#122: A tale of two ditties


In The Arabian Nights, the heroine Scheherazade told one thousand and one tales. We, on the other hand, need only choose between two songs.

The first, cheerfully whistled by the consensus, is that the world economy is enjoying “synchronised growth”. We needn’t worry about debt and other measures of financial exposure, because a financial crash is very unlikely – and, even if it happened, the authorities would know what to do about it.

The alternative refrain is that most of the “growth” claimed by the authorities is cosmetic; that we really should worry about financial stress indicators; that a crash will happen, because it’s hard-wired into the system; and that plans for dealing with it probably won’t work.

Which of these is the true music – and which is off-key?

The aim here is to weigh the evidence, which comes in many shapes and sizes. The first conclusion is that the consensus view is a Pollyanna song (and Pollyanna, you might remember, found “something to be glad about in every situation, no matter how bleak it may be”). The optimistic consensus is every bit as complacent now as it was back in 2007, when growth was to be celebrated – and debt, we were told, didn’t matter.

The second conclusion is that the odds are shortening on a crisis happening a lot sooner than most people think – it could, indeed, happen latter this year.

Third, and from what we can surmise about them, the plans for responding to a crisis probably won’t work.

GDP – eggs in one basket

When you come down to it, the optimistic consensus is based on a single indicator – growth in GDP. This puts a lot of eggs in one basket, but the conventional line is that GDP is the only basket which matters.

If GDP is growing – and is expanding at a rate faster than population numbers, so that per capita GDP is rising, too – then people are becoming more prosperous. (It’s worth remembering that, for an individual or a household, prosperity increases when income grows more rapidly than essential outgoings such as housing, food and the cost of energy and travel – in short, prosperity is that “discretionary” income which you can spend as you choose).

Rising GDP serves to offset fears about expanding debt, because what matters about debt isn’t the quantum amount, but the ability of the borrower to service and repay it.

Put simply, the assumption – and an article of faith in conventional economics – is that growth in per capita GDP makes people better off. This means that productive output is increasing. Rising GDP gives people more money to spend on things that they want, rather than simply need.

This is great for anyone supplying these wants, so retailers, restauranteurs and other ‘customer-facing’ businesses are in clover when consumers are getting more prosperous. Growing prosperity also means that demand is expanding, which, if you’re a producer, makes a compelling case for investing in expansion. As well as spending more day-to-day, the prospering consumer is likely to buy more capital items, like cars or domestic appliances. The prospering person may or may not increase how much he or she saves for the future, but is certainly unlikely to need to take on more credit.

All in all, then, growth in prosperity, as betokened by increasing GDP per capita, is a cheerful situation. Consumers are happy, having (and spending) more money. It’s great for producers of anything from cars to chocolate bars, whilst shopkeepers, restauranteurs and others have “never had it so good”. Happy and prospering citizens may not express gratitude towards politicians – and politics is a thankless task – but they’re unlikely to turn rebelliously against the establishment that has presided over all this prosperity.

A true note?

It’s interesting, to put it mildly, that this happy refrain, played on the magic flute of growing GDP, isn’t exactly what we’re seeing in the world around us.

Far from raking in bigger profits, customer-facing businesses like shops and restaurants are going through a firestorm, with even the survivors typically closing sites, laying off workers and renegotiating rents downwards. New York’s Madison Avenue hasn’t had this many vacant storefronts since 2008.

This, by the way, cannot be blamed on rising on-line purchases – the numbers don’t add up, and no one has yet found a way to eat or drink through a laptop or a smartphone. Incidentally, too, sales of smartphones themselves seem to have peaked.

Sales of cars, meanwhile, aren’t expanding – indeed, are shrinking in many markets. Car makers are cutting their production lines and trimming their rosters of distributors. The boom in car purchases fuelled by specialised credit seems to have peaked.

If customer demand is increasing, as growth in GDP says it must be, then commercial space should be rising in cost, but evidence strongly suggests the onset of severe downwards pressure on rents – and this, moreover, is bad news for any investment or debt predicated on future streams of rental incomes.

Meanwhile, business should be in an expansionary mood. In fact, the trend now is towards cost-cutting and “zero-based budgeting”, something particularly evident in advertising expenditure, which is an important lead-indicator.

The growth in prosperity indicated by rising GDP should have financial as well as commercial implications. People should be putting aside more money for the future, yet a ground-breaking report by the WEF (World Economic Forum), studying a group of eight large economies, identifies an unprecedented shortfall in pension provision, a “global pension timebomb” set to expand from $67tn in 2015 to $428tn by 2050. In the United States alone, says the WEF report, the gap is worsening by $3tn annually, which is 17% of 2015 GDP, and roughly five times what the US spends on defence.,

Politically, the West’s happy and prospering voters, far from letting the establishment get on with building a materialist’s nirvana, are kicking that establishment in the teeth whenever they get the chance, be it Mr Trump, “Brexit”, votes in France and Italy, or even in Germany. The establishment, of course, routinely derides its insurgent opponents as “populists” – which, presumably, means acceptance that established politicians and parties have become unpopulist.

Governments, too, are acting in ways consistent with hardship, not prosperity.  Protectionism and trade wars are a hallmark of seeking someone else to blame, whilst geopolitical belligerence is a time-dishonoured way of distracting the domestic electorate from hardship. Both protectionism and belligerence were rife in the depression conditions of the 1930s. Additionally, and as Charles Hugh Smith has explained in an excellent article, protectionism is a wholly logical consequence of “financial repression” as incorporated into the policy responses to the GFC.

A numbers racket

How, then, can we square the evidence around us with the claim that, because of rising GDP, people are prospering? After all, final data for 2017 is likely to confirm that the world economy (measured in PPP dollars at constant values) has grown by 29% since 2008, equivalent to growth of 17% at the per capita level after allowing for the 11% increase in population numbers over that period.

Regular readers, of course, will know the answers, which needn’t be spelled out in detail here. (Anyone wanting a refresher should read Interpreting the post-growth economy, a guide to Surplus Energy Economics which you can download here).

Essentially, we’ve been faking “growth” by pouring ultra-cheap credit into the economy. Each $1 of growth since 2008 has been accompanied by $3.40 of net new debt, and has also been accompanied, according to SEEDS estimates, by $3.40 of erosion of pension provision. We’ve been keeping up the illusion of “growth” by spending borrowed money and raiding our savings.

Anyone who thinks that this is sustainable needs to re-imagine economic reality.

As we’ve seen, hardly any (in America, less than 1%) of this “growth” has shown up in manufacturing, construction, agriculture or the extractive industries put together. We’re moving money around more rapidly, through finance, real estate and insurance activities. Government is spending more, and people increasingly are “taking in each others’ washing” through low-value service activities, which are saleable only at home.

This pattern of activity is wholly consistent with boosting statistical measures of activity using borrowed money. It is not consistent with “growth” in any meaningful sense of that word.

This cheap money, of course, has created huge bubbles in asset markets such as stocks, bonds and property. These are no offset to debt, of course, because they cannot be monetised. The only people to whom a nation’s housing stock can be sold are the same people to whom it already belongs, so you can’t turn the theoretical value of that stock into money. Using marginal transaction prices to put a value on the aggregate stock of assets is pure sleight of hand.

As regular readers will also know, the SEEDS system generates underlying output numbers, and these are diverging ever further from reported GDP. According to SEEDS, the estimated end-2017 measure, which puts world debt at about 218% of GDP, rises to 336% when debt is measured against aggregate prosperity.


We can’t really predict the timing of economic or financial shocks, because they wouldn’t be shocks if we could. We may not get advance warning from stock markets, because debt-financed buy-backs, and relaxed investor attitudes towards “cash-burn”, might not change until after the roof has started to cave in.

But the strong likelihood now is that hardship in sectors like retailing and restaurants will broaden out into other customer-facing activities, perhaps including travel bookings, car rentals, hotel occupancy and other areas of “discretionary” spending.

A strong downtrend may already have set in where commercial rents are concerned, and we need to watch for vulnerabilities in commercial as well as consumer debt.

The critical point, however, is that what is already happening is likely to prove to be enough to discredit the “growth and prosperity” mantra underpinning consensus complacency.

It’s also worth remembering that complacency reached its previous peak in 2007. It may be, in the natural world, “always darkest just before the dawn” but, in the economy, it can often seem “brightest just before the crash”.

……and what (can be done)?

Finally, what might the authorities do if the GDP-based ballad of complacency gives way to the discordant reality of weakening prosperity and escalating debt?

It seems reasonable to surmise that policy rates will be cut, though rates are now so close to zero that cuts of the magnitude of 2008-09 are no longer possible. We can expect a lot more QE, though, like most drugs, its effectiveness diminishes as doses rise. Governments can also be expected to try to underpin the banks, but this is made harder by sharp increases in governments’ own indebtedness since the GFC.

Additionally, this time, we might expect “bail-ins”, which amount to taking money from depositors to plug gaps left by failed borrowers. If implemented, bail-ins would probably have lower limits (to protect the poor), and upper limits (to protect the rich). The authorities might also resort to the blatant monetisation of their debts (and it’s worth remembering that the Japanese central bank has already purchased almost half of all outstanding Japanese government bonds, using money newly created for the purpose).

If these are the plans for coping with a crisis, there are at least two reasons why they won’t work.

First, the assumption is likely to be that the main stresses will be confined largely to banks, as they were in 2008. But the GFC put the pressure on banks because it was a crisis caused by “credit adventurism”.

This time around, though, the main cause of a crisis is likely to be the “monetary adventurism” practised since 2008. The implication is that, in the next crisis, fiat currencies might be in the front line – especially if bail-ins and debt monetisation are invoked.

