankers out of their wits.

Let’s be crystal clear about something else, too. Anyone who asserts that this adventurism isn’t attended by an escalation in risk is living in a fantasy world of “this time is different”.

Here is a common factor linking 2008 and 2017. In the years before the GFC, reckless deregulation created dangerous debt excesses. Since then, recklessness has extended from regulation into monetary policy itself. Now, as then, irresponsible behaviour has been the common factor.

A big difference between then and now, though, lies in the scope for recovery. In 2008, the banks could be rescued, because trust in money remained. This meant that governments could rescue banks by pumping in money. There exist few, if any, conceivable responses that could counter a haemorrhage of faith in money.

Obviously, you can’t rescue a discredited currency by creating more of it.

If a single currency loses trust, another country or bloc might just bail it out. But even this is pretty unlikely, because of both sheer scale, and contagion risk.

So there is no possible escape route from a systemic loss of trust in fiat money. In that situation, the only response would be to introduce wholly new currencies which start out with a clean bill of health.

An exercise in folly

To understand the current risk, we need to know how we got here. Essentially, we are where we are because of how the authorities responded to the GFC.

In 2008, the immediate threat facing the financial system wasn’t the sheer impossibility of ever repaying the debt mountain created in previous years. Most debt doesn’t have to be repaid immediately, and can often be replaced or rolled-over.

Rather, the “clear and present danger” back then was an inability to keep up interest payments on that debt. Because the spending of borrowed money had given an artificial boost to apparent economic activity, there was widespread complacency about how much debt we could actually afford to service. When the crash unmasked the weakness of borrowers, it became glaringly apparent that the debt mountain simply couldn’t be serviced at a ‘normal’ rate of interest (with ‘normal’, for our purposes, meaning rates in the range 4-6%).

The obvious response was to circumvent this debt service problem by slashing rates. Cutting policy rates was a relatively straightforward, administrative exercise for central bankers. But prevailing rates aren’t determined by policy alone, because markets have a very big say in rate-setting. This, ultimately, was why QE (quantitative easing) was implemented. QE enabled central banks to drive down bond yields, by using gigantic buying power to push up the prices of bonds.

Beyond the mistaken assurance that QE wasn’t the same as “printing money” – so wouldn’t drive inflation up – little or no thought seems to have been devoted to the medium- or longer-term consequences of monetary adventurism.

In essence, ZIRP (zero interest rate policy) was a medicine employed to rescue a patient in immediate danger. Even when responding to a crisis, however, the wise physician is cognisant of two drug risks – side-effects, and addiction.

The financial physicians considered neither of these risks in their panic response to 2008. The result is that today we have addiction to cheap money, and we are suffering some economic side-effects that are very nasty indeed.

The inflation delusion

Even the assurance about inflation was misleading, because increasing the quantity of money without simultaneously increasing the supply of goods and services must create inflation. This is a mathematical certainty.

Rather, the only question is where the inflation is going to turn up.

As has been well explained elsewhere, handing new money to everyone would drive up general inflation. Giving all of it to little girls, on the other hand, would drive up the price of Barbie dolls. Since QE handed money to capital markets, its effect was to drive up the price of assets.

That much was predictable. Unfortunately, though, when policymakers think about inflation, they usually think only in terms of high street prices. When, for example, the Bank of England was given a degree of independence in 1997, its remit was framed wholly in CPI terms, as though the concept of asset inflation hadn’t occurred to anyone.

This is a dangerous blind-spot. The reality is that asset inflation is every bit as ‘real’ as high street inflation – and can be every bit as harmful.

Massive damage

In itself, though, inflation (asset or otherwise) is neither the only nor the worst consequence of extreme monetary recklessness. Taken overall, shifting the basis of the entire economy onto ultra-cheap money must be one of the most damaging policies ever adopted.

Indeed, it is harmful enough to make Soviet collectivism look almost rational.

The essence of a cheap money is policy is to transform the relationship between assets and incomes through the brute force of monetary manipulation.

Like communism before it, this manipulation seeks to over-rule market forces which, in a sane world, would be allowed to determine this relationship.

By manipulating interest rates, and thereby unavoidably distorting all returns on capital, this policy has all but destroyed rational investment.

Take pensions as an example. Historically, a saver needing $10,000 in twenty-five years’ time could achieve this by investing about $2,400 today. Now, though, he would need to invest around $6,500 to attain the same result.

In effect, manipulating rates of return has crippled the ability to save, raising the cost of pension provision by a factor of about 2.7x.

Therefore, if (say) saving an affordable 10% of income represented adequate provision in the past, the equivalent savings rate required now is 27%. This is completely unaffordable for the vast majority.  In effect, then – and for all but the very richest – policymakers have destroyed the ability to save for retirement.

Small wonder that, for eight countries alone, a recent study calculated pension shortfalls at $67 trillion, a number projected to rise to $428 trillion (at 2015 values) by 2050.

What this amounts to is cannibalizing the economy. This is a good way to think about what happens when we subsidise current consumption by destroying the ability to provide for the future.

Savings, of course, are a flip-side of investment, so the destruction of the ability to save simultaneously cripples the capability to invest efficiently as well. The transmission mechanism is the ultra-low rate of return that can now be earned on capital.

A further adverse effect of monetary adventurism has been to stop the necessary process of “creative destruction” in its tracks. In a healthy economy, it is vital that weak competitors go under, freeing up capital and market share for new, more dynamic entrants. Very often, the victims of this process are brought down by an inability to service their debts. So, by keeping these “zombies” afloat, cheap money makes it difficult for new companies to compete.

Obviously, we also have a problem with inflated asset values in classes such as stocks, bonds and property. These elevated values build in crash potential, and steer investors towards ever greater risk in pursuit of yield. Inflated property prices are damaging in many ways. They tend towards complacency about credit. They impair labour mobility, and discriminate against the young.

More broadly, the combination of inflated asset values and depressed incomes provides adverse incentives, favouring speculation over innovation. And this is where some of the world’s more incompetent governments have stepped in to make things even worse.

In any economic situation, there’s nothing that can’t be made worse if government really works at it. The problems created by “zombie” companies are worsened where government fails to enforce competition by breaking up market domination. Though the EU is quite proactive over promoting competition, the governments of America and Britain repeatedly demonstrate their frail grasp of market economics when they fail to do the same.

Worse still, the US and the UK actually increase the shift of incentives towards speculation and away from innovation. Having failed to tax the gains handed gratuitously to investors by QE, these countries follow policies designed to favour speculation. Capital gains are often taxed at rates less than income, and these gains are sheltered by allowances vastly larger than are available on income.

The United Kingdom has even backstopped property markets using cheap credit, apparently under the delusional belief that inflated house prices are somehow “good” for the economy.

How will it happen?

As we’ve seen, monetary recklessness – forced on central bankers by the GFC, but now extended for far too long – has weakened economic performance as well as intensifying risk. In some instances, fiscal policy has made a bad problem worse.

In short, the years since the crash have been characterised by some of the most idiotic policies ever contemplated.

