#125: Quantum of risk, part two


At first sight, it might appear a reasonable inference that the greatest significance of Mr Trump’s decision about the deal with Iran will be felt in oil markets. The reality, though, may be rather different. Oil may not be hugely affected, and the Iran decision might not do all that much to hasten the next supply squeeze.

The line explored here is that the greatest ramifications of President’s decision may show up in two other areas.

One of these is a widening in the nascent schism between Europe and America over what “capitalism” really means. This is a topic that we’ve explored here before, and needn’t revisit now. This said, the Iran situation could prompt Europe (and others) to accelerate their retreat from the “Anglo-American economic model”.

The other consequence, of far greater immediate practical importance, is what this development might mean for fiat currencies.

Three critical issues, #1 – the petro-prop

To put this in context, we need to remind ourselves of three critical points.

The first is that the US dollar relies massively on the “petro-prop”. Because oil (and other commodities, too) are traded in USD, anyone wanting to buy these commodities needs first to purchase dollars. This guarantees buyer support for the USD, and this in turn gives the dollar a big valuation premium.

If you convert other currencies into dollars on the basis of the prices of comparable goods and services, what results is a PPP (purchasing power parity) rate of exchange. If you then compare this with market averages, you can only conclude that the markets price the dollar at a premium to the fundamentals.

And that premium is massive. Through 2017 as a whole, for example, the market priced the dollar at a premium calculated by SEEDS at 78% above its purely economic (PPP) value. This isn’t new, of course, and premia have certainly been the norm since America ended gold convertibility way back in 1971.

But it’s the dollar’s “petro-prop” premium which alone enables the United States to issue massive amounts of debt – and seldom this can have been more significant than it is now, given America’s bizarre budgetary outlook.

It’s also at least arguable that only the “petro-prop” has allowed the Fed to run huge QE programmes, without either (a) risking severe currency depreciation, or (b) having to maintain interest rates at appreciably higher levels.

So, if you think that QE and ZIRP have underpinned the global financial system in a beneficial way since GFC I, then you have the “petro-prop” to thank for this outcome.

If, conversely, you share the view that “monetary adventurism” has been a new exercise in recklessness, then the “petro-prop” should carry much of the blame.

Either way, the “petro-prop” is a critical feature of the monetary landscape.

Any weakening of it could usher in hugely disruptive change. The one thing, above all, that the United States really doesn’t need right now is for countries buying and selling oil to start doing so in currencies other than USD.

Three critical issues, #2 – fiats in the firing-line

The second point we need to note is that, whereas GFC I, as a consequence of “credit adventurism”, put the banking system at risk, GFC II could extend the risk to the world’s fiat currencies, because the folly-of-choice since GFC I has been “monetary adventurism”.

Fissures in the monetary system are already showing up, initially in the plunging values of a string of EM (emerging market) currencies.

The consensus assumption seems to be that this is happening because of a strengthening USD.

This interpretation, however, is probably far, far too simplistic. The reality might be that investors are becoming more risk-averse, prompting a flight of capital out of EM economies.

This sort of risk aversion, albeit concentrated then on banks rather than national economies, happened in 2007, with the “credit crunch”.

If we call that the “banking credit crunch”, and regard it as the precursor to GFC I, then it’s reasonable to view current trends in EM currencies as a “currency credit crunch”, setting the scene for GFC II.

Three critical issues, #3 – an ignorance of risk

The third in our triumvirate of foundation factors is that fiat currencies, and the financial system more generally, already stand at unparalleled levels of risk – but anyone who assesses these issues along conventional lines is not in a position to appreciate this risk.

Essentially, stock numbers (such as debt), and flow data (typified by reported GDP), are insufficiently connected by conventional interpretation. Imagine that a given economy’s debt rises but, at the same time, its GDP increases, too, restraining the expansion in the ratio. This would be a mathematically valid equation if changes in stock don’t impact measured flow – but they do.

The GDPs of advanced economies (in particular) are dominated by household consumption, which typically accounts for between 60% and 70% of activity measured as GDP. But pushing credit into the system boosts this consumption, thereby invalidating much of the apparent debt ratio comfort derived from apparent increases in GDP. In short, a cessation of credit expansion can expose masked debt risk by undercutting debt-financed expenditures.

That such an event looks increasingly likely is underscored by Nomi Prins’ recent observation that the next threat to the system may be bottom-up, not top-down.

Authorities and observers are accustomed to appraising top-down risk, assessing – for example – the scale to which banks’ assets might be vulnerable.

What happens next, though, could very well be bottom-up. What this means is that hard-pressed borrowers might stumble off a treadmill in which debt servicing has become an increasingly onerous burden within the context of flat-lining incomes and rising household expenses.

What are the risks?

The SEEDS answer to the risk issue is to use calibration based, not on credit-inflated GDP, but on prosperity. The aim is to strip out the component of growth which derives from the simple spending of incremental borrowed money. At the same time, SEEDS factors in trends in the energy cost of energy (ECoE).

An ongoing SEEDS study of the Big Four fiat currencies suggests that risk exposures may be very, very much greater than conventional (GDP-based) calibration indicates. Debt, for example, equates to ‘only’ about 250% of GDP in the United States, but rises to 340% when measured against prosperity.

Other Big Four debt ratios, translated to prosperity calibration, rise to 349% (compared with 250% of GDP) for the UK, 305% (rather than about 240%) for the Euro Area, and 456% (versus 360%) for Japan.

The corresponding impacts on financial assets exposure are even more pronounced. Britain’s financial assets rise from about 1140% of GDP to 1578% of prosperity. For the others (with the GDP-based equivalent in brackets), the levels now stand at 768% (rather than 595%) for the Euro Area, 927% (733%) for Japan, and 660% (490%) for the United States.

All of these ratios – both for debt and for financial assets, measured against prosperity – are far higher now than they were ten years ago, on the eve of GFC I – which isn’t what you’d conclude if you settled for measuring both against credit-inflated GDP.

This leads us to two immediate and very sobering conclusions, neither of which should really come as any great surprise. Indeed, both are pretty obvious, properly considered.

First, if a country spends a decade gaming its currency, it masks the attendant risks, just as it is increasing those risks.

Second, any course of action tending towards a weakening of the dollar’s “petro-prop” could have unexpected consequences. Of course, we don’t yet know what Mr Trump’s Iran move really means, and we don’t know how Russia, China and – critically – European countries are going to respond.

One thing, though, seems certain. Whilst it proved impossible for Saddam Hussein’s Iraq to shift oil trade away from dollars,  there is no reason why really big players shouldn’t do exactly this. If major oil importers such as China, India and even the Euro Area develop new bilateral terms of petroleum trade with Iran, there is no reason whatsoever why these deals should be conducted in dollars.