Second, governments are likely to assume public acquiescence in their rescue plans. But politics has changed fundamentally since 2008 – and any government which thinks it can sell another “rescue of the bankers” to the public is probably practising one of the worst types of complacency imaginable.





127 thoughts on “#122: A tale of two ditties

  1. Interesting, Tim, but a couple of observations, in random order.
    The WEF report is totally useless. The massive pension shortfall by 2050 is non existent. It CANNOT be. Sovereign governments are PAYG operations. They have no need to save or borrow their own currencies. They totally command their currency. As now, pensions are paid directly from the Central Bank so will it be in future. The government will only run out of money when it runs out of laws. Pensions are not even included in the deficit spending statistics [not sure about the UK] In the USA and Aus that is a fact.
    Repayment of ‘government debt’ is never a problem. The “debt” is savings held in the Central bank and repayable as a book keeping operation. Private debt, however, is a growing problem probably only resolvable with a debt jubilee, promoted by Steve Keen and David Graeber [Debt, the First 5000 Years] The main help would be to eliminate the financial arms of the banks, leaving their mortgages to survive but paid off in the Jubilee.

    But that aside it’s a good relevant blog. Thanks.

    • Another way of saying this is that the Government is ultimately inflation constrained by limited resources – ultimately energy. PAYG for pensioners would ultimately inflate other assets as ambitious government spending competes with the private sector to inflate prices – forcing other people out of consumption by price and basically causing other sectors of the economy (such as the middle class) to be priced out of services.

      We see this in the US healthcare system.

    • According to MMT guru, Warren Mosler, inflation is very difficult to get. He points out that Japan has not been able to get inflation up for 20 years or more. Right now there are so many signs inflation is way off into the future that deflation is much more likely. Looking at un- and under- employment suggests the output gap is trillions of dollars away. You have to have full employment before inflation can take hold.
      Also we need inflation. It pays down debt. Your mortgage would never be worth taking on if at the end the assets hadn’t changed in value to make the interest etc worth having paid out.

    • I tend to agree with you and Mosler that people worry more about inflation than they do about unemployment. This fear of money losing value comes at least in part from the real historical fact that many currencies have lost all their value. It also probably involves some unconscious anxiety about the reality of fiat currency and the implications of how beholden populations are to monetary sovereigns. I would echo Tim’s recent statement that inflation and forex are two test cases for how this will play out and admit we don’t know how far it can be taken. It may be more honest to transparently declare that we aren’t going to maintain the illusion of funding through savings. Such a move entails real political problems, not the least of which is the impact on individual behavior when the ethic of thrift is replaced by a public decision that our plan for the future is to ‘let ‘er rip.’

  2. What you suggest Dr. Morgan as solutions I have heard from many colleagues in various forms; “they are already printing why does it matter”, “there isn’t a problem here just print the money”, ‘debt doesn’t matter’. Their naivety lies in who gets the money, thinking it will be them, and as we have witnessed it wasn’t.

    Populist anger toward the 1% will likely mean a gutting of savings of the remaining middle (lower upper if you prefer). That takes place as bail-in’s or destruction of purchasing power, seem to be your conclusions. Destruction of purchasing power would impact everyone and would likely feed populist anger not diminish it. Verbally taking on the rich would win elections while the true policies would protect them, the same old dog and pony show. Taking savings from the middle (lower upper) income would likely be the last straw of what might be the 1%’s only ‘outside’ support.

    I see as you seem to suggest an final attempt at an asset grab(bail in), followed by massive printing. My only question is whether that final asset grab has happened yet or not? You suggest it hasn’t.

    • Thanks. I think that what happened during and after the GFC was indeed an asset grab. QE and ZIRP inflated values for those already owning assets, and, significantly, no attempt was made to recoup these gains through taxation.

      At the same time, 2008 effectively marked the end of “capitalism”, because it took away the consequences of failure – and these, hitherto, had always legitimised the large rewards flowing from success.

      I can only assume the hope was that the 99% ‘wouldn’t notice’, but subsequent political developments suggest that they did, and have. The situation now is that unpopulists run the show. Though the shift may now be from ‘populists’ to the collectivist left – time will tell – the bottom line is that democracy is likely to remove from power those who endorsed what happened in 2008-09.

  3. Yes, they PAYG, but debts represent commitments for revenue streams – MMT handwaving ignores the massive political problem a debt jubilee represents. The economy is the production and exchange of goods and services through the application of labor and energy to resources. This economy is only represented by money.

    Take the representation away and the reality is that a portion of the population has been promised a share of the goods and services produced by the economy. The problem is that said goods and services will not exist in the quantities expected.

    MMT solutions, in so far as they create full employment, could help maximize production. But they cannot reverse the terminal decline in the ratio between surplus and sunk costs as a result of the physical inability to increase the energy available from the marginal barrel of oil and tonne of coal.

    In the prosperity crunch – the underlying problem is declining availability of cheap energy, which puts pressure on the thermodynamic value of labor. Redistributing digital tokens which imply some people have an increased entitlement to consume does not make the products of consumption more available. The effect on demand would be upward, but only manifest as GDP growth rather than inflation if the resources are available in sufficient quantities to expand faster than the money supply expands.

    Furthermore, if monetary sovereigns misrepresent their economy in the above fasion (i.e. increase the money supply such that inflation outpaces the underlying growth of the resource economy) they will find that they are not, in reality, sovereign. Rather sovereignty is a relative international phenomena. Nobody has to give me a barrel of oil for $65. They can give it to China. This is a political problem, admittedly, not a mathematical one. But that is the whole point. Money is a language we use to talk about the economy, it is not the economy.

    • @drtimmorgan

      “Money is a claim on energy.

      Debt is a claim on future money.

      So debt is a claim on future energy.”

      Yep – so wouldn’t the pension problem represents the fact that implied levels of consumption cannot be delivered to pensioners when the future arrives because of changes in the ratio that these claims represent in the share of the overall flow of energy?

      MMT may conclude that savings is a parlor trick because you can’t save energy – so social promises about portioning future energy only matter if there is more energy in the future than the present.

      The limitation in MMT of inflation is ultimately a political problem – as in who will suffer when the promises can’t be kept? The practical limits to inflation are social unrest.

    • Governments can, in theory, produce as much money as they wish, and can never “go bust” in their own currency.

      But this isn’t risk-free. One obvious risk is inflation. Inflation isn’t, as is sometimes said, purely a matter of monetary quantity, but it is a case of effective money supply (Q x V) versus quantity of goods and services.

      Critics said in 2008-09 that QE would cause inflation – it’s advocates said it wouldn’t, and hasn’t. But (i) velocity slumped after the GFC, offsetting increases in quantity; and (ii) inflation happens where the money is injected, and there has been huge inflation in asset markets, which was where QE was put into the system.

      A second risk for a monetary sovereign is FX – create too much money and the FX markets will turn against you. This said, look at Japan – it’s creating about 52 trn JPY annually, and buying JGBs with it, yet the annual fiscal deficit is barely 20 trn JPY. So they are monetising debt – yet the markets haven’t turned against the JPY – yet…..

      Ultimately, all money is a ‘claim’ on all goods and services – and these do not increase just because the aggregate of claims has expanded.

    • MMTis well aware of resource limitations as a wall that cannot be avoided. The system is to have full employment which would be a marker of a fully used economy without inflation pressure. Employment is a government problem, not a private sector one, because the government creates the currency.

  4. Thanks for the new article, by the way. I agree with your expectation of more monetary adventurism – but in general a grinding down of GDP per capita and a trend for this to distribute unequally causing political tensions which may exacerbate trade conflicts.

    • Thank you. My broad point is that we’ve moved into a kind of economic ‘virtual reality’ by pouring cheap money into the system, and yes, we could have yet more monetary adventurism before things crash. If you look at the Saxo Bank report, referenced below, you’ll see this point writ large from an influential source.

  5. Excellent article…

    It’s also worth remembering that complacency reached its previous peak in 2007. It may be, in the natural world, “always darkest just before the dawn” but, in the economy, it can often seem “brightest just before the crash”.


  6. Tim
    Do you have any comments on the current shape of the US Treasury yield curve as a predictor of an upcoming recession?

    • Generally speaking, an inversion or, as now, a flattening of the yield curve presages a recession. But this reflects the changing expectations of market participants, whereas this time there’s a definite Fed input, recent hikes having most effect at the short end. So, is an inverting curve still a useful indicator in the age of ZIRP? My hunch is that it still is……

  7. Hi Tim

    Thanks for another thought provoking piece.

    I think the response will be monetisation for a number of reasons. It’s stealthy, it doesn’t openly disadvantage particular groups immediately and keeps the mob quiet. The effects are uncertain and are down the line, probably years away, and this gives Mr Micawber time to come up with something. Obviously interest rates can be kept low without being negative which could and would provoke some resistance, despite what folk like Ken Rogoff may think.

    As regards bail ins I can never see this as it applies to ordinary depositors; if ordinary folk had part of their bank balances used to prop up the venalities of the banks then I believe that would be a “pitchforks and barricades” matter, I really do.

    When we get out of the EU if I were the government I would go full bore down the automation/AI route, even to the extent of direct investment. We are behind in robotics and a degree of catch up will improve the productivity figures (hopefully).

    The only snag with this is what Carney mentioned the other day and what I have thought for some time: if we do this we are heading towards a communist state and that Karl Marx will be proved right in the end just a couple of hundred years late!

    • Thanks Bob

      First of all, a lot of respected economists see nothing wrong with bail-ins, regarding even depositors as “investors” and not, as I see them, simply customers. We had this debate about Cyprus. For what it’s worth, my opinion is that bail-ins would be tantamount to confiscation, and any government which sanctioned them would lose a lot of its legitimacy.