All that remains to consider is how the crash happens. The prediction made here is that, this time around, it will be currencies, rather than banks, which will be first suffer the crisis-inducing loss of trust (though this crisis seems certain to engulf the banks as well, and pretty quickly).

The big question is whether the collapse of faith in currencies will begin in a localized way, or will happen systemically.

The former seems likelier. Although Japan has now monetized its debt to a dangerous scale (with the Bank of Japan now owning very nearly half of all Japanese government bonds), by far the most at-risk major currency is the British pound.

In an earlier article, we examined the case for a sterling crash, so this need not be revisited here. In short, it’s hard to find any reason at all for owning sterling, given the state of the economy. On top of this, there are at least two potential pitfalls.  One of these is “Brexit”, and the other is the very real possibility than an exasperated public might elect a far-left government.

Given a major common factor – the fatuity of the “Anglo-American economic model” – it is tempting to think that the dollar might be the next currency at risk. There are, pretty obviously, significant weaknesses in the American economy. But the dollar enjoys one crucial advantage over sterling, and that is the “petro-prop”. Because oil (and other commodities) are priced in dollars, anyone wanting to purchase them has to buy dollars first. This provides support for the dollar, despite America’s economic weaknesses (which include cheap money, and a failure to break up market-dominating players across a series of important sectors).

Conclusion

Once the loss of trust in currencies gets under way, many different weaknesses are likely to be exposed.

The single most likely sequence starts with a sterling crash. By elevating the local value of debt denominated in foreign currencies, this could raise the spectre of default, which could in turn have devastating effects on faith in the balance sheets of other countries. Moreover, a collapse in Britain would, in itself, inflict grave damage on the world economy.

Of course, how the next crisis happens is unknowable, and is largely a secondary question. Right now, there are two points which need to be taken on board.

First, the sheer abnormality of current conditions makes a new financial crisis highly likely.

Second, and rather than assume that banks will again be in the eye of the storm, we should be looking instead at the most vulnerable currencies.

Losing faith in banks, as happened in 2007-08, was bad enough.

But a loss of faith in money would be very, very much worse.

 

93 thoughts on “#105: Anticipating the next crash

    • Thanks. The point about the City is well taken. More broadly, the UK, like the US, has long seemed more interested in moving money around than in more value-adding activities.

  1. Thank you Dr Morgan for another excellent appraisal. My view is that Governments generally, and ours in particular have been worried, since the crash, about deflation.
    Consequently they flooded the finanicial system with easy cash. Of course they may have gone too far and weakened our currency, but do you think that deflation is still a possibility? Particularly if they are forced to raise inerest rates.

    • Deflation is a natural concern with a stagnant economy – this helps explain why UK inflation hasn’t (yet) been pushed even higher by devaluation.

      Deflation can be disastrous for the heavily-indebted – it makes debts bigger in real terms.

      Against this, though, we have for many years been understating inflation, through techniques such as hedonics, substitution and geometric weighting. Shadowstats has a good primer on this.

      Also, an expanding population, with resources that, ultimately, are finite, suggests inflation.

      Lastly, the only way to deal with gigantic debts is deflation. With unaffordable debts, states have two options:

      – Don’t pay (“hard default”)

      – Pay, but in money which has lost its value through inflation (“soft default”)

      Governments almost always choose the latter.

      This, incidentally, is why I take “quasi-debt” (like pension commitments) so seriously – unlike debt, these commitments cannot be shrunk through inflation, because pension needs, for instance, are effectively linked to inflation.

  2. Thanks for another informative post Dr Morgan. Would it be cheeky to ask what you suggest that I as a pensioner living in the UK do with the small amount of savings I have to best protect them? Having, until now, been convinced we were heading for another banking crisis I have been holding onto some cash, rather than having it all in the bank, but it sounds like that won’t help much if the issue is the pound this time round. (I also have chickens, bees and a large veg garden, as recommended by one of your commenters on the previous sterling post.) Having followed what’s happened in Greece, I’m fully expecting that pensions are likely to be cut at some point too.

    • I really cannot advise, beyond the obvious, which is not to have all your eggs in one basket. In my case, I long ago created accounts in EUR and USD at my high street bank, to enable me to diversify. Obviously, some banks are likely to prove safer than others.

      In any case, almost all classes of assets have been inflated by monetary adventurism – it really presents a choice, not of “best value”, but of “least bad”.

    • @Chrissies,
      Many of us share these same concerns.
      I am still working, but I am also preparing for retirement. I cannot advise you on this, so do not interpet this as advice, but I can tell you what I have done.
      As Dr. Tim recommends, diversification is your best hope of hanging on to at least something. I think it is safe to say that we will all lose something, so the aim is to lose as little as possible. In addition to GBP, USD and EUR, in cash and in the bank, I also have Thai Baht and Russian Ruble in local banks. These latter currencies actually still pay interest, so although I have “lost” on my GBP:RUB exchange rate, I have recouped it all by getting 7 – 10% interest. Thailand is not paying so much, but at least the interest I do get pays a few nights hotel accomodation.
      I also have Gold and Silver, ( bars and coins ), and I have crypto curencies, Bitcoin and Litecoin. ( These have done so well for me lately, that both my son’s want me to buy them new cars ! )
      My house is paid off, and I have a plot of land in Austria which I intend to build a little chalet on, keep a few chickens, grow some veg and I like the idea of some bees too.

      Kiss your pension goodbye.
      When the Stock and Bond markets crash, there will be nothing left for you.

  3. Just wait until we experience a 10% or 20% drop in oil supplies. In a few years or sooner we certainly will. When it hits the economic and social damage will be catastrophic. The end of Western Civilization, from China to Europe, to the US, will not occur when oil runs out. The economic and social chaos will occur when supplies are merely reduced sufficiently.

    • My view – set out in my book, and refined since – is based on surplus energy (that is, the amount produced, minus the amount used to produce it). The gross quantity of energy is still increasing, but the cost ratio has worsened, so the aggregate of surplus energy is now growing only at roughly the same rate as population.

      So these stages can be identified:

      1. Total surplus energy growing, more rapidly than population – prosperity increasing

      2. Total still growing, but at same rate as population – prosperity stagnant

      3. Total growing, but at slower rate than population – prosperity erodes

      4. Total shrinking – prosperity in rapid decline

      I put us now on the cusp of changing from stage 2 to stage 3. Overall, prosperity is stagnant – still growing in China and India, declining in most Western economies.

      The compounding problem is that our “financial” economy is predicated on growth – it isn’t viable where prosperity is even static, let alone shrinking.

      That’s why we’ve been faking “growth” – using debt before 2008 and, since 2008, using both debt and cheap money. It’s a process of mortgaging the future.

      Given the financial system’s need for growth, the system can crash even if prosperity is simply static. That’s where I think we are now.

    • There’s something else to add.

      So long as people are getting wealthier, they find the great absolute wealth of a minority tolerable.

      If people stop getting wealthier, however, and start getting poorer, tolerance for wealthy minorities will go up in smoke.