In the proverbial nutshell, when your need for debt capital is being pushed up by budgetary irresponsibility, it makes no sense at all to undermine demand for your currency.

FX risk with tablejpg_Page1


122 thoughts on “#125: Quantum of risk, part two

  1. Thank you Tim – more than enough to make anyone sober up from debt binge unless you’re a politician.

    • Thank you. Issues needing to be addressed seem to be piling up right now.

      I suspect that the single most important trend at the moment might be increasing risk-aversion, showing up, first but not last, in attitudes to investment in EMs. There’s already evidence of caution in the trend towards “zero-based budgeting” at corporates.

  2. Tim countries with ridiculously high interest rates – Argentina 40% – Venezuela over 20% – do you see these rates as being engineered by external interests. By this I mean in a general sense that it’s designed to force down consumption in these (and probably other countries too) leaving more resources for the richer countries. This is over and above overseas currency investors turning buying into selling.

    • This raises the paradox of the risk premium.

      If a borrower – a government, for example – is considered high-risk, the cost at which it can borrow is higher than normal, the difference being a “risk premium”. This supposedly compensates the lender for the increased risk.

      But, if you think this through, it is nonsense. The higher rate worsens the situation of the borrower. By doing this, it increases default risk. So demanding a risk premium actually worsens the risk borne by the lender….

      I’m not sure that these higher rates are engineered as you suggest, though Venezuela has plenty of people who would love to see it fail. Governments usually think that jacking up rates in a really big way supports the currency, but it almost always fails – as the UK found out in the ERM crisis of 1992.

  3. Hi Tim

    Thanks for this.

    I understand that China has already introduced yuan futures for oil so the undermining of the reserve currency status of the US$ is already underway and I seem to recall that Russia and China are both joining forces to reduce the use of the dollar.

    Could the withdrawal of at least some of the dollar trades in commodities such as oil, reducing the pool of the reserve currency, mean that there may be more likelihood of outright monetisation of deficits in the US which would top up what is lost through de-dollarisation?

    • Yes, it does.

      I believe that Japan has been a leader in some of these trends, and what starts there can be seen (just like QE) as a precedent for others.

      What’s happening in Japan really is monetisation. The BoJ now owns almost half of all JGBs in issue and, as I calculate it, QE is now running at 52 trillion JPY annually, even though the fiscal deficit is barely 20tn JPY.

  4. Tim when you refer to risk exposure for fiat currencies, what specific undesirable event(s) are you referring to. The risk of what event happening?

    Maybe it is implicitly obvious for most – but I couldn’t see it.

    When I was trained to assess risk, it was always done regarding a specific event, within boundaries of concern for the study.

    Relative risk = Impacts of within x Probability of within

    I assume the events, or situations, you are referring to is a significant decrease in perceived value, and hence purchasing/propping capability, of specific fiat currencies? But I just wanted to be sure.

    If possible, could you provide a comment on potential impacts/consequences? My lack of understanding on how the financial system affects the real-world always made this difficult for me to determine.


    (Undertaking National Risk Assessments were what first led me to Perfect Storm and your studies ;))

    • I’ll have to get back to you on this – please jog me if I haven’t by Tuesday.

      Essentially, though, a single currency can slump in value, like GBP in 1967 and 1976, pushing up inflation, expanding the local value of debt in other currencies, pushing rates up as well, and turning into a vicious circle because the cost of servicing debts escalates (both rate & FX effects). Then, unless you are in a prospering world (1967), or someone rides to the rescue (1976), you default. The currency value collapses, people won’t accept it, so essential imports cannot be obtained or afforded. Worst case scenario is your currency becomes worthless. The only way out is if (a) you have resources you can export to earn hard currencies, and/or (b) you don’t need imports. That’s essentially how Russia survived default, as have other countries at other times.

      Multiple such events will take longer to answer…..

    • Incidentally, I’d be fascinated to know how your work on national risk assessment led you here. I was on the fringes of some of that stuff. Maybe drop me a line?

    • If any of this happens, markets will “attack” (a.k.a. “test”) the weakest-looking candidate. Amongst the Big Four, that’s GBP by a big margin…….

    • After seeing what the PBOC did to short-sellers a few years ago when the Chinese markets were teetering (they threatened them with jail)…. I do wonder that if we encountered a situation in the UK or emerging markets…akin to the 97 financial crisis (I was in HK when the hedge funds were attacking HK and the government stepped in to buy the market and thwart them) ….

      Would the CBs issue a very serious warning to the wolves…. telling them to stay away …. or else.

      As a fund manager… you would not want to on the wrong side of the most powerful entities on the planet…. that would spell ruin…

      Keeping in mind what is on the line here — essentially if a key wounded beast (like the UK) were to be dragged down by the throat by a pack of wolves … the entire herd gets culled… the pack of wolves gets culled…. everything gets culled…

      So would not the CBs do whatever it takes to protect the wounded beast…

  5. Thinks Tim – I do remember 1992 very well – especially my director’s face turning white as he’d just bought an expensive property in Finchley.

    I would suppose any new borrowing for businesses is completely out of the question in these countries as would be any consumer loans. Anyone with an existing loan must be being hammered. A disastrous state of affairs.

    • Yes, borrowing in the local currency would be all but impossible, and borrowing in other currencies, even if possible, would be impossibly expensive.

    • Avoid, like the plague, borrowing in $US. Just buy dollars on the spot market. Use your own currency for all local jobs and engineering. Don’t sign up to external contacts in any currency but your own. Don’t go anywhere near the World Bank, or the IMF, as they are just US$ orientated exploitation arms of the USA.
      Use the central government’s sovereignty to pay for each contract. Avoid banks, as theIr added financial CLOUT weighs in at double, even triple the raw cost itself,

    • John

      You obviously have a severe dislike of the United States. I don’t allow myself such positions, because the SEEDS project requires objectivity.

      Have you ever been there? I’ve been to most parts, bar the West Coast, and it’s pretty hard to be categorical about a country that varied. I loved Dallas, and Boston – hated Houston – liked Philly – met lots of great people, and a few of the other sort. I had great times with friends in NY.

      Seriously, I think we have to distinguish between Americans, America and ‘the system’. The system is ghastly, and most Americans (that I’ve met, anyway) are amongst the first to say so. Not for nothing has the area inside the Beltway been called “the swamp”. I mistrust ‘the system’, but then President Eisenhower warned about this way back in 1960. Listen to some Tom Lehrer – really, do.

      The United States definitely has an agenda. Most big powers do. What I dislike about the US system is the connexion between government and corporate money. There’s a widening schism between how the EU and the US perceive capitalism. My interpretation of market economics leads me to prefer the EU line. Adam Smith wasn’t an anarchist…….