      As you suggest, moving down the AI route could become politically toxic – a tiny minority could then own “the means of production”, and would no longer need employees. Though a dream outcome for anyone subscribing to what I call “the Mein Kampf school of management”, in that circumstance, with the vast majority living on grudging hand-outs and unable to accumulate capital, either demand would collapse, and/or a revolution would prove Marx to have been right in the end – perhaps both.

      A significant proportion of the public already think that some Western countries have become kleptocracies – bail-ins, and, longer term, AI implemented without addressing ownership structures, would confirm them in that view. I said a long time ago that we need fundamental and voluntary reform – but things are increasingly reminiscent of France on the eve of 1789 (with Davos as the new Versailles?)

    • I think that, ominously, you are beginning to get some fracturing in the political situation even before serious economic trouble.

      In the EU the east europeans are starting to assert themselves and disturb the EU meme, and this is before any problems arise from the Italian elections. Germany is also looking weak and this will augment the political strains that were apparent during the recent elections.

      In the US God knows where the Trump administration will be in two years time but there’s an undeniable “end of empire” sniff about things whoever is in power.

      Any serious downturn will augment these problems and mean that there might well be serious political as well as economic upheaval but I wouldn’t hold your breath that we will end up doing the right or even the useful thing.

    • Yes indeed, and, as I say in the article, established parties have turned themselves into ‘unpopulists’. I keep hoping that they’ll embrace reform before it’s forced on them, but history suggests that I might be being over-optimistic in that hope. The horrors of post-1789 France or Bolshevik Russia might have been avoided if the elites had given ground, with good grace and in good time. Neither of them did. The British elite did see this need, first at the end of the 1820s and again in the 1860s – but does any elite have equivalent wisdom now?

      I’ve been trying to picture what would happen if, as in 2008, governments again responded to a crisis with policies designed to bail out bankers and restore/re-inflate asset values on behalf of the wealthy. Populations largely acquiesced in this back then – but I can’t see them swallowing it again.

    • Tim … the CBs have pumped out tens of trillions of dollars of stimulus/bail outs since 2008

      I do not recall being asked…

      If they pump out 100 trillion when the shoe drops… I will not be asked to vote on this …

      Something other than the masses revolting against more largesse… will bring civilization to its ankles

    • Tim
      We’re in a different position to 2008; there is much more scepticism about motives and much less trust in the ruling elites and also people have many more sources of heterodox opinion available – people like yourself.

      There is a conspiracy view that says that the aim of TPTB is actually to destroy the current system in order to create a new one and hence a crash is a necessary condition of that process. I’m not a believer in conspiracy theories but the logic isn’t totally insane. We have a situation which is very difficult to resolve by “normal” methods, that is ones that leave the economic and political system relatively unscathed. In this circumstance bringing the whole system down would create a crisis and folk are willing to accept sacrifice in a crisis that they would not accept in more normal conditions. One would like to think such an act of monumental folly would be ruled out but I’m not so sure.

    • As a historian, I always favoured the “cock-up theory of history” over the conspiracy theory.

      Conspiracy theories are often persuasive – but, looking at TPTB, do you think they’re clever enough? Most of the politicians I’ve met haven’t been…….

    • Tim, do you believe the gas attack in Syria was a cock-up, or a fake story? I must say it’s hard to believe the Russians and Syrians would be so dumb, when they have won the conflict now, to shoot themselves in the foot like that. That alone is enough to think of a conspiracy. But we also have a testimony from the Libyan ex ambassador debunking it as well.

    • @John Doyle

      i think the attack in Syria was “fake” in that it was not a chemical weapons attack. Robert Fisk of the Independent has given a comprehensive account and I’m far more inclined to believe him than the government.

      This also applies to the Novichok poisoning incident where the OPCW has said that it cannot identify the country of origin of the sample of the Salisbury attack. The Russians now allege that the substance used was in fact a US patented form not one that has its origin in Russia.

      Take your pick!

    • Probably like you, I would disbelieve any government analysis. The WMD established that. May started ranting before it was possible to know., A clear sign of a put up job.

    • The news, once ubiquitous on the nerve gas attack is now subject to a government issued ‘D’ notice and has almost entirely disappeared from the MSM. That too is very telling. I hope they get “hoist with their own petard”, as Shakespeare said. Novichok is now fentanyl apparently and another twist is that it was a government operation all along.

    • Yep. That is a tell. And how powerful is that – when you are busted you just ignore the story — and it is as if it never happened.

      BTW – why didn’t we get the info off the black boxes on the jetliner taken down over Ukraine a few years ago? The US flunkies have it… (well the CIA has it or the US military) ….

      Why not show us the smoking gun?

    • Fortunately, events in Syria (and Salisbury) don’t have an economics dimension – enabling me to refrain from commenting!

      Seriously, I believe very little that comes out of Moscow, and nothing at all that comes from Damascus, but, nowadays, I don’t put a lot of faith in Washington or London either.

      It may be significant that, whatever else it has done, the UK hasn’t frozen all Russian assets, seemingly a logical response……..

    • And the logical response to such a move by Russia would be … to turn the gas to the EU off… for a day or two…

      After all… isn’t this what Syria is all about? Opening a route for gas from a source this is not Russian…..

    • Additionally, I’m now putting Russia onto SEEDS, and might summarise its findings here – but one reason I’m hesitant is the amount of pro- and anti-Russia comment on the net. I would certainly have to block anything that isn’t very strictly economics – but it might be easier all round to write about, say, Brazil, or Ireland, instead!

  8. I feel a bit less of a maverick after reading this!


    Here are some quotations:

    “We are nearing the end of the largest monetary policy experiment of all time, and ascendant nationalism, staggering inequality, and a widespread loss of hope among the younger generation are among its varied fruit. The good news? Things only change when they absolutely must”.

    “Last September, the Bank for International Settlements estimated that there was a net $25 trillion in USD-denominated debts and derivatives in the offshore financial system. The world can ill afford another USD funding mishap, one that has already partially been set in motion by Trump’s corporate tax cuts, which are encouraging US corporations to repatriate hundreds of billions of USD from outside the US and draining liquidity from the offshore USD system”.

  9. Avoid “the internet of things”. Make sure things don’t stop working when you’re alone.

    • More than 1 billion people worldwide don’t even have grid electricity.

      The Indian premier asked recently whether his country is supposed to go to bed when the sun sets at 6pm.

      But the West only supports renewables energy investment in emerging countries, and won’t support development involving fossil fuels. Yet no country has ever transitioned from an agrarian to an industrial economy using solar panels.

      The implication is that we’re forcing poor countries into high-ECoE routes to development. These look neither workable nor equitable, as I see it.

      I hope to have more to say about this, from a SEEDS perspective, in the near future.

      With the system now pretty much complete where the advanced economies are concerned, the next stage for SEEDS may be extension of coverage to more emerging economies (presently, only China, India and Saudi are fully on the system). Mexico, Brazil and South Africa are at the top of the list of priorities.

    • Thanks doc. The ‘west’ needs a host for its parasites. Be it oil from the mid-east, be it commodities through corrupted African governments, OR; to lure other countries into debt to make them dependant on western demands. So, indeed, force them into higher EcoE, in that way they cannot compete with ‘us’, but will serve the debt based bully.

      Micro credit, too, is a form of expanding our systems needs. Credit is stupidity in degrowth. As long as we speak, think, eat and love ‘money’, or ‘currency’, there’s no solution.

      The decoupling of money from reality, upwards or downwards, always leads to disaster. First i lend you money for two weeks, with £10,- interest. Next comes the 10 year guilt, 15 year bund, 30 year treasury. And before we know it we have perpetual bonds with negative interest, bought with printed ‘money’.

      That’s where we are now. Its getting dark in the petri-dish. Before you know it 5 billion people loose the grid. And we all go to bed at 6 pm.

      The money concept has been good to us. Its time to leave.

    • We’re in the final stages of Ponzi economics, a reckless credit and monetary experiment that began in c2000. This cannot end well. The public have woken up to what’s been happening.

    • I travel to Hong Kong regularly from NZ… and I manage a HK business remotely…. and I have noticed a major change in people who were excited by the run up in properties after a 25% during the 2008 crisis…. they were very pleased with themselves…

      Now the mood is subdued.. even though the market climbs ever higher (average price of a home is now over USD2,000,000!) …. they have finally recognized that these gains are ephemeral… that they are based on CB largesse…. and that at some point this is all going to end in a heap of rubble.

      There are a lot of people out there — aware that the next shoe is going to drop at some point … not drop actually…. rather come pounding down over and over again .. smashing and destroying civilization

      I suspect many harbour intense fear… and are just hoping the CBs can extend and pretend for as long as possible… nobody wants that day of reckoning… because they suspect that it my bring the end of days.

      And it will

  10. Is it really the case that “The only people to whom a nation’s housing stock can be sold are the same people to whom it already belongs.”

    Surely the influx of foreign buyers/investors into hot spots like London, Vancouver and parts of the US is a method of monetizing at least part of the domestic housing stock.

    If only 1% of Chinese people can afford a foreign home then that is 14 million people – and 14 million houses that have effectively been removed from the housing market in which they are physically located.

    Property salesmen in Hong Kong estimate that of all the mainland Chinese who want to buy a foreign property then so far only 3% have actually transacted.

    • Overseas buyers certainly affect prices. According to a recent study, an average UK property price of £210,000 would have been only £174,000 without overseas buyers.

      My point, though, is that if you multiply the average house price by the number of houses, you come up with a number which sounds like a huge offset to debt. Reports by the UK’s ONS customarily applies marginal prices to aggregate stock and states that houses in Britain are a hugely valuable asset. But you cannot turn such numbers into cash – if you tried, you’d crash the market.

      New Zealand has been a case in point. Foreigners have bought properties in parts of NZ, reportedly as bolt-holes in case the worst happens. This has priced locals out of the market, leading the country’s recently-elected government to ban overseas buying.