  4. Lots of wisdom in this blog, but I don’t buy all of it. I don’t think you are yet up to speed on money. You admit to issues with MMT. and this is highly likely from a non cognisance of money mechanics. MMT is all about the mechanics of money. [There is no” theory” in the hypothesis sense there. The word theory is like theory in the theory of gravity. Easily misunderstood].
    QE, was an asset swap, not money creation. Eventually the fed was pushed to create vast sums of money [$29 Trillion!] to bail out banks because QE didn’t work and was misused.

    Fiat money is indeed a “full faith and credit” supported system. But nothing can prepare us for the incompetence, the idiocy, of politicians. This level of rank incompetence is world wide, so the problem will perforce become world wide. Politicians don’t understand the mechanics of money and those ones fortunate enough to understand, like central bankers have traditionally been, are scarce. So it’s indeed likely they will cause any crisis in money, when it comes, to be made worse.

    There is an implied criticism of what MMT stands for in the blog. Is that deliberate?. Misusing MMT is dangerous just as is the misuse of mainstream theories. However the malfunctioning of the economy today is a direct result of neo-liberal monetary theories pushed into the new “Normal” you so correctly criticise. MMT offers solutions, if understood.

    So I am not convinced money will be the problem. The proviso is to understand what money can and cannot do. This is where the academics, the media and the politicians need to know their limits. MMT says Money can only be created as a response to debt, so the debt levels are more key than money per se. Since the financial arm of the economy has gone way beyond a sensible level. it can and probably will be trimmed by simple repudiation of the debts, a debt jubilee perhaps and with no liability to repay. The ordinary economy can keep afloat for as long as there are goods and services for sale. The boundary here is our finite planet.

    Being scared that money will be produced in excess is not a tenable position if it hamstrings efforts to reduce inequities and wealth gaps already burdening society. Inflation is not a problem as long as there is an output gap between a fully mobilised economy with unemployment at 2% and the current one barely surviving deflation. Spending creates work and opportunities for growth such that the cost of full employment is revenue neutral. A UBI or a Job Guarantee is not a recipe for inflation, while the fiscal space is so large as it is today. Your comment that spending on handouts would drive inflation is wrong, simplistic.
    We actually need more spending today, not directed to debt repayments, but into the everyday economy.

    • I’m not dismissive about MMT, but not convinced either – you could say I’m neutral on it.

      For me, the big issue isn’t the financial economy of money and credit, but the real economy of energy, resources, labour, goods and services.

      On the latter measure, prosperity globally has flattened, and is shrinking in most Western countries. Unfortunately, our financial system is dependent on growth. That’s why we’ve been using both debt and cheap money to fake “growth” – the only way of keeping our growth-dependent financial system afloat. This is already having very, very bad side-effects, making a crash look ever likelier.

    • So you are of a different opinion now? Probably wise because the money will always be there and the stop will be resources such as goods and services, the grid too.

    • I don’t think I’ve changed my mind…..

      What matters most is the real economy.

      But a collapse in the financial system could cause massive damage and disruption.

      I’m not dismissive of MMT, but I’m not convinced by it either, so am open minded.

      I don’t see how MMT could prevent the damaging consequences of a collapse of faith in money.

    • WE already live in an MMT economy. It’s just not recognised as fact by those for whom the false economic paradigms benefit. They go to some lengths to disguise this truth, such as touting a household analogy for a monetary sovereign government, which is completely false.
      MMT won’t necessarily save us but it will make a substantial difference on the way down. It’s too long in detail to be relevant here.
      But if you believe Federal tax does not pay for government spending, that spending is not supported by taxes and borrowings, that it can not run out of money, that we will not burden future generations with unfunded liabilities, and that healthcare and pensions are not unaffordable, then these myths will be accepted as myths and you will be well on the way to understanding MMT.
      Believing the myths makes the situation more dire than believing reality does. It won’t stop our collapse as it is ordained now and no one has a plan to reverse direction.

    • I get the part of MMT that says a sovereign government can’t go bankrupt as it can always issue more money as a monopoly supplier.

      It’s on the issue of inflation where I feel MMT falls a bit short by ignoring the behavioural aspects of the economy treating it just as an accounting exercise. Don’t get me wrong it provides useful insights but I see a danger that it could be used as a prescription for the destruction of the real value of money.

    • It’s prescriptions can always be traduced. Nothing is immune from that. But it says money is created by buying debt so it’s no free-for-all. Money only exists to buy debts. No debt=no money.
      It’s a false equivalence to talk about printing money. Apart from banknotes and stamping coin, money is 97% numbers in accounts, and half US dollars are stored outside the US anyway- mostly in $100 bills.
      It is actually quite difficult to cause inflation. In today’s world deflation is much more likely. To have inflation the economy must be in a boom cycle. I can’t see many signs of that today. MMT tells it like reality is. It’s not a per se source of inflation or deflation. That’s up to us. The limit is the supply of goods and services available for sale. As long as we stay below that limit there will be no excess inflation. We are trillions of dollars shy of that today, so there’s no excuse to not start paying decent pensions and welfare and free education etc. The fact we don’t is political, not economics.

    • You reckon? What’s your evidence? One is a misleading description, designed to confuse. The other is wrong in that you don’t create debt at 0% interest. You buy debt. No debt = no money. Printing money gives the idea one can print it and just store it for some future use. You don’t want to leave anyone with that impression.

  5. Diminishing returns on energy have been masked over by cheap credit. When the credit bubble pops, the energy deficit will be exposed for all to see. The end of the world as we know it.

  6. One aspect that hasn’t been mentioned is a stock market crash. October is a month that seems to attract jitters. And there is plenty to be jittery about!

    • I’m very conscious that late September and early October seems to be a risky time for crashes – but this needn’t apply only to stock markets. I remember at least one instance of a forex crash at this time – the USD, when markets were spooked by the “twin deficits” (C/A and budget).

      There’s no reason why either, or both, shouldn’t happen at that time.

  7. Hi Tim

    Thanks for another very perceptive post.

    From my perspective it isn’t just energy here that’s the issue. Many parts of the World have demographic issues and we seem to be in a hiatus as far as transformative technology is concerned and there is also the issue of climate change, quite apart from the issue of the debt burden itself which, as you say, is a huge incubus on quite a number of economies. These are independent matters which simply compound the erosion of the energy equations and make our problems that much worse.

    As to whether the collapse will be a currency phenomenon I’m not sure. As you say currencies have collapsed in the past and, whilst there are often severe distributional consequences of such a collapse life does go on and necessary adjustments are made. It is the “real” things that concern me (Demographics; the changing energy equation and so forth) rather than the nominal as tackling these will require real changes in people’s attitude and behavior and this is far more difficult to achieve, particularly in view of the fact that there will be many losers, whatever form the crisis takes.

    • Thanks Bob – these are very good points. All of these things are related – energy, prosperity, geopolitics, currency, technology and so on. These connections are perfectly logical, even if events often are not. Obviously, I couldn’t address them all at the same time.