    • I should perhaps have added that I find the dominating business ethic in the US (and the UK) contemptible, and this obviously influences policy and behaviour.

      To this extent, I’m opposed to how the US tends to behave. But that doesn’t make me dislike Americans. If anything, they’re victims of it.

  6. Thank you for this. I suspect the US, in conjunction with Israel, expects to uproot the theocratic regime in Iran quickly after which it will be business as usual. Iran has already called the purported rocket attack from the Golan a false flag, an excuse for Israel to attack its infrastructure in Syria. If regime change is quick, the allies might heave a sigh of relief and actually thank the Donald for pulling off another North Korea!
    Another riddle is Japan. How is this oil importer able to monetize its debt for so long without crashing its currency? If Japan can get away with it why can’t the U.K. and the US? Isn’t Japan’s success more to do with the peculiar human psychology around money illusion where we collectively believe strongly in the value of fiat? It will take a lot to destroy that trust. Faith in alternatives like gold has been trashed over the last few years by enormous short selling of gold in futures markets which some say was actively encouraged by central banks. The message: There is no alternative to fiat.

    • Factors which may influence the balance are that Japan is a net exporter while the U.S. and U.K. are net importers. Being a net importer is an advantage in real terms – after all it’s better to receive than to give in economics. The U.S. and U.K. have not however created domestic programs to robustly promote industrial policy or jobs – which I think you really need to do if you are going to be a net importer. It seems to me like these kind of trade imbalances can only last so long and are propped up by political military relationships represented by fiat currencies.

    • There are certainly very many people in Iran who like to see the back of the Mullocracy,and get some cash in their hands – poverty is at the root of the widespread, daily, corruption there. And also the drug addiction.

      They are ruthless and violent, however, and the problem with such entrenched dictatorships is that they lead to great political immaturity.

      Might it not become another Libya?

    • We can only hope so … Libya is a paradise now that Dr Evil Gaddafi has been reamed with a dagger and dispatched to the land of many sexy virgins.

      Let us check in on old Mooomar….

      Hey Moomar…. who are things up there in Jannah?

      Oh not too bad … plenty of honey.. and milk… and I’ve been once through my allotment of virgins … and am about to begin again … I’m making a list of my favourites!!!!… there is plenty of Ecstacy and thumping techno music here so I am dancing frequently … it keeps me fit… we also get broadcasts of Premier League matches… that gives me something to look forward to….

      Well that’s great Mooomar…. good to hear you are enjoying your retirement….

  7. If the petrodollar reserve currency status were lost then demand to save in dollars would decrease. This would theoretically not be a problem in theory because it would mean people want to buy things made in America and such spending would increase jobs. However, nothing is made in America, chiefly because we no longer have the cheap domestic energy resources to do so. If this happened quickly there would be no ability to bring production online and we could see currency collapse.

    It’s all about demand for the currency as a savings vehicle.

    If this happened gradually I think it would not be as big of a problem. And certainly another crisis would still likely increase a run into the dollar. Lots of unknown here – truly monetary adventurism!

    • I don’t see how it can happen gradually, especially based on extensive experience working in the markets. People are always asking “what next?”, trying to anticipate events and “get ahead of the curve”.

      So in a market environment, “crashing, but only gradually” might be a bit like being “pregnant, but only slightly”.

    • @Tim Morgan. I agree. I think this is the #1 place the MMT/MCT crowd has it wrong with government spending.

  8. Tim, thank you for the recent series of truly excellent articles. They are always a pleasure to read. Living in the United Kingdom is becoming increasingly surreal. The way I look at things is we’re running a huge structural trade deficit and bridging the gap by issuing debt and selling assets, which results in increasing claims upon future interest and dividend payments. Since GFC1 the rate of trend GDP growth (based on ONS figures) has halved, and most of the growth has come from increasing the size of the population and expanding credit. Moreover, the rate of growth in household disposable income has faltered. It is true that employment has never been higher, but this omits the large number of people outside the labour market that would like a job; and there are of course many in work who would like to work longer hours. I strongly suspect that there are quite a few households living champagne lifestyles on lemonade wages. I simply cannot for the life of me see how this is remotely sustainable in the longer term and am not surprised that the £UK continues to lose purchasing power against real goods and services. Frankly I have given-up all hope on the British political class and I long ago stopped raising my concerns with family and friends as the response was one of bafflement if not outright incredulity at my stance. More often they looked at me as though I should be locked away in the attic.

    • ‘They’ will never allow anything truly bad to happen. Technology is the fix. Now back to the reality tv and facebook … stop bothering us with this negativity!!!!

      That pretty much sums up what virtually everyone believes.

    • Good grief- I didn’t know my name was Kevin and I lived in Colne because that seemed to be word for word what I would have written especially the last few lines. The denial is strong.
      As ever great work Tim – thank you

    • Perhaps being locked away in an attic is to be highly recommended: at least rational, well-informed conversations about the UK economy would be possible, and one wouldn’t have to hear any nonsense or have one’s sanity doubted.

      I tend to talk to the dog. Dogs tell no tales.

      Yes, it is all quite surreal.

      But not just in Britain: step over to Spain,and the Conservative government is boasting about the ‘recovery’ it has engineered, while prospects for the Spanish young remain utterly dismal in terms of wages and security of employment.

      It looks as though many believe them, and they and the neo-Francoists will most likely get a very solid majority in the next elections (some 50% of the vote).

    • A huge topic, very well expressed. Just some quick thoughts.

      Selling assets (and borrowing from overseas) has been used to cover the gap for a long time – eventually, you run out of assets, and/or buyers, and’or lenders.

      It has become a spiral, with outflows (of dividends and interest) now far exceeding income. Until c 2005, this income used to be a useful offset to the trade gap – now it has become an addition to the trade gap.

      Output is biased in an unhealthy way towards moving money around, and activities like real estate, which are not really value-additive.

      Also, GDP includes overseas creditor support (the income component of the current account), and “imputed” (meaning non-cash, and arguably non-existent) rent, the latter being about £125bn per year.

      Manufacturing is now less than 9% of output, but the last time I looked it was close to 18% in the Euro Area.

      I gave up hoping for effective leadership a long time ago.

    • Actually the best evidence is that “money” was invented by military governments so they could provision their soldiers by enslaving people with tax obligations.