      I’ve seen this myself, when I lived in an area of England where the buying of second homes pushed prices out of the reach of locals in an area where wages are low. There are places in the US where buying in order to let through Air BNB etc has had the same effect. Barcelona is grappling with the same problem now.

      But it still doesn’t mean that the notional value of homes in any given area could be turned into cash by selling all of them.

    • Absolutely…

      It does not take a great deal of foreign interest to set off a property market… developers will build to meet demand… but if say 100 additional punters show up in a small market like Queenstown… that throws the demand – supply equation out of whack… and prices can jump significantly

    • Well if all the brits sold their homes to chinese and moved to cheap homes in … Vietnam (?) … UK could cash in.

    • How would Brits get on in Vietnam? Even if it isn’t practical economics, I think you’ve got a great script for a sitcom or a soap! Fish & rice shops, anyone?

  11. Tim, thank you for another excellent article. Your article confirms my growing suspicion that we may be headed for ‘Financial Repression 2.0’. If my experience of some senior representatives from the mainstream political parties is anything to go by I can say quite categorically that they are taking their cues straight from ‘The King Louis XIV Playbook’. The story I am about to recount is small and seemingly insignificant, yet in a way hugely telling about the mind-set of members of the current ruling elite. I sent a letter to an elected member of the Lower House of Parliament suggesting that the ONS should be required to produce an Essential Prices Index. I argued that such a measure may help our governor’s gain a better insight into the way in which things were moving for ordinary folk, and in doing so could assist in lessening the gulf of understanding between the governors and the governed. The response I received told me that I should move to a smaller house to reduce my cost of living and … oh … re-mortgage the place on the basis that interest rates are at an historic low! My second brush with a governor related to a letter I sent to an unelected member of the Upper House of Parliament regarding some substantial increases in charges for facilities provided by a local authority accompanied by a hefty rise in local taxation – Council Tax. The respondent told me that my letter was ‘silly’. I realise that my evidence, for want of a better word, is limited and anecdotal but quite frankly this sort of stuff is just one step away from ‘Let them eat cake’.

    • I think what you describe is arrogance on their part, not silliness on yours.

      When I was head of research at Tullett, I created the UK Essentials Index, which was useful, and got a lot of media coverage. I still maintain it, though it’s no longer updated monthly, only annually, to save time (FYI, I’m now working on SEEDS coverage of Mexico, Brazil, Russia and South Africa, plus the purchasing power of the USD, so you can see that my time is limited). (I also maintain a seasonal crude buying model, which has proved invaluable, because it overcomes the main problem which makes conventional supply-demand models poor on timing). (But I digress….)

      Do you mean Louis XIV (the “Sun King”, “l’etat est moi!”), or Louis XVI, victim of the revolution?

      Either way, your point is spot on. I refer you to the Saxo report (see my earlier comment) as it’s the best piece of realism that I’ve seen from a market participant in many years.

  12. Tim, I plead the Captain Manwearing defence: ‘Ah, I was wondering who’d be first to spot that’. I could, of course, claim it was a ‘keying error’, but you’ve caught me well and truly! I meant Louis XVI. How embarrassing to display my ignorance in such fashion!

    • Not to worry, we’ve all done it!

      I once, in rather exalted company, said that a certain government minister “couldn’t string three words together without tripping over his tongue”. I then found out that my listeners included his daughter.

      Likewise, one of my bosses once asked me what I thought about a certain car. I called it “a poor man’s Porsche”, only to find out that he’d just bought the car in question

      The Times, on the opening of (Vauxhall?) bridge by Queen Victoria, reported that “Her Majesty cut the ribbon and pissed* over the bridge” – so we’re in good company!

      * They meant “passed”, of course…..

    • When I lived in England I had a friend who ran a small taxi business. His cars had to be tested to an additional level a lot higher than the usual UK roadworthiness test (MoT), as you’d expect for vehicles carrying paying passengers. His insurance was more comprehensive and costly. Each driver, even part-timers, had to be licensed, including criminal records checks – even ten years ago, that cost about £250 per driver.

      I mention this because I have no problem with Uber (etc) if they are held to the same standards as conventional firms like my taxi-owning friend. Otherwise, this is not a level playing-field. Competition is always to be encouraged, so long as it is free and fair. Likewise, Air B’nB properties, I believe, should comply with the same regulations as hotels in the same country. Where I live now, letting a property not licensed by the local authority carries a fine of not less than 40,000 euros.

      Indebted governments are not my biggest concern. Banks are of more concern. But private and business borrowers are the main focus – and we need to focus on pension gaps, too. I’d point out that, whereas banks were in the front line in 2008, next time it could be fiat currencies.

      Finally on this, we need to look at total financial assets (essentially, the scale of banking activity). The UK, one of the most exposed of the big economies, has financial assets of about 1140% of GDP. But, as in most countries, GDP dramatically overstates prosperity. Using SEEDS to measure UK financial assets against prosperity instead of GDP produces a ratio of around 1560% – and the Netherlands and Ireland are worse.

      Ireland is interesting because changes to methodologies have boosted GDP dramatically, something which has been called “leprachaun economics”. SEEDS is especially useful here because it produces prosperity data not affected by this change of method. In fact, I’d be writing here about Ireland soon – if I wasn’t so busy looking at Russia……

    • I was speaking to a cabbie last year on a trip to Europe.. and he was telling me that he has a few cabs … one of his drivers quit and went over to uber…

      He had a massive pile up — the passenger was badly injured — insurance would not cover any of it because he did not have commercial cover…

      Of course this is one reason why Uber can charge lower rates …. but when you step into an Uber ride… understand that if you get injured…. you are not insured.

    • Thanks for the link, by the way.

      My sense is that sentiment is beginning to change, moving in what I might call “my” or “our” direction. Some of us have understood the fundamentals for a long time – but my “antennae”, so to speak, suggest this is about to go mainstream.

      As ever, sentiment is critical. A company doesn’t go from good to bad, or bad to good, overnight – but share prices spike or slump, when sentiment changes. A broker report can trigger this – and likewise for economics.

      This is why I’m urging everyone to read the Saxo report. It may be a ‘sentiment-tipper’, which other opinion-influencers might follow. A real case of “the emperor’s new clothes”, if that’s what happens.

      That’s part of why I’ve shortened my timescale on when a crash might happen, suggesting in this article that it might occur in 2018. If pushed further, I’d say autumn, but let’s wait and see……

    • Obviously there’s a limit to how much I can say here, but, for starters, that yield on bonds is less than inflation, so I can’t see that it helps much. Annuity rates are a better guide – if you buy an annuity for £100,000 (say), what annual income do you get? These rates collapsed during the GFC, and have remained crushed.

      The WEF report, which I cite here, isn’t about deficits in funded schemes, but about how much we have put aside, compared to how much we should put aside, to provide adequate pensions for everyone. There has always been a gap, not least because most governments don’t fund (invest contributions for) public employee pensions. But the collapse of returns on investment have created vast shortfalls. In the US, schemes have gone to court seeking permission to slash payouts because otherwise they will run out of money. I’ve heard of cases where monthly payments have been cut from $2000 to $600, for example.

      The broader picture is that monetary (and fiscal) policies are ‘signals’. High interest rates encourage saving, and can be reinforced by preferential tax treatment. For instance, until 1997 (Brown’s huge tax raid), UK pension funds received dividends free of tax, a big incentive to saving.

      Since the GFC, however, monetary signals have been: “don’t save: consume!

      We’ve been creating a low-wage, low-saving economy, with low saving rates as a necessary accompaniment to cheap credit – both are intended to boost consumption despite low wages. Remember that low production costs (wages) are great for profits, but only if customers can buy things, which they can’t with low wages – hence cheap credit (from about 2000), and cheap money too (since 2008).

      I don’t think the public know – yet – what has happened to the ability of the economy to finance retirement. Boomers think that property values solve this problem – but to whom are they going to sell, with the young priced out of the market? Logically, market forces arbitrage this – as more boomers try to monetise their property equity, prices fall into the buying range for younger buyers.

    • The ability of an economy to pay pensions is better than the way the current system would lead us to believe. The current system relies on tax, or thinks that is the case. You cannot make a case that in a low wage economy there will be enough tax to fund any decent pension plans. The MMT picture is quite different. You would eventually stop paying taxes altogether as the tax cost would starve the economy. You would get your pension directly from the Central bank, from thin air, as long as there remained something to buy with it.

      It really depends on how things pan out. If the crisis is mostly a financial sector panic, then just the financial sector would be compromised. If there is a crash in the real economy it would require that the government have a plan of action to distribute food etc in an orderly manner, using say coupons. But there would have to be a plan “shovel ready”. I see no sign of such a thing. Our innate optimism blinds us to planning for any such disaster. 30 hours without food is the yardstick.

    • I should add that a low wage economy is a low tax economy – which has implications for the affordability of pensions paid by the government. The UK government treated pensions very generously (“triple lock”) – pensioners are likelier to vote than youngsters! – but that generosity is already starting to look unaffordable…….

    • @John Doyle,
      Some time last year, if I remember correctly, the German Government advised all citizens to keep a 10 day supply of food and water in their homes.
      This “advice” went largely un-noted in the media.