      I pick on currencies following this logic:

      2000-08 = excessive borrowing = loss of confidence = banking crash

      2008-17 (?) = reckless monetary policy = monetary recklessness = money crash

      But there are other linkages:

      Energy = declining prosperity = ‘populism’ = geopolitical issues

      Geopolitics + declining prosperity = migration

      ……….and so on.

      One of my concerns over technology is domination of key sectors by single players or small groups, almost invariably American. This lack of competition can stifle innovation – and we can’t expect others (including China and Europe) to accept American domination. I’m half expecting (and certainly would favour) Europe stopping the so-called “sharing” economy gaining a foothold here.

  8. Another good post Tim

    It’s difficult to separate the real and financial economies. It seems that some are completely focused on one or the other and aren’t fully aware of the interplay between the two.

    Perhaps a good way to view the two is that the financial system is basically an information system. In itself the financial system isn’t an economy at all, but rather it directs and steers the real economy. The real economy is quite simply the exchanges of energy between parties. Wealth of one party is always relative to the other and is built on the surplus of energy that one party has in relation to the other.

    The Free Market Capital system which has come to dominate global trade has created a fabric of information that expedites transfers of real goods and services internationally. Through the trading within markets, when there was true price discovery, global resources have been allocated to produce the highest yields. When we look at the manufacturing industry we see this clearly evident. We often miss the reality that labor savings isn’t the only driver in shifting manufacture from one region to another. Energy costs are also. So globalization is really a function of scarcity of resources, this includes demographics.

    In order for the present economy to persist growth is an absolute requirement. Without growth the system enters into a deflationary spiral. In some ways this happened to the Soviet Union which was truly a competitive economic system. Capitalism requires growth in order to perpetuate itself. In a real sense it acts as a dissipative system just as we witnessed recently with Irma.It is self organizing as long as the prime energy driving growth can be increased. However when the energy driving growth stagnates the natural friction within the structure causes it to disassemble.

    This is what we are witnessing presently in the economy. The information contained now in the financial system is distorted and is being directed to none productive outlets. This condition has been mistakenly attributed to poor management, or bad politics. But the real issue is the global system has hit a wall that it can’t climb, because the decline in net energy is removing the needed growth that had been driving the system.

    This happened in the 70s in the US as the country declined in recoverable resources. The solution was to expand globally. Globalization. This is the same reaction that Great Britain experienced as it’s indigenous resources became economically unproductive.

    What makes this time different is that we are now at a global maximum in net energy supply. Modern Money Theory doesn’t accept that reality as one of significance but subconsciously they actually are. This persistent capital creation through whatever means possible is the direct result of hitting the energy wall. The economic crisis of 2008-9 would not have occurred if the economy had been able to grow past it. But it couldn’t.

    As the net cost of energy increases more capital has to be directed towards its production. Either it must be created or transferred. If we hold to neutrality of money or superneutrality, we might say it is always a transfer.

    Have we witnessed this? I think we have. In what is often described as ignorant economic policy, we have watched with increasing velocity the destruction of the global economy. The transfers needed to to finance in particular the “Shale Revolution” have been taken from pension systems, and increases in student debt. (Only two examples).

    What if the banks had not been bailed out? What would the consequences have been? Where would the investment capital have been drawn from to fund the basic ponzi scheme economy we now have with all the global zombie corporations? With GDP being measured with hedonics.

    The alternative would have been to stop shale and tar sands. Which means that the global oil industry would have reduced output by 8% by now. So in a way we have a role reversal taking place today. The Financial Economy is now subservient to the Real Economy. This was clearly evident when oil prices collapsed to below cost of production for a marginal barrel in late 2014.

    This time is no different than when the Roman empire fell. Rome existed as long as it maintained conquest. Why? Because with conquest came surplus energy in the form of food and gold and resources accumulated by other civilizations. The same is true today. It is the surplus energy that had been accessible to the capital market system that has built the present economic system. The present net energy now isn’t enough to function as a replacement let alone growth system. Doesn’t matter what economists do or try, they maybe ignorant, but thank them for that. The real economy is in decline and it will take the financial economy with it.

  9. Turgot 1766

    “The land has also furnished the whole amount of moveable
    riches, or capitals, in existence, and these are formed only
    by part of its produce being saved each year.”

    “Not only does there not exist nor can there exist any
    other revenue than the net produce of lands, but it is also
    the land which has furnished all the capitals which make
    up the sum of all the advances of agriculture and commerce.

    It was that which offered without tillage the first
    rude advances which were indispensable for the earliest
    labors, all the rest is the accumulated fruit of the economy
    of the centuries that have followed one another since man
    began to cultivate the earth. This economizing has doubtless
    taken place not only out of the revenues of the proprietors
    but also out of the profits of all the members
    of the working classes.

    It is even generally true that,
    although the proprietors have a greater superfluity, they
    save less because as they have more leisure, they have more
    desires and more passions, they regard themselves as more
    assured of their fortune, they think more about enjoying
    it agreeably than about Increasing It luxury is their inheritance.
    The wage-receivers, _ and especially the undertakers
    of the other classes, who receive profits proportionate
    to their advances, to their talent and to their activity,
    although they have no revenue properly so called, have yet
    a superfluity beyond their subsistence, and almost all of
    them, devoted as they are to their undertakings, occupied
    in increasing their fortunes, removed by their labor from
    expensive amusements and passions, save all their superfluity
    to invest it again m their business, and so increase
    it.

    Most of the undertakers in agriculture borrow little,
    and scarcely any of them seek to make a profitable employment
    of anything but their own funds. The undertaker
    in other employments, who wish to make their fortune,
    stable, also try to get into the same position: and, unless
    they have great ability, those who carry on their enterprises
    upon borrowed funds run great risk of failing.

    But, although capitals are partly formed by saving from the
    profits of the working classes, yet, as these profits always
    come from the earth, inasmuch as they are all paid,
    either from the revenue, or as part of the expenditure
    which serves to produce the revenue, it is evident that
    capitals come from the land just as much as the revenue
    does, or, rather, that they are nothing but the accumulation
    of the part of the values produced by the land that
    the proprietors of the revenue, or those who share it with
    them, can lay by every year without using it for the satisfaction
    of their wants.”

    Turgot was a Physiocrat
    If you carefully read his conclusion and reflect on the global economy as it mirrors France in his day you will see clear parallels.

    • If you’ve read Life After Growth (2013, 2016) you’ll know I identify two great leaps forward based on surplus energy. Harnessing fossil fuels was the second stage, but would not have been possible had not the agrarian stage created the first (albeit modest) energy surplus, and provided the foundation technologies for the second, bigger leap forward.

      Capital, like any other economic good, ultimately comes from energy, which may be labour or exogenous inputs. Applying these to resources – land, minerals and so on – creates capital assets.

  10. Brexit??

    Clearly this may well seriously affect the UK’s ability to meet its debt obligations. and if we cant then there may well be significant implications both at a Global and National level

    • Yes – and didn’t I hear something about electricity prices rising by 12.5% soon?