  9. I think any reports of the death of the petro-dollar are a bit premature. I cannot see the other remaining “four eyes” wanting it, nor the ASEAN, GCC states or anyone else who is dependent on the USA for its security. Can you really imagine Singapore not accepting US $s if the US Navy turns up seeking a replenishment for one of its fleet? Lets remember how the 21st century international economy works. Russia provides natural resources. China because of its endless supply of cheap labour, lack of environmental, elf and safety regs makes cheap stuff and India does the paperwork. If the Western democracies go down the khazi led by the US, who are these three going to do business with? Its not as if the Chinese economy is not built on a pile of sand itself with its own colossal debts.

    • Here we are verging on rehearsing the consoling argument pre-1914, that the economies of the world were so inter-linked that it would be inconceivable to start a global war, being in the interests of none of the states …….

    • Perhaps I didn’t express myself as clearly as I could have.

      USN ships can of course bunker in Singapore in USD. HM Ships can bunker in GBP. But the price is a dollar price, which is then converted to GBP on the bill for the RN ship. It’s perfectly possible that USN ships can carry on bunkering in USD – but at a price converted from one or more other currencies.

      The petro-prop is about exclusivity – because almost all oil trade is done in dollars, it supports demand for the USD.

      There are two ways in which this might change, or indeed is changing. First, a buyer – like China – invites bids in RMB. It might also invite bids in EUR, if it sees a possible benefit.

      Second, bilateral trade deals are struck, again not in USD. For instance, India might buy Iranian crude in rupees, or, again, in a third party currency like RMB or EUR.

      The Chinese economy is indeed built on debt – we’ve discussed this here before, and will do it again soon, with SEEDS now fully operational. I’d expect the RMB to come out pretty badly on my new FX risk matrix (I’ve only tested USD, GBP, EUR and JPY so far).

      But the Iran policy is meeting very stiff resentment in Europe, especially in France and Germany.

      If the US wants to ban American companies from dealing with Iran, that’s a legitimate policy decision.

      But if the administration tries to ban French, German, Chinese, Russian or even – maybe – UK companies from trading with Iran, they might encounter resistance at the least, and retaliation to enforcement.

      Put another way, does the US want a trade war, not just with China, but with anyone unwilling to have US trade policy enforced on them?

      I’m not sure if Mr Trump understands this. I’m also waiting to see if the reimposed sanctions actually match up to the rhetoric!

    • Doc, in my opinion the system needs an anchor. Currently its the US$ through its coupling with oil/commodities. A virtual safety net. If, or rather when, that dissapears, what could be the anchor? The €, because it can be dumped or adopted if and when needed? Should the anchor be backed by gold, because we’re in degrowth, and, fiat currencies and debt don’t work in degrowth? After GFCII, trust has to be restored rather quickly if we want to survive. Trade, even at 10% of its current level, has to commence. Trust, between nations, regions whatever, has to be restored. What will be the next anchor? A basket is not an anchor, we’ve had sea shelves and tulips, so now what?

    • Bhagwhan, I think you have a very valid point, and although I would agree with you that the Dollars demise is not imminent, I certainly do think that it is pending,
      ( whether the “other 4 eyes” want it or not ! )
      De-Dollarisation is being led by Russia and China, but others will eventually join in too. Saudi is the big question, will they accept RMB for oil sales to China ?
      The big problem with the Chinese is that they do things at their own pace, and that pace from a Western standpoint can be seen as glacial.
      But I am sure that the Chinese are positioning themselves. The AIIB was step one, step 2 is the Shanghai gold exchange, step 3 is the petro-RMB. These are all just small baby steps, and markets are quick to dismiss them as being too small and insignificant in the bigger scheme of things. But as we all know, babies do grow up and start taking much bigger steps.
      The world wants to de-Dollarise and the world will eventually do so.
      This will be painful for the US and they will resist it with the full force of their military. The Chinese and the Russians are aware of this, but what is encouraging though, is that the Chinese are the Masters of patience and the Russians play a good game of chess too.
      Hopefully these attributes be sufficient to overcome American recklessness and impulsiveness.

    • A couple of weeks ago China showed to the world that it effectively now has a “president for life”, a phenomena not seen so far outside of Africa. To be a provider of the global reserve currency you need to be a parliamentary democracy to deliver the levels of transparency for anyone else using it to be able to trust its underlying worth. For the foreseeable future I would likely accept payment in RMB as much as I would take bits of paper with Bank of Toytown written on them.

    • I take your point about China, and I’ve never been a member of the predominant China fan-club.

      But this begs the question about democracy in the US and the UK. Are these countries really democratic, or is ‘democracy’ really just a courtesy title?

      In Britain, there is no separation of powers; a government can gain a majority in Parliament with 36% of votes cast; and a majority in Parliament becomes something akin to ‘an elective dictatorship’ not least because the upper chamber is nominated, not elected.

      In the US, the connexion between corporate money and political power is extreme, something that no American (of my acquaintance) has ever sought to deny or defend. One of the healthiest things about America has always seemed to me contempt both for politicians and the system.

    • Also, I’m not sure that anyone is suggesting the RMB as global reserve currency, though China may have aspirations in that direction.

      I think what we’re really seeing is a trend towards a multipolar system.

    • Houtskool

      Yes, we need an anchor, which in effect has been USD since 1945. Back then, though, the US accounted for 50% of global GDP, and was the world’s biggest creditor.

      Personally, I don’t see how it can be gold. The SDR might be a better idea.

      The issue now, though, is what happens during GFC II. My view – a radical one, I know – is that this time it won’t be just banks in trouble, but fiats as well. This could become a domino sequence, starting – now – with Turkey, Argentina, Mexico and similar (and I’m concerned about Brazil).

      But can this be confined to the small ones? GFCI wasn’t confined to banks like Northern Wreck, but spread to the big banks. Will GFC II be confined to EM currencies? I wouldn’t bank on this, and transmission lines look pretty clear.

      GBP looks riskiest of the Big Four. JPY is already monetising debt. USD has budget problems. EUR is dysfunctional. RMB isn’t open enough. RUB and SWF are too small.

  10. Being able to form a government with a small proportion of the votes cast is not the real problem. There is no point in voting in elections at the moment, if all the main parties essentially believe in the same thing. The only difference between them is the level of how much more they want to increase the size of the national debt, how much more tax they want off you and how may more foreigners you are going to have compete against for a job or support as effective lifetime wards of the state (taxpayer). Personally I would like some of Lee Kwan Yew’s and his successors “guided democracy” the proof of the Singaporean pudding speaks for itself.

    • I agree about lack of policy alternatives, but that’s changing, I think. Apparently, a new coalition will soon take power in Italy, committed to running a currency in parallel to the euro, introducing a universal basic income and taking an ultra-tough line on immigration. I’m not Italian and have no opinions on these policies – but they’re certainly different!

      Democracy cannot function in a healthy way when politicians are held in contempt by voters. Politics has never been an esteemed profession, but things are much worse now than in the not-too-distant past.