  13. As usual, Dr. Tim, another excellent analysis.
    The fact that we are getting closer to an extinction level event, ( at least as far as the current Financial system is concerned ), is being felt all around us.
    Although there are some true believers out there who think that MMT will be our salvation, I think that they will be standing gob-smacked when real-life does eventually strike back.
    However, our situation depends not only upon the great financial disaster which is unfolding before us, but also in how our government reacts to the coming changes. We see how governments, especially the more vulnerable ones like the US, the UK and La France, are reaching to increasingly desperate measures to push their narrative. Events like the recent Skripal case in the UK, which is now turning out to be more orchestrated by the UK and the US than it was by Russia, and the rush to bomb Syria for a staged “Chemical Weapons Attack” prior to any credible evidence being presented, are indicative of this desperation.
    I personally lost faith in government some time ago, and I think that more and more people are opening their eyes to the blatant lies being peddled by them. Those who still have faith are now struggling to believe the narrative, and prefer denial to closer examination of facts.
    Suddenly the failing economy, mass immigration and Brexit-Blundering are all relegated to page 3 of the national newspapers. Casting my mind back to my student days, there was more worthwhile “reading” on “Page 3 then, than there is now. ( As I posted on one of your articles some time back, I still do not believe that Brexit will happen. The UK public are at present just being softened up for the reversal. )
    The real danger that we face is not the implosion of the economy, which in itself will be disastrous for a great many people, but in the fanatical reactions of our governments. I have always been fearful of the UK turning into a Police State, and my fears in this are being reinforced on an almost daily basis. As things unravel, I can see confiscation of removable wealth being one of the first reactions of the government. Once this is done, then it will be easy to just declare all government pension obligations null and void. Even if the older generation are those who do turn out to vote, by this stage any veneer of the UK being a democracy will have been torn off anyway.
    As I believe Mark Twain once said, “If voting made any difference, then they would not let us do it”.
    The Chinese have now launched the “Petro Yuan” which will work towards undermining the US Dollar. I always keep in mind the old Chinese proverb about, ” How do you move a mountain ?”,
    ” Well, you start with a shovel, and you take a shovelful, and then you take another shovelful, … “.
    This chipping away at US Dollar hegemony will eventually hit a pivotal point, and then things will cascade from there. As the US reacts to maintain its power base, the “£-Sterling” will be sacrificed in the process, in fact I would not be too surprised if the IMF were soon to eject it from the SDR.
    That along with £ – Euro parity will be the end of the UK as a “global player”, and I really do not think that the UK will be a pleasant place to be when that time arrives.

    • You cover a lot of ground here!

      First off, no monetary theory convinces me – this comment is NOT aimed at MMT, but reflects my view that money is a token or “claim” on real goods and services, so, in this sense, ANY form of monetary economics can’t feed us or warm our homes. ‘Sound money’ is probably the best we can ask for.

      Second, a financial collapse would inflict truly enormous damage on the real economy. Just think of payment systems; power for homes, shops and work places; distribution; refrigeration……. We came within hours of this happening in 2008, and then it was just the banks that were in trouble – if, this time, it’s fiat currencies as well, then the scenario is truly mind-boggling.

      The ability of the US to issue endless debt depends on the petro-prop, because anyone wanting to buy oil (and many other commodities too) must first buy USD. My data suggests that FX markets overvalue the USD versus other currencies by 78% (average for 2017). This has always led me to suppose that Saddam was ousted because of his plan to sell oil in EUR. I can see why the US might feel that necessary on grounds of critical national interest – but it cannot in any way justify America’s allies in that war.

      Britain and the US have always been quasi-democratic. In Britain, the voting system entrenches established parties, and enables a government to be formed with as little as 35% of the vote. There is no separation of powers, and the upper house is not elected (at least when it was hereditary, it had independently-minded people, surely better than nominees). The US has separation of powers, but the system seems to me to be owned by big business. In Britain, ministers often retire straight on to the gravy train of ‘consultancies’ and the ‘lecture circuit’, as they do in the US. For both, ‘democracy’ is a relative term. Germany, and perhaps France, may be better, but you’d have to look at Iceland to see real democracy in action.

      I’m not going into the Skripal case here, except to say that I’m inclined to believe London rather than Moscow. Incidentally, though, if the UK had managed to assassinate the traitor George Blake, after he’d escaped to the USSR in the 1960s, would many in Britain have condemned this action? I doubt it, somehow.

      I thought the Litvinenko case was much more serious, because it put huge numbers of civilians at risk. I still don’t understand why the UK hasn’t frozen all Russian assets in Britain……

  14. Hi Tim, nice article! but I wanted to pick your brains on another subject.

    What do you think of the UK’s “War on Plastic”?

    I haven’t fully researched it, but I have a sneaking suspicion that using alternatives to plastic is often more energy intensive than just using plastic (particularly when you consider food wastage due to damage goes up if things aren’t properly packed).

    Sorry to derail the conversation!

    • You are welcome, but I don’t have any chemical/energy answers (if anyone has……)

      My instinct is to applaud the war on plastic. Packaging makes intensive use of gas-sourced plastics, and uses energy to no good purpose. Germany has always taken a strong line on packaging in general. In times past, people managed with paper bags for things like fruit and vegetables, and I don’t think we’ve benefited from the change. I’ve even doubted whether using white (bleached) paper instead of newspaper to wrap fish & chips is such a great idea – maybe newspaper ink isn’t all that healthy, but relative to what we’re breathing on city streets – and the extra bleach put into water supplies?

    • Dr. Tim, Thank you for your response, again, very enlightening.
      I know that I cover a lot of ground here, but as you know, all these issues are interlinked, the Financial, the Economic and the Geo-political. So it is not possible to discuss one without heeding the inputs from the others. I am hoping to get not only your feedback on various points, but also the insights of other readers of your blog here. Hence the broad brush.

      I really liked your succinct summation above, about Money being a claim on energy, and Debt being a claim on future money, hence Debt being a claim on future energy.
      This has the beauty of a solved mathematical equation.
      However, it is the socio-political environment that ultimately determines how this beautiful equation will come to affect our everyday lives. I am sure that a great many people whose future lives will come to be shattered, will fail to grasp the beauty of this fundamental equation.
      It is all very well doing mathematical analysis of data, and demonstrating what sort of outcomes can be extrapolated from it, but when we have incompetent politicians with maniacal delusions running the country, then what would be a best case outcome of “Financial Losses for the 1%”, can very quickly turn into a worst case outcome of total war with “Death and Destruction for everybody.”

      As for Skripal and Litvenenko, there is to date, in both cases, insufficient public evidence available to allow an impartial and accurate determination of culpability.

      Despite this being the case, the British government chose to apportion blame.
      This indicates to me, that the British Government is pushing an agenda, which is not based on factual evidence.
      The reason that Russian assets have not been frozen in the UK, is because that would open up avenues through international institutions to openly challenge the narrative being pushed by the British. If the Russians were allowed to challenge the British assertions in a court of law, then the British government would have to provide factual evidence in support of their claims.
      The British government does not have any factual evidence.

    • On Russian assets in the UK, call me a cynic, but the answer seems to me simpler – a lot of well-connected people do very nicely out of Russian money.

      My feeling – and I could be wrong, of course – is that we’re now into the end-game of Mickey Mouse economics built on ultra-cheap money.

      When the crash comes, the public are going to be much, much angrier than they were in 2008. In that situation, watch France and Germany, as well as the US.

      Americans elected Trump, and might well, given the chance, have elected Sanders. France picked Macron over Le Pen, having already rejected the established parties, though they flirted with the Mellenchon of the far Left. The AFD gave Mrs M a drubbing, pushing her into a coalition which looks to me like a case of circling the wagons. Britain, I think, will elect Corbyn – with more voters switching to him every time his opponents try scare tactics…..

      …………and my point is that all of this is BEFORE any crash has even started. So what on earth breaks lose when the financials start crumbling, and governments present plans to – as the public, rightly or wrongly, will perceive it – “bail out the rich again”?

    • Thank you, Dr. Tim.
      I share that feeling too, that we are approaching an end to Mickey-Mouse economics. Things just seem to be getting more absurd with every day that passes, indicating that the lunatics really are in charge of the asylum.
      As for Public anger breaking out, I don’t know.
      To be honest I cannot fathom how complacent the public have been up until now.
      If I were a younger man, I would have taken to the streets with a pitch fork long before now !
      You mention Germany, and I know from local experience that there is still a deep resentment there against Merkel and her immigration policies but at present that seems to be off-set by relatively full employment and a booming economy. It will take a very, very serious knock to the German export driven economy to awaken them from their pipe-dream.
      I see the UK and France with their high proportions of immigrants as being hit with Social unrest long before Germany. Germany is a feminist society where any Male traits get rooted out at an early stage, and where compliance with the collective is rigorously enforced.
      Modern day Germans are Weicheier, ( soft-eggs ).

    • Funny to read you say the Germans are softies. I think so too. I lived in northern Italy 40-50 years ago. My evaluation of Italians is that they are a very hard headed people. They may be demonstrative but that doesn’t affect their toughness. The fact they have incompetent political parties is a cross we all bear today.
      No I did not hear of the recommendation to store 10 days supply of foods in Germany. It’s a good idea but 10 days is not enough.
      Tim, I have looked at the Saxo report, but not yet read it through. However I detect a misunderstanding about bonds. Calling Bonds debt is an accounting identity. They are actually savings accounts. There is so much money sloshing around in the banking world investors are buying back shares and buying bonds for lack of investment opportunities. The QE saga alone put $29 TRILLION into the financial economy. Estimates of the shadow banking and derivatives markets vary from $800 Trillion to $1.4 Quadrillion. Even the Forex market is $4 Trillion every day.
      People don’t realise the humungous size of this sector. It can only be resolved with a jubilee writing it all down. Remember it’s just numbers in accounts and in the real world represents almost no actual assets, just insurances. The real assets like mortgages I don’t consider as part of this financial world. You can separate them out.
      When Neo-liberals describe the economy as a sort of deity we have to serve, this is the one .

    • If I can add my 1/2p worth…the majority of plastics that enter the ocean come from India and Asia. Dirt poor places without the ability to manage waste properly. There is a massive problem there with small plastic single use containers that are affordable for the masses. It is common practice to site rubbish tips near the sea in these places so that they are periodically flushed. Of course Mrs May would never dream of condemning such practices as she follows the doctrine of political correctness. We the western world are the oppressors so it must be our fault hence the over emphasis on our coffee cups and drinking straws.