      GBP was stronger on the inflation number, because it increases the possibility of a rise in interest rates. Quite aside from the latest CPI number, there’s a compelling case for raising rates, arguably by 50bps. I don’t think it’ll happen, though, because the BoE seems wedded to the fallacy of cheap money.

      Higher inflation also strengthens the case for lifting the cap on public sector pay settlements. I’m waiting for Labour to suggest a wealth tax to pay for it.

      On the broader measure of prosperity calculated by SEEDS, people are now getting poorer at a rate of just over 2% annually, and will be 19% less prosperous by 2026.

  11. It seems ‘they’ read the SEEDS blog too…

    The dollar failed to maintain momentum after Monday’s 0.6 percent gain, with market focus turning to whether U.S. consumer-price data due Thursday has the potential to improve the greenback’s allure. The Bloomberg Dollar Spot Index swung between gains and losses as investors unwound risk-off positions, while the pound rallied on the back of faster-than-estimated U.K. inflation. Sterling rose to $1.3282, its highest level in a year, as data showed annual core inflation in Britain accelerated to 2.7 percent in August, the most since 2011. Profit-taking in euro-pound longs also helped cable push above the August highs, according to currency traders in Europe and London.

    The strong U.K. data spurred an immediate repricing of Bank of England rate-increase odds. Based on MPC-dated overnight index swap rates, chances of a 25 basis point hike by the end of year have risen to 33 percent from 24 percent Monday. A tightening is fully priced in by end of summer next year. Risks are now skewed toward a hawkish shift in the BOE Monetary Policy Committee vote on Thursday, with more than two members now pushing for a rate increase, providing more support for the pound.

    • Thanks, most helpful. For those interested, here’s my summary.

      – The EUR has been strong recently on hopes that QE will be tapered off – though the first rate rise still lies a long way in the future.

      – The USD has weakened on expectations that Mrs Y won’t put rates up again this year, and might even be replaced by somebody keener on cheap money.

      – Rising UK inflation has suggested that the BoE might raise rates, giving a small speculative boost to GBP.

      Only the ECB position has any logic at all – they sense the EZ recovery is fragile so are being cautious.

      The idea of replacing Mrs Y with somebody keen on cheaper money for longer wouldn’t make sense – but the “petro-prop” does support the USD. (Incidentally, Saddam proposed moving oil prices onto a basket of currencies instead – was that why the US saw him as such a big threat?) (That’s my theory, BTW)

      The majority position of the BoE’s MPC is pretty daft. They need to raise rates, by 25pbs now and another 25bps soon after, to defend GBP and curb inflation. If they don’t, they risk wage inflation in the public sector, amongst many other things. But they don’t have the wit to realise this, IMO.

  12. A 19% deterioration is huge – how will already poor families cope with this? By wealth tax do you mean extra tax on the high earners or perhaps actually taking away people’s savings (or both).

    I’ve just read the article in the Guardian from August – another blow to the already stretched finances of some families.

    We’re heading towards major social unrest in the 2020’s if not sooner. I think Brexit should be cancelled for the good of the country – it’s simply going to cost too much.

    • According to SEEDS, Britain hit ‘peak prosperity’ as long ago as 2000. Since then, prosperity per capita is already down by 17% – and the rate of deterioration is accelerating.

      Actually, I think this trend is visible. Real wages have been weakening since 2009. The cost of essentials has risen sharply. Dependency on debt has increased markedly. Household (as well as public) debt keeps rising. Student and car debt are more recent worries. People are struggling. There are food banks in a supposedly rich country. Public services are being eroded – everything from health and defence to bin collections and libraries. The anger seems to me almost palpable.

      So unrest probably looms. I understand that, over the last year or so, there have been big increases in violent crimes (though that’s not wholly economic, but cultural).

      A wealth tax is not uncommon here in Europe. It might be, say, 0.5% on all assets over £1m, 1% on everything over £5m, and 5% on everything above £10m. In some ways this is preferable to taxes on income. We might also look at CGT and inheritance taxes.

      To be sure, the Tories’ core supporters would oppose this. But government really needs the money, and the country is seriously divided between the lucky (started work at a better time, were able to afford properties) and the unlucky (essentially, people under 40).

      I don’t think the Conservatives will do this. But I’m pretty sure Mr Corbyn will. The Tories need to get smart and shoot Labour’s fox on redistribution.

    • Well the Conservatives shot themselves in the foot by decreasing inheritance tax at a time when the country cannot afford it.

      The potential car loans crisis seems to me like people having one last consumer binge (which they can ill afford). I wonder what’s going to happen to the industry when these finance deals eventually stop or at least reined in.

      An annual wealth tax will be unpleasant for some especially if the bulk of their asset worth is in property – but I can see it happening.

      I don’t know how many people in the UK have assets worth over £1m so I can’t estimate how much tax would be raised. This tax would of course be severely dented if there was ever a property crash.

      Regarding property – despite the pitfalls of greedy and lazy landlords – I suppose the Government doesn’t mind the rental market as it’s an extra source of revenue from the tax earned on the rental income.

    • Raising taxes solves little. It only brings a sense of fairness to the picture. It raises no spending money. The economies all over the planet are closing in on deflation, because the politicians are listening to the fake analyses by their donors, the already very wealthy bankers etc., who care zero for the majority.
      It’s past due for the population to understand the government’s spending power comes from its mandate as the sole creator of net credit funds, without liability. Bank credit creates liability money so while its part of GDP it’s not part of the annual government accounts, which is where we see budget deficits and surpluses in the news.
      For as long as there will be goods and services for sale the government must deficit spend. Budget surpluses simply fail to stimulate the economy. In fact they bring on recessions. That’s because the government withdraws spending power away for the economy if taxes are too high, exceeding spending. So balancing the accounts equals clipping the non government sectors spending power.

      Taxes cannot pay for government spending. It is mechanically impossible. They have to spend FIRST so we punters can earn the money to pay tax and to know what it will be. Government money gets clipped by tax at every transaction and eventually reduces to near zero, forcing it to spend new money into circulation continuously. They also have no need to use bank lent money. Although they do so it’s because the banks are major donors to political parties, but it adds huge amounts to the bottom lines of government enterprises, doubling even tripling the cost, all so banks can add its tolls to the economy.
      All this skewed political mischief is a big part of the misery inflicted on the majority of the population by incompetent governments. It’s not a good omen for the future.

    • It’s interesting about car finance. It seems that ads seldom mention the price, they just say how much it costs per month. Maybe this is a sign of the times?

      In the US – and I’m sure it’ll happen in Europe – the car rental sector is in big trouble, partly because they all expanded at the same time, meaning huge numbers of cars are now arriving on the used market, driving prices far lower. It seems possible that the big expansion in car finance could compound this effect. On top of that, sub-prime is alive and well in the US car finance sector.

    • Regarding sub-prime it’s not only the amount of cars and bad loans – it’s the falling value of diesel cars which threatens the future value that the finance companies have guaranteed.

      Over 320 diesel Golfs have suddenly appeared on Motorpoint at knock down prices.