      I’m as certain as I can be that this contempt was decisive in electing Mr Trump and carrying “Brexit”.

  11. A great and potentially dangerous change is certainly occurring: universal contempt for democratic politicians is one of the crucial steps towards dictatorship and the destruction of liberal democracy.

    In the past, differences were largely those of ideology and class, and parties were supported or opposed on those criteria, which boiled down in most instances to taxation levels and aims.

    The principal change over the last decade is perhaps that, increasingly, voters see politicians of all established parties – and trans-nationally – as pursuing policies which are against the national interest as reasonably conceived, most notably totally unwanted mass immigration, and the steady erosion of welfare/pension provision and employment protection as generally established after WW2.

    Not to mention all established parties being seen to be – after GFCI – in the pockets of high finance and industry, and therefore largely indifferent to declining living standards among the mass of the population.

    Nonetheless, status quo parties can still control the game, as I have pointed out in the case of Spain with the PP-Ciudadanos-PSOE-PNV continuum (all would follow largely the same policies as approved by Brussels) which cannot be broken by the radicals.

    Unwisely, these – discredited – politicians representing the status quo are responding with the attempted repression of all dissent, as we see with the legislation in Britain and other states concerning ‘hate speech’, which will make any criticism of mass immigration, the behaviour of certain races, and their religious practices a criminal offence.

    In effect, they are creating the crime of dissidence! This is far from being a wise way to govern.

    • Good points, and I’m reminded, too, of my own comment that we’re now governed by unpopulists.

      History suggests a process whereby elites become complacent, and that’s often their undoing. Changes in material prosperity act as major catalysts for change.

      Where SEEDS fits into this is in measuring prosperity. People in countries like the UK and the US are now about 10% poorer than they once were, and there seems to be an almost frightening fragility creeping into the UK economy in particular. I’ve even read (though, I must stress, without corroboration) that British-made goods are being discounted, implicitly because customers are less than convinced about continuity of spares and service.

      On top of this, both countries seem to have an element of complacency. The UK, for example, got away with it in 1940, despite lamentable complacency in the 1930s. The crises of 1967 and 1976 were weathered, though it was “a damn near-run thing” in ’76. The financial system dodged a bullet – by a very narrow margin – in 2008. Relying on a hyper-vigilant guardian angel isn’t a good strategy.

      The risk metrics around the UK are very disturbing – financial assets are about 1140% of GDP (but nearly 1600% of prosperity), the economy continues to depend on uninterrupted credit creation (plus sales of assets), and prosperity trends suggest considerable ‘acquiescence risk’ around any future rescue programme.

      I hate having to say this. I was in the English East Midlands not long ago, felt very welcome and could only regret what so many basically nice, decent people are already enduring.

      I suppose I’m going to have to subject the UK to the SEEDS process, though there are other projects ahead in the queue at the moment.

    • @Xabier,
      That great change is coming, is now beyond any doubt whatsoever !
      Unfortunately, there is nobody leading this change, there is no philosophy behind it, it is just one headless chicken chasing another headless chicken.
      British politicians must be the most incompetent on the planet, but as they say, the people get the politicians that they deserve. ( some maybe, but sadly not all )
      The problems facing the UK are not just economic or financial.
      These are massive problems in their own right, but there are other forces at work.
      The UK of today, is not the UK of the 1940’s.
      The social cohesion of those years is in the past and will never return.
      I would say that today. about 75% of the UK population cannot express their opinions openly without causing offence to some group or other. So effectively these people have no voice, and the voices of the minorities is the only one heard. The social cohesion of today is not real, we are as fragmented as never before.
      This is what will change.
      The majority will find their voice, and I can see many members of minority groups running for the nearest closet. ( just a euphemism as an example )
      As we have now learned, the Economy is an Energy Equation.
      It is not about money, it is about energy, and very soon the UK will be unable to afford to buy energy.
      We also know that the government actively promotes immigration in order to increase consumption levels in the country, in order to show some kind of economic “growth”. Increasing immigration stretches the limits of cohesion.
      When the energy runs out, we will find a very high concentration of people with no access to resources, neither financial, nor physical and a great many of them will have no marketable skills either.
      What we are looking at is an explosion in petty crime, theft, house-breaking, muggings, and probably a corresponding increase in violence too, as people get more desperate.
      The fact of the matter is, that the UK cannot support a population of 60-odd Million people when it has no energy, precious little primary industry, and no manufacturing. We cannot afford a society in which 50% of all people in the workforce are employed by the public sector.
      It is totally unsustainable !

  12. And yet, with all the discontent, and the very obvious erosion of real prosperity in the UK, people still seem to behave as if things were otherwise.

    Everyone is taking readings off the wrong instruments and, therefore, setting the wrong course……

    For instance, I am very amused to see that a neighbour, no doubt inspired by the news that Cambridge has seen ‘60% capital (?!) appreciation in the last three years’ is now intent on turning their 1970’s bungalow into a house: the roof has just come off, and the new story is being created.

    Like the taxi-driver giving one share tips indicating the very peak of the market and time to get out, believing that one can turn bungalows which were c £100k in 2000 into £500k + houses is yet a another flashing red light…..

    Really, everyday in the UK should start with warning sirens. But would even that wake anyone up?

    • Back in the peak of the dot-com farce, I knew a man – bright, and in a very good executive job in manufacturing – who quit his job to focus 100% on buying dot-com stocks. He wouldn’t listen to my advice, even when I told him that nobody of my acquaintance in the City had or would do such a thing.

      People believe (a) what they’re told, (b) what they want to believe, or (c) both.

      But their anger can be something to behold when they find out they’ve been duped. As Abe said, “you can’t fool all of the people all of the time”…..

    • I know of at least one person betting the bank on cryptocurrencies… he’s done well… but rather than taking money off the table … is pouring more in …. looking to hit more home runs….