    • Yup – I lived in Bali for 7 years… they have to rubbish collection so they either toss everything in the river — or burn it in open fires…

      People in OECD countries using plastic shopping bags are NOT the problem. Those bags get incinerated at very high heat.. they do NOT end up in the ocean

    • Like most things, this is a story with two sides, and my concern with development issues requires me to balance them.

      We in the West have seen emerging economies as pools of cheap labour, and ‘globalisation’ has never done much to boost demand in these economies, essential for real improvement in prosperity.

      Also, we’re trying to insist on development based on renewables, i.e. without the use of the fossil fuels which powered our own transition from the agrarian to the industrial. In SEEDS terms, we’re demanding a high ECoE development model, which is neither fair nor efective.

      We certainly need to help them tackle the plastics issue, but that’s not cost-free. At least Britain is one of the minority of countries which keeps its promises on aid, something to take pride in.

  15. Please note:

    In the last couple of days, both Morgan Stanley and Bank of America seem to have joined the tilting consensus, writing of ‘very late stage cycle’ for markets, with recessionary potential, and conditions not seen since 2007. The flattening yield curve is mentioned. Timescales seem to be 6-12 months from now.

    In equities, US markets apparently expect companies to spend almost $1 trn this year on stock buy-backs, almost all of it borrowed. In the above analysis, I reference this as one of the two trends that could knock the market, the other being investors revising their views on “tech”, and other cash-burn sectors. To that lot, I should have added shales.

    Here’s my take on this. Cheap money means corporates can buy back stock (boosting prices), and investors are relaxed about watching techs and shale drillers burning through their money. With rates tightening – market rates as well as Fed rates – these props would lose their validity.

    When? If pushed, I’d say autumn.

    Again, please do read that Saxo report – https://www.home.saxo/-/media/documents/quarterly-outlook/quarterly-outlook-q2-2018.pdf

    • Thanks Dr Morgan for sharing your views such clarity is really appreciated. It does beg the question that if stocks and cash are no longer a relatively safe haven where can an individual store the fruits of his or hers life work ? If I converted my stocks into Euros today I’m not sure I would be able to sleep anymore soundly.

    • There is no safe haven. In fact… the bigger concern will soon be how to stay alive.

    • The danger this time is that it won’t be just banks at risk but currencies as well. The dollar is the lynchpin of the system, but may no longer be strong enough to carry that burden. Even without a financial crisis, the US budget may strain credibility given the sheer size of the deficit. I share the view that we may be heading for something without precedent.

  16. Thanks for another great article Tim.

    After reading, my first thought was ‘I just want the next crisis to happen now, so at least we know where we are at!’

    The speculation on the potential responses of TPTB is overwhelming now. (Although no where close to the speculation of the Star Wars fans before The Last Jedi)

    As an old, cantankerous Luke Skywalker says: “This isn’t going to go the way you think!”

    Advice for our times?

    Saxo Bank report was interesting, nice find. Steen Jakobsen discussed these topics in his recent interview with (your old pal) Chris Martenson.

    Finally, an anecdote on precarious credit based consumer spending. The company I am currently working for is making a roaring trade in remote immobilisation devices/services to sub-prime auto finance companies, installed as a ‘stick’ to force payment when people default. I am hearing stories of people taking out payday loans from Quikquid and similar services just to remobilise their cars so they can start the daily commute. Btw, I don’t press the button on them – I just build the tech. I’m not that ruthless!(?)

    An indicator of industry desperation close to the end of a sub-prime auto credit adventure maybe?

    • Thanks Kevin.

      It is, I think, an old equity market axiom that sentiment changes are more significant, and certainly more dramatic, than changes in fundamentals. Even a few months ago I felt that “it has to happen sometime”, but now that has become “within nine months” – my hunch is September-October. What’s changed is sentiment.

      Back when I was head of research at TP, I published Perfect storm, which I think I can say was the first warning from within the system that things were going wrong. It was extremely controversial, as much as from where it came as what it said. Now, Steen Jackobsen, is, I think, the first person within the system to call what is happening, for which praise to him, and to Chris.

      Others won’t be far behind, judging from what I’m hearing is emerging from Bank of America, Morgan Stanley and others. I anticipate this change in sentiment becoming a landslide. Reported big bank exposure to $345bn of sub-prime doesn’t help.

      Apart from commentary, my focus now has to be SEEDS. If the consensus interpretation goes down the pan, so do the models supporting it……

      One of my priorities now – rightly or wrongly – is to extend SEEDS coverage to emerging countries, now that modelling of the big developed economies is as good as I can get it. I’ve now got Russia, Mexico, Brazil and SA ready, as well as China, India and Saudi which are already on the system.

      There’s a fascinating story to investigate about the emerging countries – more than 1 billion people do not have grid electricity, but we in the West are trying to enforce a “renewables only” straitjacket on development…..

      Sub prime car debt was always crazy. Last time I was in England I noticed how many shiny new cars there were, a stark contrast to what I would call hardship, or at least “shabby gentility”, in so much else.

    • ‘I’m not that ruthless: I just build the ovens’?

      I knew a lovely chap whose retail business (despite great experience) hit the bumpers in 2009: so, he went straight out and got himself a job as a sales rep in publishing and…….his car was repossessed and he killed himself the same evening.

    • Sad story sorry.

      In a world full of humans with an economic addiction to growth. It is quite unavoidable to be involved in the exploitation of other humans in some way.

      In a rising ECoE future with a reducing or stagnant pie, if you want to increase the size of your slice, or maintain it, or at least mitigate it’s shrinkage – then it is likely going to come at cost to someone else – unless we can implement some green socialist policies worldwide. Which I don’t see happening pre-crisis.

      I don’t like this, but I accept it. Hey..at least I am not building military weapon systems anymore.

    • I doubt if any of us are in a position to cast the first stone, and only true ascetics can avoid being grubbied by the world around us.

      All we can do is try to make things better in the future. I think it was Disraeli who said “all of us are in the gutter, but some of us are looking at the stars”.

      One of the worst aspects of the dominant economic greed mantra of recent decades is that it has corroded how people relate to each other. This seems to be at its worst in countries like the US and the UK, where treatment of employees and customers is often woefully short of what it should be.

      What comes next is critical. In France, the noble ideals which freed society of the Ancien Regime soon became the Terror, with a rusting wrought-iron Tree of Liberty sitting beside the guillotine in every place.

  17. I look forward your report on Russia, as I am currently living in Moscow. Alternating with rural Gloucestershire! Both my children are bi-lingual so they go to ordinary local Russian state schools, where I chat with mums in playground every day, in Russian. This gives me a good feel for state of economy but I would be very interested to see your views.

    • I’ve got the data and forecasting pretty much completed, so it shouldn’t take too long – I’ll probably aim for brevity as I have other countries to cover. Initial thoughts are that the economy is fragile and not performing well, but at least debt is low.

      One other thing. It’s sometimes said that Russia has “an economy the size of Holland”, but this is nonsense. It’s arrived at by converting Russian GDP to USD at market rates, but these are very misleading. PPP conversion gives a much bigger number, and one that is more meaningful.

    • Gavin:

      It might interest you that the rouble is coming out pretty well on a currency risk-scoring exercise that I’m trialling.

      Russia has low debt/prosperity and financial assets/prosperity scores. Annual borrowing (as % GDP or of prosperity) is low, so also scores well for low dependency on credit continuity going forward (essentially, lots of other currency areas would be in big trouble if the flow of credit even paused).

      The last of four tests is ‘acquiescence risk’. The scenario is that GFC II hits, and governments try to replay the 2008-09 response (QE, bank rescues and then austerity) – then, does the electorate and/or the opposition block or overturn the rescue plan? This is a safe score for Russia. I’m not sure that British (or even American) public opinion would accept another such rescue, whilst Germans might not back a second Greece-style operation for another debt-raddled peripheral.

      This is starting to suggest the RUB as a (relatively) safe-haven – which is pretty counter-intuitive given FX markets’ attitudes to the rouble……..

  18. FYI, the next countries to be added to SEEDS will be Indonesia and Turkey. I’ve not been able to find the numbers I need for some sub-Saharan African countries.

    So the full list of additions is Brazil, Mexico, Russia, South Africa, Indonesia and Turkey. The previous round of extensions added countries which have not been published yet – Ireland, Poland, the Netherlands and New Zealand.

    These are in addition to the original SEEDS ‘universe’ of the US, Canada, France, Germany, Greece, Italy, Norway, Portugal, Spain, the UK, Saudi Arabia, Australia, China, India and Japan.

  19. Oil prices

    With crude prices rising again, I think it’s worth mentioning the seasonal effects.

    Broadly speaking, there are two seasonal consumption peaks – December/January, the Northern Hemisphere’s coldest months, and July/August, with peak holiday demand.

    But these are consumption peaks for refined products. Before crude reaches end-users, it needs to be shipped, refined and distributed.

    So the peaks and troughs of the crude purchasing cycle anticipate the end-user pattern. Buying ahead of winter peaks in November, then falls away sharply. We’re now at the start of the pre-summer crude buying build-up, and we can expect continued strong purchasing until the end of June.

  20. On the one hand, those entering into contracts should expect the terms of those contracts to be enforced, and so repossession is of course justified, both legally and morally. (Armaments are also morally justifiable, it all depends on circumstances).

    On the other hand, in a rapidly declining economy, decent people will certainly find themselves ruined, and repossession might be what tips them into suicide and their families into total ruin – through no fault of their own.