    • Ejhr – Taxation can be seen as removing the ability from the population to buy scarce resources which can then be used by the Government

    • That’s not quite the way I would put it. Taxation makes space for spending into the economy , not so much to save on scarce resources, which is a different problem and only applies when the economy is approximately at maximum capacity and with full employment.
      One day that time will come, and it will be a very bad signal for the future. Once we run low on resources, the essential ones, taxation problems will vanish. If a government is prepared it might be able to institute rationing and it will certainly nationalise everything it needs, so that profiteering is cut away. It’s a big IF!

  13. The SNB sure knows how te deal with demand:

    “Here is the irony. The SNB creates its own money, and can do so in unlimited quantity. It then buys foreign stocks and bonds with those freshly created CHF, because it can. It can because there is heavy demand for CHF in the foreign exchange markets. Foreign investors take whatever the SNB prints. And this is the irony: the SNB is watering down its tiny currency more than any other central bank, and yet, foreign investors are falling all over each other to buy it.”

    https://wolfstreet.com/2017/09/11/shares-of-the-swiss-national-bank-soar-64-in-two-months/

    So watch as the BoE starts buying stuff on the Pyongyang stock exchange 😛

    Distortions in ‘markets’ are off the charts. Lies and games keeps it all together. Expect much more of it.

    • And be happy. Anything less would have ended BAU much sooner. There was no choice this is the playout. Counter intuitive but end play nonetheless. The Western world has a front row seat.

  14. When we look at the reality of surplus economics a few things become apparent.

    In the previous agricultural system the means of production was the land. With the introduction of fossil fuels the means of production shifted to those who control the supply of energy.

    So there is no mystery that the US has persistently interviened in the politics of energy producing economies. This isn’t a coincidence rather a requirement.

    The means of production must be guarded at all cost. Even if it requires the destruction of prominent buildings in NYC.

    What China is now proposing with a yuan gold oil trade is suicide.

    • JT, first the gold standard was abandoned, then we got financialization, after that globalization, now we’ve got extreme monetization. The current fiat currency system cannot work much longer. So what’s the plan now? I’d say we go to hard assets and we are leaving the fiat currency system. Step by step, as another extension of BAU, on a much lower scale. Behind the scenes, countries and central banks know what is going on.

      Why did Modi remove currency? Because they want India to use less cash currency? Or do they want their citizens to use gold and silver as medium of exchange?

      There’s a plan JT. BAU light. It will get messy though.

  15. Hi Tim, interesting analysis. Could you explain what might happen if there was a simultaneous loss of confidence in multiple currencies? My understanding of a run on a currency is that investors bail on that currency in favor of a more stable one, but if the crisis were more systemic (or if a crash in confidence in one currency prompted a wider rethink) then I’m wondering how that plays out. I can see how the USD is somewhat immune from this, but surely there are limits to the extent that it would be seen as a safe haven if there was a run on GBP? So my question is, what does a wider currency crash look like?

    • The “multiple currency crash” scenario is hard to think through, but makes logical sense. Currency A crashes, so country A defaults. That blows a huge hole in the balance sheet of country B, so currency B crashes – and so on.

      I’m planning a new discussion soon on crash scenarios. Basically, a lot of people expect one – financial, economic, political, social – so what I’ll do is put down one scenario and throw it open for discussion.

  16. Thanks Dr Morgan for another engaging read.

    What is your view on the nature of the coming crash? – will it be an event on the 10 o’clock news or something more drawn out that doesn’t draw immediate attention – a slow motion crash.
    History shows that there are no limits to government incompetence.

    I’m thinking of my parents that had their savings decimated in the 70’s by inflation. Despite this they were able to save enough to start a business….which was almost bankrupted by John Major’s interest rates of nearly 20% in the 90’s. What will the next event be ?

    Now in retirement they are told they are the ‘lucky generation’ and should have their pensions and other perks cut…

    • Yes, just to elaborate on this question Tim: not asking you to “predict” because there could be many ways, but could you spell out one feasible sequence of events resulting in death of the UKP?

      My tuppence worth of game theory: the major currencies and economies need each other too much to allow any of them to fail.

    • Can I refer you both to my answer to O Knight, above?

      I think we need a forum on this – one scenario from me, then everyone can take the discussion where they wish.

  17. houtskool

    The problem is gold was only a place holder. We have to identify why gold has value, or as many believe universal value.

    Gold has been a store of value because of the energy required to obtain it. So it’s a device created by surplus energy. If it wasn’t for the energy involved in it’s production, whether human labor or fossil fuels, it would have the same value as competing stores of value. Like wood. So there was no remarkable change to currency when the gold standard was dropped, other than this. The currencies pinned to gold were fixed to the efficiency, or cost of gold production. Gold is convenient in storing a lease on energy but useless until it is reconverted to the work it represents.

    The inherent problem with gold is it’s value can not be inflated beyond it’s cost of production. Which translates to the inability to grow the money supply. In effect the economic growth of global GDP would be confined to the growth of gold production. As that envelope was pressed, had the gold standard been kept in place, the effect would have been a global gold rush leading to very low ROIs. This would have substantially brought more gold to the surface at much higher values because of depletion. But we would have traded or fossil fuel endowment for a pile of useless gold.

    By ditching the gold standard and functioning with a fiat currency back by oil (petrodollar) there was a great deal more prosperity to be had. Why? Because the energy that would have been wasted in the gold mines could be freed to grow the broader economy.

    The point? The financial manipulation has not created the problem. Which means financial manipulation can’t solve the problem. The world is running out of low entropy highly productive energy supplies. So far there is nothing that can fix that.

    • Very well written, JT.

      Corollary: any kind of BAU survival would have to openly recognise that energy flows are the key constraint.

      (Rather than the deceits of the past; I was shocked when you referred to */** in a previous post – Tim’s trying to run a family show here 🙂

      The physics and maths required to understand the existing predicament is not advanced; it ought to be in the reach of anyone near positions of power.

      But science has been much maligned and obfuscated by politics.

    • Thanks JT, very well understood. Its not that i promote a gold standard, just maybe as a one time event to soak up the debt overload. That won’t solve the energy cliff of course. The system will ditch all fiat currencies because they all fail in an exponential way as we speak. Something has to replace it, and that replacement cannot be based on future growth aka trust money.

    • JT

      A very interesting post.

      To me the thing about gold, or seashells or notched sticks, all of which have been used as mediums of exchange is that they are symbolic. Have you read David Graeber’s book:”Debt:The First 5000 years”? It’s a fascinating book by an anthropologist not an economist that shows that debt and credit (not gold, or seashells or notched sticks or barter or other pure symbols) is the basis of economic relations, certainly within the hunter/gatherer groups that populated the Earth a few thousand years ago. Mediums of exchange such as gold came to be used as groups traded with one another (inter group as opposed to intra group). I think what Graeber is saying it is the debt that is important not the medium for expressing that debt. The existence of debt on a huge scale – as has always been the case- does have huge economic, power and moral connotations and it is to these that one must look to understand the issues.