  13. Tim, as you say politics has never been an esteemed ‘profession’, but I fear we’re moving into very, very dangerous territory when the governors come to be viewed with contempt, if not outright despised. That worries me very much. If I was pushed, I’d say that the decline in the standing of politicians began accelerating towards the end of the Major government with ‘sleaze’, was given a mighty push under Blair with the Iraq War promoted under false pretences, took a further hit under Brown with the ‘Expenses Scandal’, and I’m not sure has been aided by Cameron or May. My feeling currently is that the UK economy is in dreadful shape. Leading politicians should be aware of the situation, and if they cannot grasp this fact then they are unfit to hold public office. If they are aware of the situation, but are remaining silent then in my view they are unfit for public office. Either way the current political elite are damned. Even if one looks at the official GDP figures from the ONS one cannot escape the conclusion that something, somewhere is very badly wrong – we’ve had unprecedented fiscal and monetary stimulus yet economic growth remains feeble. Our plight is made all the more desperate by the abject failure of ‘The Fourth Estate’ – the mainstream media – to give the issue prominence, or sound the alarm. The situation really is quite dire, if not depressing. Finally, here’s an anecdote that is telling. Last autumn we had some work done on the house and our joiner asked me if I knew anything about ‘investing’ in Bitcoin! I remember thinking, now that’s an interesting question, and wondering whether it was indicative of a peak in the price. The lure of easy money, eh? I’m not wishing to be unduly negative, but all I’m yearning for is a politician that will face-up to the reality of the situation – one way or another we’ve got to get to ‘First Base’ and that means defining reality correctly. In my humble opinion the BBC should be inviting you onto the ‘Today’ programme on BBC Radio 4 in the prime slot just after the news at 8 a.m. to set-out your thesis, offer commentary and be subjected to interrogation by the presenter (which I’m sure you’d pass with flying colours!).

    • Kevin

      Politics has always been pretty scurrilous. Insider dealing was rife in the South Sea Bubble, and during the Titanic inquiry. Incompetence and corruption in Nelson’s day was horrific. Admiral Byng was judicially murdered to distract from the then-government’s incompetence. I read recently that “politics isn’t a trade for gentlemen”.

      This said, I think it probably is worse now than it’s been in a long time. I don’t know what the British people did to deserve some of the leaders of recent years. But I’m open minded about Mrs May. My hunch is that she has the right instincts.

      I’m on more comfortable ground with the economy. I authored something called Project Armageddon as long ago as 2011. My feeling now is that the UK faces truly dire economic challenges. I don’t comment on “Brexit” – not least because I respect the decision of the voters – but I don’t think that has much to do with it, yet anyway.

      You might recall my article on Candyfloss economics? I used US stats to ilustrate it, but it’s as true of the UK as of the US. If you pick apart UK economic stats in a forensic way, the resulting picture is dire. There’s a limit to how long any country can get away with grotesque mismanagement.

      I’ve been on the BBC many times, albeit not in recent years, but I’m not sure I’d be happy to do that again. I’m not a fan.

      I really feel for the decent, ordinary – and, left to themselves, generous – people of the UK. They don’t deserve any of this.

    • Is it mismanagement? Or is just what happens when the ship is going down … and the crew realize that … and decides to raid the bar and stop serving the passengers…

      The ship by all rights should have gone to the bottom in 2008…. we’ve had an extra 10 years of life…

      I am not sure what the crew could have done to keep us afloat longer… in fact perhaps they should be applauded for holding it together for this long….

      And by crew I do not mean politicians… I mean the people really in control … the central bankers and their owners….

      I do not know what they could have done better — that would be like me watching Wayne Gretzky play hockey and second guessing him… and saying I could have done better than that….

    • As countries decline into 3rd world status… they get the same levels of governance that we see in 3rd world countries… there is very little that can be done because this is what happens when more ends….

      Or think of it this way… 10 people are locked in a room … they begin to get hungry …. the pizza boy shows up with a dozen large pizzas… the 10 people are happy to share (although a few will make sure they get more than the rest)….

      But if the pizza boy shows up with only one large pizza….

      ‘good’ people … can quickly turn into ‘bad’ people …. when there is not enough.

      And vice versa

    • Thomas I know you are correct and it appears we can allow for the large amount of killing of the “right kind of people” with nary a peep from the first world. America is already a banana republic and is in the first stages of sell off of assets, with public lands high on the agenda.

      The 4th estate is owned by corporations and will promote the agenda at all costs. Fun times….I will be in my RV all summer enjoying the wonderful wide open spaces that America invested in when it had some soul. I will also tilt at the windmill one more time as I attempt to run for CONgress as D in the Petro State of Wyoming. No chance, but it is the last place to actually “tell some truth”, not that Wyoming will hear it as the populace has been taken in by Fox News and Right Wing Radio punditry.

  14. Does anyone think that a SEEDS piece on the UK should ‘jump the queue’? The queue currently is: a brief guide to GFC II; where next for SEEDS?; and a study of FX risk. Ireland and Canada, too, are possibilities

    • We know that the UK is doomed, it would be refreshing to hear about your views on the rest of the world, and what could be more enticing than GFC II?!

    • Tim, your thoughts are always refreshing regardless of the order of the stories. I would be keen to read a brief guide to GFCII and a SEEDS piece on the UK.

  15. I’m just wondering what we can actually manufacture here in the UK to revive our manufacturing base. We can’t compete with the Chinese in electronic goods on price – our car industry is suffering due to diesel but was always going to suffer anyway with the underlying price of oil going up.

    Jobs are in freefall on the high street – my local town centre’s refurbishment has been delayed for 6 years now as have plans for a theme park (Paramount pulled out a while ago)

    We also have the spectre of A.I. taking over call centre jobs although it’s still not anywhere near good enough for many types of query and won’t be for another 10 – 30 years.

    • I get the general impression it is imagined that AI, bio-tech, hi-tech generally, exploitation of patents, will somehow do the trick, not the old industries.

      Hence all the infrastructure development money here in Cambridge, the London-Cambridge-Oxford triangle , etc. The research buildings of the hospital are now like a small town in themselves (and yet I know from a surgeon friend that it is desperately hard to get adequate funding, only 1 in 4 applications he makes -and he is a leading figure in his field – are approved).

      Allowing, however, the Chinese to send their best and brightest in very large numbers – sometimes I see only Chinese grads when cycling into town! – to the science labs of Cambridge University (wonderful for harvesting inflated fees, of course) does not seem particularly bright, long-term.

      In a way, though, they are just like the flocks of imperial speculators who once made their way to Moghul India, to pick the fat and leave the bones….

      Retail news just gets worse, daily. I expect to see many more vacant prime retail properties empty next Spring.

    • Pending final data, I’m expecting manufacturing to have accounted for less than 9% of UK output last year – barely half the level of the Euro Area – and less, in ex-inflation terms, than in 2000.

      A fundamental problem has been a preference for competing on price rather than quality, and an over-eagerness to sell assets to overseas buyers for a quick profit.

    • One does get the sense from plunging auto and retail – and falling property prices… that the UK may be our trigger.




      This is the deflationary nightmare that Bernanke feared…

      The UK is far TBTF…. if this is not reversed soon… the UK becomes the iceberg that sinks the good ship BAU.

      Any more tricks up the sleeve Mr Central Banker? It’s too soon to end the show now… more please .. can we have at least one more?

    • Economic progress is in my view linked with science and technology. The UK still has a number of World class universities and to my mind we should go down the science/technology route, thus playing to what are our strengths. The situation may be desperate but not hopeless.