    In the case of sub-prime loans, which is a distinct one, the main moral responsibility is surely that of the lender, who should not have made credit available to those not worthy of it, and perhaps of limited intelligence.

    On the whole, it is perhaps not an adequate argument to say that one is at such a distance from the process – ‘merely supplying the technology’ – that one’ s hands and conscience are therefore clean.

    I know someone high up in security who started off at rock bottom, broke, and out of curiosity I once asked if he had ever been a debt-collector (he is a big, rather frightening-looking man): ‘I wouldn’t soil my hands with that!’ was his rather contemptuous reply.

    It is the choices we make which determine the quality of our society.

    Of course, ‘Dr Kevin’ has a family to provide for, wishes to make and save as much money as possible in the near-term (both laudable aims and duties), and no doubt mortgage debt to service, etc, which illustrates just how morality invariably goes by the board as times get worse .

    I am not throwing stones in any sense, but morally he is not superior to the heavy who bangs on people’s doors, or ‘pushes the button’, which was his excuse.

    Clearly his conscience is slightly troubled by what he is doing, which is to his credit.

    • The real issue, for me, is that the economic system that has become dominant in recent times is as morally bankrupt as it is grotesquely disastrous. At least until 2008 we had something that bore some resemblance to a market economy, albeit a badly managed one. But, having abandoned capitalism during the GFC, what we have now is closer to a law-of-the-jungle kleptocracy.

      The crazy part of this is that we’ve long known what works best – a mixed economic of private and public provision, with the private sector regulated to prevent both over-concentration and dishonesty, and the state sector accountable to the public.

      Can we ever get that back?

    • Tim, the car anecdote I provided was I think a specific example of the new “law of the jungle kleptocracy” you describe.

      The technology I have been involved with, (telecoms, sensors, info systems) is all about monitoring and control.

      Ideally this could be deployed to increase efficiencies in activity help offset increasing ECoE, and to monitor and better care for the health of ourselves, our economy, and our environment.

      Unfortunately this ability to monitor and control is generally used to extract more work from people, to get the edge in business, to cut costs, with the aim of increasing shareholder/owner dividends. It seems like a tool to enable these kleptocractic processes of upward redistribution.

      “Can we ever get that back?”

      Did we ever really have it? Is kleptocracy is the norm? Does it just reduce it’s appetite every so often so it doesn’t cross undesirable tipping points?

      We have always taken from our environment. We just have a world full of humans now, so aren’t we inevitably going to have to take from people somewhere?

      The Handy predator-prey model was applied to human societies recently and showed a clear historical predator-prey relationship between the elites and the rest of us. I will try to find the research.

    • Here is the HANDY work – sorry they did less of a historical comparison that I thought. I must have been confusing this with something else.

      Nonetheless, some of scenarios are very interesting. Especially what happens when the elites do and do-not consume/hoard the wealth of the society.

      The role of equity in determining the outcome was very interesting.


      My partner studied predator-prey models while I was doing dynamic systems modelling for electronic oscillators – I noticed the similarity in the models and behaviour of these systems and started more paying attention to her discipline – it was a more interesting application of these techniques. I always wondered if we could apply this to human systems. Then these guys went and did it.

    • Kevin

      In my studies of history I’ve concluded it is some kind of oscillation. An elite starts out, often with the best intentions, but gets greedier, less connected and less accountable over time, informed by the complacency bred by time in power. Then somebody else comes along and throws them out and the cycle starts again. The incumbents might be voted out, or removed by force.

      Some members of the incumbency manage to swap horses, joining the new elite. For example, there was a striking overlap between the French church heirarchy before 1789 and the Committee for Public Safety after it.

      The Who nailed it with the lyrics of Won’t Get Fooled Again, though Asia’s Wildest Dreams might be just as apposite right now.

      I think we have got the balance right at times, but corrosive ideas seem to put things out of balance. “Greed is good”, in the Michael Douglas film, started out as parody, but became prophecy – likewise Tom Wolfe’s Bonfire of the vanities.

      We can only hope that the next transition is orderly, peaceful and conducted democratically…….

    • That would defy human nature. Humans are competitive animals – just like any organism.

      To some extent the competitive nature has been laid dormant because of fossil fuels — we have had enough to go around ….

      Just watch what happens when there are only a few bones – and 7.8 billion hungry dogs…. the fangs will unsheath

    • Isn’t it truer to say that human beings are both competitive and co-operative, capable of combining in a shared endeavour? Without that, we would never have had the pyramids, or the Apollo programme.

      For some decades now, the dominant economic ideology has emphasised the competitive and the selfish. But elites always try to create a philosophy which vindicates their position. In monarchies, the ideology was the divine right of kings. In the USSR it was communism/socialism. Now, in an era of kleptocracy, the ideology is competition and greed. Just like the divine right of kings, this ideological veneer won’t survive the passing of the elite.

    • Yes, I believe you have the right position here. It’s not insuperable, but the elite will find out they are not willing to change. Like the aristocracy in 1789 France. The King’s entreaties fell on deaf ears, [particularly his brother, Monsieur] so they lost their heads instead.

    • We certainly do cooperate – when it serves our interests…. cooperation is required to build a cohesive community …. which allows us to build a stronger economy including better organized and better armed militaries… which allows us to dominate other communities…

      In a finite world – this is a zero sum game — for the winners to live large someone has to lose their resources…

      And when resources (particularly energy) are in short supply – or not available at all — watch how these communities rip each other to shreds… and watch how the cohesiveness within each community unravels…

      It is happening before our eyes now — slowly…. but at some point BAU collapses… and it will be neighbour killing neighbour — over a can of beans

    • Yes, John, I think we’re beginning to see the contours of what is coming, and the 1789 parallel looks apt.

      On the economy, I’d expect the response to the next crisis to be QE on a scale big enough to crash the fiats.

    • Thanks, Tim. On the idea of a QE remember it was just an asset swap, bad for good.I think more likely would be a bank guarantee, just to stop a run on the banks. QE would just protect the 0.1% and as you said yourself, the public would not like that, but protecting deposits up to say $250,000 worked last time. It doesn’t cost a federal government anything. First because there is no call on assets and Second the guarantee will stop a run on the banks. Possibly no money will actually change hands. As to mortgages, there are several options, from a jubilee writing them all off to a part payment to mortgage holders to deposit relief by the banks themselves to mortgagees, with a write down of the asset values. Naturally this all depends on the grid staying alive.

    • There does seem to be a workable distinction between QE and “printing money”, and/or monetising debt.

      Here are some of the questions which need to be asked:

      – Are bonds purchased in the market (QE), or from the issuer (monetising)?
      – Is there a genuine intention to sell (QE), or is it permanent (monetising)?
      – Do purchased bonds pay interest (QE), or not (monetising)?
      – Are purchased bonds redeemable (QE), or perpetual (monetising)?
      – Are CB and treasury balance sheets kept separate (QE), or merged (monetising)?
      – Is it an autonomous CB operation (QE), or linked to fiscal policy (monetising)?
      – How much public debt has been bought? (the guideline apparently being 40%, more than this is monetising)?

      Here’s a source on this – see page 17


      Japan, for instance, surely must be considered to be monetising. The BoJ owns almost half of all JGBs in issue. Purchases last year were above 50trn JPY, but the fiscal deficit is barely 20trn, so they’re monetising existing debt. I very much doubt if the government will (or could) redeem JGBs owned by the BoJ, and paying interest seems pointless, as it probably goes back to the government anyway. Reversal of the BoJ buying programme looks inconceivable. The market in JGBs has virtually ceased to exist. Bond buying is an avowed part of fiscal policy.

      That’s where most countries are likely to find themselves after the next crash – and the credibility of fiats will go up in smoke.

    • Thomas

      Yes, I agree.

      As you might know, I’m conducting a SEEDS analysis of a series of emerging economies at the moment, and the ECoE (energy cost of energy) picture is looking disturbing.

      This is already more than undermining efforts to improve prosperity in a number of cases, and we can only make this worse by pressuring them down a non-fossil path to development.

      So SEEDS is reinforcing a point well made recently by Priti Patel – that no country has ever transitioned from an agrarian to an industrial society using only fooftop solar panels.

    • Assuming we are now entering zero-sum game situation brought on by increasing ECoE.

      Which regions do we think will be the winners, and which the losers?

      If I was a US strategist I would contemplating how to best use the US military to best effect now laying the ground work for US advantage over the next century. A ‘use it or lose it’ dilemma?

  21. Perhaps the widening gap in wealth is beginning to be more pronounced because in a zero-sum, no-growth environment the wealthy can only increase their wealth from a net subtraction from less well-off levels of society. This gravitational pull, especially by the financial industry will continue until there is no longer food upon the table and then a grand redistribution of wealth or societal chaos will ensue.

    • I’m sure you’re right, though I don’t know how the removal of the incumbencies is going to happen.

      My analysis suggests that the economy, certainly in many Western countries, is going to fall apart, bringing the chaos you mention. Pre-GFC, we put banks at risk, which was bad enough, but you can rescue banks if you have (a) viable money, and (b) popular acquiescence.

      This time, I’m not sure we’ll have either. I’m trying to imagine “the day after payment systems collapse”. That could crash the system in 48 hours, I suspect.

    • I think a lot depends on what we’re trying to “save”.

      As I see it, the financial system may now be beyond rescue, because the next crash will see QE mutate into monetisation, with obvious consequences for fiats.

      The current structure of ownership and governance, too, is likely to follow the established historic progression, moving via greed, disconnection and complacency into collapse, like so many elites before it. Very few would lift a finger to save it anyway.

      The questions then are:

      – Can we construct a viable economic system after finance has crashed, and with prosperity declining?

      – Can we rescue what we might loosely call “civiiization” or “culture” in a post-growth, post-finance and post-elites environment?