  18. This post appears to be predicated upon the assumption that what existed before the GFC was “normal”. In fact what existed before 2008 was “normal” just as what exists now is “normal” and what existed prior to ’79 was “normal” I use ’79 as my reference point as it is from here that the seeds of the GFC maybe traced when Regan and Thatcher set about “liberalising” the financial system.

    WE go through what is created for us or what we create for ourselves but we should never look wistfully back to a time when things were allegedly “better”.

    I live in a centrally heated, cavity wall insulated double glazed home today and my family has a car 30 and 40 years ago I did not have any of these things and life today is much better than the past even though there are many who would say now is “abnormal” and then was “normal”. If the things I mention are abnormal then give me abnormality every day.

    The Weimark went through a currency crisis and came out the other side stronger if somewhat intolerant and fanatical.

    • Good points. I think we might differ slightly on Mrs T – I see her as a necessary corrective, which her successors have taken too far for too long – but generally I agree with you.

      My calculations of prosperity start in 1980, as data before then is patchy. At constant (2016) values, per capita prosperity in the UK was £15,300 in 1980, and rose to £24,900 in 2000, an increase of 63% over twenty years. For 2016, SEEDS puts it at £20,600 – still well ahead of 1980, but significantly below 2000. We may be back at 1980 levels by 2030.

      Today we do indeed have things we didn’t have back in 1980. But we also have big debts, which are – wrongly – assumed to be secured against higher house prices (wrongly, because these cannot be monetized), and we’ve all but destroyed pension provision by slashing returns on investment through ZIRP.

    • Tim, only private pensions[I include local and state governments, everybody who is a USER of currency] are troubled by Zirp interest rates. Monetary Sovereign governments can always buy the debts. And good thing too. You can imagine the ruckus if pensions failed to pay! The government can step in and refinance all the ailing private pensions too. It just takes the political will. The tools are always there. At least neo liberal ideology will fold if real trouble comes from political inaction.

  19. Bob J

    I agree with you. Fundamentally debt could function without any capital. So they are really interchangeable in many ways.

    I haven’t read 5000 years but it makes sense.

    It reminds me of the hundred dollar inn joke.

    A traveler stops at an inn and tells the owner that he would like to rent a room. The owner says it will be one hundred dollars. The traveler gives the owner one hundred dollars but says he would like to see the room before he makes his final decision.

    The owner of the inn says ok the rooms are upstairs take a look at all of them and let me know. As the traveler goes upstairs the innkeeper goes out the back door with the 100 dollars to pay his beer tab with local brewer.

    When the brewer receives the 100 dollars he immediately goes to the farmer down the lane to pay his barley tab. The farmer I turn goes up the road to the butcher to pay his pork tab.

    The butcher has been running a tab with the local prostitute. Who he pays. She in turn promptly goes to the innkeeper and squares her debt.

    As she is leaving the traveler comes down stairs and informs the innkeeper that none of his rooms meet his requirements. The innkeeper returns his hundred dollars.

    There has been no change to the money supply but all debts have been paid. There has also been no change to the economic activity because it has been built on debt.

    So Capital creation ultimately doesn’t change economic activity.

    At least in this scenario.

    • The real fun starts when the butcher demands interest, the owner of the inn has rehypothecated the building and has mostly empty rooms. And the local prostitute turns out to be the brewers mother in law. There’s your current financial system. Luckily the major has an infinite amount of ‘money’.

  20. Thank you for another excellent article.

    I shall be putting my sterling in coal, ash wood, durable clothing, dried foods and, of course, a decent cellar.

    And, I think, spend quite a bit on the garden: to feed myself some high-nutritional-content greens and fruit as a supplement to the coming food ration, and have some lovely things to look at while all falls apart.

  21. As regards the possibility of greater violence in Britain, the Left do love the thought of popular revolution (as opposed to the excellent, elite, Revolution of 1688) as as such they encourage it. Dreaming of being heroes, as ever.

    The Guardian determinedly portrayed the 2011 riots in London as a ‘political statement’ by the ‘dis-enfranchised’, but that was laughable – they were the ‘Shop-lifting Riots’, just the scum of the city chancing their arm. The videos prove it. A firmer hand would have ended them sooner.

    They have been trying similar agitation over the Grenfell fire, which is in my view outrageous and disrespectful to the dead. The Guardian actually leaves up commens calling for ‘Killing the rich’, but deletes others!

    The rise in knife-carrying and gun-use has two roots: disfunctional ethnic groups, including our old London favourite the West Indians, who have all been too-long indulged in their misbehaviour, and the ease of moving arms around due to extremely porous borders. In other words, poor-quality people, and misgovernment.

    Roving gypsies are certainly committing more robberies, as they no longer make enough from the scrap metal business following regulatory changes. Very violent people,and no one wishes to tangle with them, including the police, Similar story in Spain with gypsies, as you know!

    Let’s not forget that it was worthwhile mugging people in the 1970s, as they carried cash. When cards came in, that stopped in London. It would in a crisis be worth stealing watches and jewellery. House break-ins would undoubtedly rise.

    I think we may well see more violence against the rich, encouraged by Corbyn and his like, and we should not allow them to stoke up resentment irresponsibly as they do. Still, the rich can afford security.

    More of a problem for them will be the activities of all the foreign criminal gangs which span continents and are well-established in Britain now. Very professional and very violent. Kidnappings. therefore, may well come to a distressed Britain,as occurred in Argentina.

    As for riots; when it is bad enough, decent people are too busy struggling.

    And rain will, as ever in Britain, stop play. You can bet on it. A bit of local agitation among some pathetic ethnic groups, nothing more.

    • Well, I’m pretty cautious about generalising – any sizeable group is likely to contain some admirable individuals at one extreme, and some unpleasant ones at the other, and pretty much everything else in between. It’s like when someone says “I don’t like the British” – the reply has to be “and have you met all 63 million of them?”

      I’ve never heard Mr Corbyn (or his colleagues) inciting violent revolution, but they certainly advocate radical change. Their perception is that British society has become bitterly divided between a minority of “haves” and a large majority of “have-nots”, and it’s hard to disagree with that.

      I wrote about the 2011 riots, and seem to remember being quoted in the press about it. My view was a different one. Society had promoted the ethos of consumerism, as though “you are what you own”, and then told these people that they couldn’t have the trinkets tantalisingly dangled in front of them. If a man is starving outside your house, and you stand on the doorstep and show him a steak and a bottle of champagne, then slam the door in his face, you can’t be too surprised if he then breaks down the door…………

      In other words, “thwarted consumerism”. Personally, I’d prefer it if we stopped promoting consumerism, and put greater emphasis on more fundamental values.

    • One other thought.

      Historically, whenever an elite corners more than a certain proportion of the national wealth for itself, revolution almost always follows – it happened in France in 1789, Russia in 1917 and numerous other occasions. It doesn’t necessarily need agitators to promote a revolution – it seems to be a dynamic, set in motion when inequality goes beyond some point of tolerance.