      Like most I believe in free markets but I also believe in judicious state participation in some fields and this is one case where that might pay off. I’m in favour of state support for R & D and even direct investment where that may be advantageous; we face a very difficult future and this is doing no more than playing to our strengths.

      When you get down to it there are very few “get out of jail free” cards available to us but we do have some and we need to capitalize on them.

  16. Perhaps we need new innovators in the mould of Alec Issigonis (although the products would have to be well built unlike the early versions of the Mini)

    • Inventiveness has never been the problem for the UK – Scotland alone can claim radar, television, the first effective steam-engine and tarmacadam, and could also, through Adam Smith, lay a claim to economics.

      The problems are management and organisation. Again, for Scotland, Darien, which bankrupted the nation.

      Incidentally, did you know that the original Mini was nearly a flop? Sales were poor, and Morris carried on making the Minor. The Mini was saved because some slebs took it up – or so I’m told.

  17. Hi I knew there were many quality control problems with the first version and that it was initially difficult to make any money out of it because the manufacturer found out that it was almost as expensive to bolt together as a larger car for which they could charge more.

    Regarding slebs – perhaps it’s adoption by the fashion brigade (Carnaby street – the Beatles – Peter Sellers etc) helped it to eventually take off after the quality issues were resolved.

    I occasionally drove my Stepmum’s back around 1990 – but it was far too small by then to be competitive. She used to drive my Dad to to the South of France and Spain in it. It must have been pure torture.

  18. There are certainly some horrendous stories about mismanagement in Britain: such as the collapsing – you couldn’t stack them safely – petrol cans of the first years of WW2, which the civil service dept. responsible declined to do anything about, resenting that their procurement choice was being questioned. This led to huge and entirely unnecessary waste of very precious fuel. Churchill knocked heads together, thankfully!

    • The lifejackets issued to merchant seamen in WW2 had a solid cork piece behind the head, virtually guaranteeing a broken neck if you jumped into the sea from a ship.

      The follow-up version was made from kapok, which became saturated if you had to swim through fuel-oil.

      All RAF bombers, on reaching cruising altitude, were required to test their radios, thereby letting the Germans know how many were coming, and from where……

  19. Regarding Trump I think it may have been China who had a ‘polite’ word with Kim. Trump’s meeting has yet to go ahead – but let’s be positive.

  20. Sanctions and tariffs never work as intended (If I put ‘discuss’ after this statement it would form a good A-level question)

  21. Updated plan

    The next piece here is expected to be GFC II

    After that, the intention is to look at the emerging markets (EMs).

    I’m hoping to include:

    Mexico, Argentina, Brazil;


    South Africa;

    China, India, Indonesia;

    and – if possible – Iran.

    • John

      Not sure I know what you mean. I log in to the site, obviously, to post new articles, but SEEDS itself isn’t on line.

      After GFC II, and either before or after the EMs piece, I might put up something about what SEEDS is, and what might be done with it in the future.

    • Hello Dr. Tim,
      you did have the SEEDS data on several countries posted on-line under your “Resources” tab.
      It was there until last week, when I was expecting you to add Russia to the list.
      Now it has all gone, but if I remember back a few months, you did say it was just a sneak preview that you were affording us.

    • Thanks, understood.

      Now that SEEDS is complete, I’m reviewing what its output should look like, what should be made available, how frequently it should be updated, and that sort of thing.

      I want to make sure that, when we’ve been discussing an issue (like Russia), you have access to the necessary numbers.

      At the same time, I don’t see a reason for enabling for-profit organisations to have access to the latest SEEDS output for all countries (now numbering 27), at a time when conventional economic metrics seem to me to be losing interpretive value.

      What comes next are (a) an annotated example, and (b) the latest dataset for Russia.

    • @JohnDoyle,
      Sorry about the “twist”, it may have been my (mis-) interpretation of what was meant.
      See #108 from October 2017.
      Dr.Tim stated then that he had uploaded a “SEEDS-Snapshot” version, while he works on the SEEDS-Professional version.
      I had understood that as being a brief insight into his work, and that it was still a work in progress.

    • SEEDS has taken a long time to create, but – though I say it myself – is proving very much more powerful than I expected when I started on it.

      The aim, simply stated, was to incorporate the energy dimension. But the outcome has been to expose and calibrate much broader failings in how conventional economics interprets things.

      In one sense, economics is ‘an industry’ that is failing ‘customers’ who rely on its product. SEEDS appears to deliver far superior insights.

      This outcome has taken me by surprise, and I’m still working out what to do with it.

  22. i suggest to read peter turchin work Age of discord when you can: after the last US election and the political turbolence around western countrys is not so surprising, and his work add a lot arguments to yours, on the political and geopolitical side. he say that what we are now living is nothing new, but happen again and again in history. for agricultural civilization was lacking food surplus that lead to hard time. he don’t know why the same trends are here for industrial civilizations, but write about a elite aspirant that convert economic power in political and go to White house thanks to popular support against “traditional” usa elite in 2006.

    about main topic don’t forget italy. in the last election liberals center-left and center-right keep 39% of votes combined, and the two populist m5s and lega North win the mayority of parlaments: it’s not sure if they can keep an Agreement to form a coalition (i bet they don’t the Southern supporter of m5s hate lega North) but if they do, the first points is 250 billions of pubblic debt forfeit, cut italy contribution to EU the second and italyexit referendum after.
    the historical record of pubblic debth to GDP in Italy was the day before Mussolini came in power 181% of GDP. this is Mussolini that burn pubblic debth on Rome in 1928

    • Thank you, and I will read that.

      I am watching the formation of a coalition in Italy with interest – some of the policies seem strange. I understand that a Lega/5 star government may try a parallel currrency, universal basic income, and very strong laws on immigration.

      According to SEEDS, average prosperity in Italy has fallen a lot over ten years, which might help to explain the political uncertainties.

    • yes fall of prosperity is a key factor for sure (turchin call popular immiseration: the same concept). distrust on “traditional” party another. PD, mr Renzi party, lose in places where never go under 50% after WW2, 5 milions of vote (on 11milions total) lost in 4 years. 5star is very difficult to understand: they say all and the opposite in electoral campaign: one day yes euro the next no euro. same proposal are interesting, but they have no clear plan to put in place, only slogan. and no political or administrative experience at all. Lega is different, very close to USA GOP radicals: no immigration, tax cut (flat tax 15%) and deficit spending in Regan style.

  23. Tim many thanks for another fascinating article. Your words and all the comments on here provide a really valuable insight.

    “But I’m open minded about Mrs May. My hunch is that she has the right instincts.”