      At the moment, I’m looking at emerging economies, with a particular focus on collateral damage.

      For instance, SEEDS shows prosperity declining in the advanced economies, but continuing to grow (albeit at a pedestrian rate) in countries like China and India. Realistically, though, can these countries continue to grow prosperity in a world in which their big customers and trading partners keep getting poorer? Part of the SEEDS system says, pretty emphatically, that no, they can’t.

  22. There are some rather naive and outworn generalisations about ‘elites’, and perhaps too much that is superficial about 1789.

    There are certainly cycles, partly brought about by intense competition among elites to be top dog (one set of barons knocks another set on the head) – so, ‘the rider changes but the saddled mule is the same’.

    Sometimes too, the same rider but under a different banner (the famous ‘All must change so nothing changes’ familiar to Italians and Spaniards, among others).

    However, that elites are inevitably brought down by ‘greed’ and ‘disconnection’ from mass reality is neither invariably nor necessarily true.

    I can illustrate this from my own family history: until recently, we held a superior social position (rather than just financial) and lived on an estate which we had held, and which had been transmitted only by marriage, for around 500 years, as far as documents in my possession indicate, and if I were to take the trouble to root among the provincial archives, that could be extended, I am sure, to 8-900 years, as the social structures were essentially stable for that time.

    Taking the family tree back as far as possible, it reaches the Carolingian dynasty, via the mid-level French aristocracy – Princes of Talmont and Viscounts of Mauleon). That’s an awful lot of time in the saddle, at various levels.

    Dominance can go on for a very long time, and ‘greed’ is a shallow word used much too freely. ‘I am a well (and justly) paid professional/trades union member/progressive politician: but you, you are Greedy!’ etc. It’s just tabloid-speak, not serious analysis.

    So, what makes the difference? The overwhelming failure of ideology; the appearance of a seemingly viable alternative ideology ,with -this is crucial – active and effective advocates; a dislocation of established trade routes and global and regional ‘wealth pumps’ and, in our post-agrarian world, technological change, accompanied by the failure of the system to distribute sufficient goods adequately and in proportion to expectations

    Not ‘greed’ and ‘disconnection’ as such – history, it cannot be said strongly enough, is NOT a morality play!

    However virtuous the French aristocracy had been, they would have been overthrown.

    Nor were they as disconnected as all that: in fact, very considerable attempts were made to alleviate poverty in late 18th century France, huge sums expended in charity (for which we should substitute welfare and government ‘regeneration’ programmes -both of which are failing us, too) all to no avail, as ‘the numbers of the poor just seemed to grow’.

    This was the subject of interested observation from the other side of the Channel -‘Why were the French failing if they tried to address the issue?’

    • Thank you, and you obviously know more than I do about 1789 (even though it fascinates me). My understanding was that, whilst the king and some counsellors (and aristocrats) did appreciate the need for reform, vested interests, including rentiers and the church, opposed reform, whilst the court was somewhat isolated in Versailles.

      Where greed is concerned, obviously there are two ways of describing the same thing, but here’s an example of the sort of divisiveness I had in mind. In many places, people who already own one home are buying up second, third etc homes, using cheap credit (which they can access thanks, in part, to having owned assets before asset values were inflated after 2008). These are then let to tourists (often in defiance of local regulations), to the direct detriment of younger (or simply poorer) people who can neither find nor afford somewhere to live. This is also detrimental to the owners of hotels, which have to charge more, because they comply with the various regulations.

      Recent news from Palma, Mallorca, illustrates this. As I understand it, the city authorities have announced that, from July, the law on letting unlicensed properties will be enforced very strictly. Letting without a licence carries a fine of up to 40.000 euros, whilst acting as an agent for illegal letting carries a penalty of up to 400.000.

      It is said that, of 11,000 flats let to tourists in Palma, only about 650 comply with the law (which essentially favours the licensing of villas, but not of flats). It might also be assumed that those letting illegally do not – because they cannot – pay the appropriate taxes on their rental incomes. Are those who let properties in defiance of the law acting greedily – and are younger and poorer people right to expect help from the authorities?

    • What is interesting is that in these theories about collapse economic factors are important and are stressed; in the sense that “collapse” is something that happens over a number of years this is undoubtedly true.

      However, there is another factor that is to my mind of equal, and in fact possibly of far more salience and that is demography. The vast majority of the developed world is in the process of self disintegration and in some countries (Japan as the foremost example) it has been underway for a number of years. This is a matter of huge import that is not a matter of speculation about what might happen in thirty years it is already underway and the pace of change will accelerate and this is a certainty that can be calculated with a minimum of speculation. Both Europe and Russia are in substantial decline as far as population is concerned and this will accelerate starting around now. The “collapse” is already happening in this sense and has indeed been underway for some years. Even in China demographics are a huge issue and the consensus is that China will get old before it gets rich. This in some ways is an issue that overtakes the economic as it has profound economic and cultural implications.

      What is rarely mentioned is that demography partly explains the anaemic growth in the past few years (the 55+ age group has been and is growing fast but they consume less) and the demographic issue has huge implications going forward.

      I’m not suggesting that debt levels and economic factors won’t be important in any collapse and remake of the current system; what I am saying is that demographics have a more profound and darker message about the future which it is all too easy to ignore.

    • Yes, Bob, agreed.

      I think the point I need to make more strongly is the probable extremity of economic and financial stress. I doubt if even a competent and public-spirited elite could survive the magnitude of disruption that occurs when crisis rips bare the scale both of deteriorating prosperity and of (perceived) inequality.

    • But isn’t the geopolitical situation part of the energy story? Isn’t Syria all about the supply of gas to the EU?

    • John

      Thanks for the link. I think the scientist (and IMO genius) James Lovelock has talked of population falling to 1 billion.

      But how on earth – literally – do we get there?

    • It seems to add up though. And 100 million is still a substantial number. But we are, as I have said before, a locust species. We won’t stop consuming until it’s all gone and only devastation remains. On our way up there was plenty of “low hanging fruit” There won’t be any of that on the way down.

      China’s population problem will ONLY be one of resource exhaustion. Paying pensions etc will never be the big cliff. MMT explains.

    • Thomas

      A valid point, of course. What I’m getting at is that, all over the net, there are discussions dominated by one-sided, ex-cathedra statements that Russia did/didn’t mount the Salisbury attack, that Assad did/didn’t use chemical weapons, etc etc etc. ZH, which I used to enjoy reading, is full of this stuff nowadays.

      We know that Russia employs armies of people posting one-sided material, and we can assume that the US does something similar. So what I’m asking for is that we don’t go down that route, but stick to economics.

    • Thanks Bob, I saw that.

      According to my data sources, China’s population at mid-2017 was 1,390 million, compared with 1,321 million in 2007, so has increased by 5.2% over ten years.

      This puts the focus on a critical issue for Beijing. Throughout its long pre-Communist history, China had civil unrest causing blood-letting on a scale unmatched anywhere else in the world. This hasn’t happened on a big scale since 1948, but it always could – not least because unrest tends to start in urban areas, rather than amongst country dwellers, and China is now very urbanised. The migration from the country to cities remains huge (anecdotally, 75 million annually).

      The unwritten pact that the party has with the people is that it denies western-style civil liberties but delivers prosperity in return. For this to hold, China must keep delivering growth, especially growth in employment. For this reason, China doesn’t have a Western-style focus on profit – its concern is with volume, i.e. employment. Building a factory which then makes losses, or a shopping centre which then sits empty, doesn’t matter, so long as jobs are created (for example, in construction).

      I strongly suspect that this has coloured China’s attitude to debt, which has expanded dramatically since 2008 in order to keep growth going. As you know, I’m pretty hot on “growth” that is really nothing more than simply spending borrowed money, and I think this is happening in China to a disturbing extent.

      This needs to be considered, too, in the context of trade wars. China doesn’t really mind if profits are damaged by tariffs – but she does mind if she loses volume, even if that volume is (in purely business terms) loss-making. Likewise, accusations that China uses predatory pricing (selling at a loss to destroy competitors) need to be seen in the context of volume.

    • Yes, Tim. I do also believe the Chinese government has an unwritten pact with their population that requires constant growth and living standards always rising. I have written that all those empty cities could be demolished and rebuilt again. The thing is, there will always be the money to pay for them, but it will stop when resources become too scarce.

    • Doesn’t every government have the same pact? Try getting elected during a recession….

    • As someone who is adamant we are heading for a collapse you might have seen this publication summarising all the future problems we now and in the future will face;
      Just one example to illustrate; In China 500 villages are abandoned every year due to encroaching desertification. 500!

    • So that’s why Chin a is building so many apartments and giving them away…. these people need somewhere to live

    • Tim

      Your last paragraph hints at something quite important. In China with the current political system they can “mix and match” to some degree as they don’t have the inconvenience of democracy to worry about. Therefore if exports tail off they can encourage home consumption to keep the show on the road, something that we cannot do to the same extent.

      There has to be some doubt as to whether China will thrive in the longer run as I think there’s a link between freedom and progress and it’s all OK as long as they can freeload on the West but innovation requires the ability to dissent and this is the one thing they don’t have in China at the moment.

    • Bob, I agree, but switching to domestic consumption has one big snag – China’s need for imported resources, especially energy. China’s domestic oil production looks to have peaked, and experts within the country are talking of a big switch towards coal (BTW, Chinese policymakers do seem to be aware of EROEI, unlike their Western counterparts). So resource shortfalls require China to be a trading country.

      As for innovation, a truly astute acquaintance of mine, who has supervised operations in China for Western firms, expresses views similar to yours. The problem isn’t so much blue-sky inventiveness, but seeing connections between two or more products, services or processes.

      Still, SEEDS does show continuing (if modest) growth in prosperity for China. The worst SEEDS case-study to date is Ireland, by the way…..

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