    • Tim, you could look at the idea of finite dynasties, like we see with China, but applying elsewhere too. They average cabot :>>>
      We live in a techno/ super-techno dynasty, called the industrial revolution is fast closing in on its due overthrow. We all realise that will be a traumatic time without precedent, but it’s unavoidable.
      So, let’s party!

  22. There are two things that worry me, firstly Housing as family homes end up being used for Air B&B & Buy to Leave amongst other things

    But the big one is Universal Credit as an increasingly harsh and irrational system of so called sanctions are rolled out to ever larger section of the population while Jacob Rees-Mogg calls food banks uplifting.

    I suspect that we will see a growing level of ‘survival crime’ which The Police may be reluctant to act against

    • John – my Mum knows someone who works for Sainsburys and she often sees people walk out with loafs of bread without paying – but she doesn’t challenge them because she knows they come from a local poverty stricken estate which relies on food banks.

  23. Thanks for the article. It has answered many of the questions which I posted on the previous post.
    Just to ask the antithetical question: if the current monetary adventurism is bad, and fiscal policies result in equally bad outcome, what exactly is a ‘good’ policy, then? Can we raise the interest rate in US or UK and the long-term side effect be better? Can the economy truly delivers on the 4-6% rate of returns of ‘normal’ interest rate, without ‘fictitious’ asset inflations? Or is the whole system based on growth needs to be revamped? As you said in the previous post, there is seemingly no way out, here.

  24. Hi Tim, when you say this,
    “Ultimately, this was all about a loss of trust. Even a perfectly sound bank can collapse if trust is lost. Because banks are in the business of borrowing short and lending long, there is no way that they can call in loans if depositors are panicked into pulling their money out”

    I wonder how it either clarifies or helps in making the point which you make? Surely Banking is defacto a state institution all be it Privatised for a privileged click of essentially very highly paid Civil servants.
    If one follows the logic through A Loss of Faith in Sovereign currencies is no different to a lack of faith in an individual bank they are merely differences of degree and not differences of Kind.

    Fundamentally I can not help think that its our conceptions of Value and useful, profitable work or services that is sending us astray we have an ethics and moral philosophy problem in our political Economy more than a mere Economics problem.

    You touch on this is your answer to the 2011 riots question: where amongst other things you say,


    In other words, “thwarted consumerism”. Personally, I’d prefer it if we stopped promoting consumerism, and put greater emphasis on more fundamental values.”

    Junkers speech to the EU parliament ( State of the Union Speech) the other day is a very real sign of just how out of ideas the Leadership of Europe is, the problem is just as Bad in the US and every where else.
    An obscure quote I am fond of from Coleridge is this one.

    Table Talk.
    this from 27th April 1823.
    The national debt has, in fact, made more men rich than have a right to be so, or, rather, any ultimate power, in case of a struggle, of actualizing their riches. It is, in effect, like an ordinary, where three hundred tickets have been distributed, but where there is, in truth, room only for one hundred. So long as you can amuse the company with any thing else, or make them come in successively, all is well, and the whole three hundred fancy themselves sure of a dinner; but if any suspicion of a hoax should arise, and they were all to rush into the room at once, there would be two hundred without a potato for their money; and the table would be occupied by the landholders, who live on the spot.
    http://www.gutenberg.org/cache/epub/8489/pg8489.html

    If one looks at Natural resources as the potatoes the way that the US is presently acting regarding Myanmar, and countless other resource-rich ( sovereign ) markets? It would seem that those waiting for a call for the second and third sittings will be disappointed.

    http://letthemconfectsweeterlies.blogspot.se/2017/09/mish-shedlock-dr-tim-morgan-warren.html

    Sorry for the rambling comment and blog post link Tim, I think you are on the right track with your EROI work , sadly I think that looking for any salvage within the existing system is a waste of time, that system is no longer fit for purpose, it is only narrow vested interests that have prevented its replacement, that coupled with the failure of mother nature to comply with the Carbon Taxing Mafia Settled Sceance dogmas, there would surely have be seen a breathing out tax enforced by THE secular Religous AGW thought police by now. allowing a further roll of the debt peonage dice.,

    • The point I was making – clear to you, I’m sure, but perhaps not to everyone – about banks is this. The vast majority of liabilities (deposits) are at immediate call, so customers can demand all their money back instantly (and even wholesale funding is short term). The bank cannot make immediate calls on its loans, which tend to be long term (most obviously mortgages, but other loans too).

      So any run on a bank can destroy it, even if the bank is perfectly solvent. No bank, however solvent, is sufficiently liquid to cope with a loss of confidence, even if that loss of confidence is wholly mistaken. No realistic level of reserve capital can prevent this.

      The reason I emphasise this is that it should have a bearing on government actions. Say a bank, although solvent, faces a run on liquidity, caused by unfounded rumours, mass panic etc.. It can make sense for the state to step in, because the bank should be fine when confidence is restored.

      The case is different where the bank is not only illiquid (as all banks are) but is insolvent as well. In that instance, the bank should fail. But this risks collateral damage, so the state might take over an insolvent bank with the aim of orderly winding down.

      However, the real problem is “too big to fail”. Efforts to create “living wills” for banks haven’t been all that effective. So “too big to fail” is still with us.

      Finally, the 2008 bail-outs didn’t just rescue banks, but rescued bankers as well. That was politically mistaken – and remains so.

    • Hi Tim

      The main thing here for me is that the banks have to be supported by LOLR facilities, almost come what may.

      As you say, insolvent banks should be allowed to fail but solvency is not something that is easy to judge and it may be years before it can be determined with certainty. The collateral effects of failing to act as LOLR are potentially catastrophic. I believe the BOE is only supposed to lend to solvent institutions but i can’t see that you can determine this in the window that would be required.

      It’s not only that the banks are TBTF; they are, in effect, utilities which cannot be allowed to misfunction let alone fail and this is the galling reality we are stuck with.

    • Hi Tim,
      Banks do go out of business through Bank runs, that’s what happened to Northern Rock although not all Banks are created equal and that’s before we get into shadow banking.
      Werner Makes an interesting claim in this Video.
      https://vid.me/fEw7t

      @-11.13 starts, Banks do not take deposits and do not lend money. A deposit is not a Bailment etc it is merely a loan to the Bank. Banks Borrow from the public, they do not lend money they are in the business of purchasing securities.@ – 10.03.

      The problem in the UK rests in that 95% of all deposits are ( or 95% of all bank borrowing from the public) is carried out by just 5 Banks. Contrasted with Germany where 75% OF all securities purchased from the Public, are performed by over 1200 much smaller local banks.

      The systemic risks in each model are quite clearly discernable to most, that said Deutsche Banks derivatives position is still a huge Systemic risk not just to the German but to the world economy.
      I don´t wish to labor the point, but It should be very clear that Banks are not intermediaries and as such the common way of explaining bank insolvency is highly misleading. Lehmans was allowed to go to the wall as their CEO was generally despised by the other equally culpable Wall Street Banks who had maintained a Balance of Political Capital, and modern Banking is about Political Capital more than financial, I would argue.

  25. Pingback: #106: Crisis – a forum | Surplus Energy Economics

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