    Can you expand on these instincts? Personally I don’t think she has any plan for the future. Her entire time seems to be spent on stopping the break up of her party, and other than a few gimmicks (25 years to eradicate plastic waste!) I haven’t seen anything which attempts address the huge problems we face.

    • Thanks, and welcome.

      I must stress that I did refer to Mrs May’s instincts, which isn’t the same as having a plan!

      As I see it, the UK has two big – actually, huge – problems. The first is division within society, not just over “Brexit” but over the very differing outcomes of recent years, most obviously between older and younger people. The second is the economy.

      Mrs May’s instincts seem encouraging on the issue of division. She is, for instance, taking a tough line on rogue landlords, and the clampdown on betting terminals to £2, too, shows that she doesn’t follow the “anything goes, if it makes a profit” line of her predecessors. She might yet side with Europe rather than the US over Iran, and I think she recognises the importance of respecting the “Brexit” vote outcome, rather than just pushing the rather cynical BINO (“Brexit in name only”) line favoured by so many others. (Let me be clear that I am neutral over “Brexit”, but not neutral over respecting the wishes of the electorate).

      She doesn’t have a plan for the economy, but I don’t think anyone does. My own view is that the British economy is in a grave situation, of which “crumbling” might be an apt label. I suspect few, in or out of government, have any idea of the scale of economic risk for the UK.

      On this, I think Ben Broadbent was making some important points. He most certainly should not have used the word “menopausal”, but it’s depressing that virtually all commentary has been on the words used, with almost nothing being discussed about the issue itself.

    • Hi Tim

      I think you condemn by faint praise.

      To me Brexit should be the main priority of the May government for the simple reason that this will reset the economic, political and social context for the UK for some considerable time ahead. It seems to me that the negotiations seem to consist of the EU saying No and then we cave in; this isn’t negotiation it is capitulation and May has to take responsibility for this. I may be unfair about this but the whole exercise has the air of thorough going incompetence about it and if fudged we will be living with the consequences of this incompetence for years to come.

    • @BobJ
      …”this isn’t negotiation it is capitulation “.
      It was the UK that decided to leave the EU.
      The EU should say, ” Well, there’s the door, don’t let it hit you on the way out !”
      I do not really see that the UK has got any bargaining chips in this game. Mrs May has effectively caved in to every demand because she has no leverage.
      What can the UK offer the EU that it cannot do for itself ?
      What is Mrs May to do ? – “Sorry Merkel we are not buying any more BMW’s ?”
      For all the faults that the EU has, I still believe that economically it is a mistake for the UK to leave.
      Not that it matters in the bigger scheme of things, The UK is going to Hell in a Handcart whether it is still in the EU or out of it.

    • I don’t recall the UK leaving anything… how long ago was that vote?

    • Three issues here, as I see it.

      First, Mrs May. I give her credit for being aware of, and concerned about, division in society, and the inequities of the “post-GFC I settlement”. This doesn’t, of itself, make her an effective leader, or one who has a plan which will work.

      Second, the economy. This is an issue needing, perhaps, an article to itself. But my interpretation, backed up by SEEDS readings, is that the UK economy has started to unravel. This means: (a) prosperity will continue to deteriorate, and (b) risk is high and rising. I don’t think either issue is really understood in the corridors of power.

      Third, “Brexit”. I tend not to get over-excited about this. I don’t see Brexit solving anything, because it doesn’t address the fundamental weaknesses in the economy. On the other hand, remaining in the EU wouldn’t solve these problems either.

      Finally, the “establishment” has brought this on itself.

    • @Johan
      If we are leaving what is the “game”?

      If we leave on WTO terms (the default position at the moment) we would impose tariffs on EU goods. How can that be a loss for us and a gain for the EU? It is a loss for both and is in our mutual interests to come to an FTA. There are issues between us that can be settled by compromise and “compromise” means agreement by mutual concession, most decidedly not what we have now. We do have leverage.

      As I see it the greatest danger to the UK in all this is not a “no deal” Brexit it is what will happen to the EU in the next few years, not the UK. The Euro is the San Andreas Fault of the EU: liable to erupt at any time and with catastrophic consequences. It cannot work without fiscal union and that means political union and that will not happen. The EU now has difficulties on multiple fronts: problems with EE members actively revolting against the status quo and now Italy. The EU is not simply going to “explode” – 27 countries do not come to crisis all at once but its disintegration is beginning to move from the possible to the probable and that is not good news for anyone.

  24. I have rented for years and have endured many poor landlords who don’t adhere to basic standards of safety. However, with a significant number of MPs being landlords I struggle to see much motivation for a long overdue increase in tennant protection. May is far too weak politically to do much of anything sadly.

    Broadbent did have some important points, but his analogy with the end of the steam age shows that he doesn’t understand why this slowdown is happening or maybe he just doesn’t want to. I never really understood the relationship between the BoE and Gov since it was made independent. Will anyone pay much heed to his comments or we will go insisting everything is just fine? I suspect the latter.

    • Well, the Conservatives are in the pockets of the major property developers…….

      Thorough reform of the rental market in Britain would be a fantastic election winner for the first party to get there.

    • What I found interesting about Mr Broadbent’s remarks is that here is someone, in a position of influence, prepared at least to consider that there might be fundamental problems. That at least is something, even if it’s far from a complete awareness of a situation which, as I see it, is extremely grave.

      It is both depressing and characteristic that debate has been sidetracked from the issues to the language. Ideally, his comments would start a debate, from which something useful might emerge. Instead, comment has been confined almost entirely to his choice of words, to the exclusion of the issues.

      The Conservatives seem to be backing the wrong horse in a deeply divided society. The reasons why they are doing this I will leave to you. But the only person likely to benefit from their stance is Mr Corbyn.

    • Some of what Broadbent has said is echoed in the works of Robert Gordon who sees the current low growth the final petering out of the technological gains made at the beginning of the century.

      In some ways what Broadbent and Gordon are saying is common sense. Growth is driven by two main elements: population and scientific advance. Both these elements are secular but we are fooled because the role of population is rarely mentioned in growth (the government have crowed about growth in the UK in recent years but have omitted to say that immigration is a major factor in this) and scientific advance is not constant. I think the truth is that when it is said that productivity grows by a constant x% and the underlying rate of GDP growth is x% then this is basically nonsense; there was a period of around five hundred years in the Middle Ages when there was no growth at all.

      What is of note is that economic commentary is all about “noise” and the huge underlying trends are never even discussed let alone addressed.

  25. I agree: thoughtless agitation over ‘trigger ‘words seems to define the level of public discourse now,and has done for some time.

    As a result, the substance of his comment (a statement of the patently obvious) about the state of the British economy was simply ignored and drowned out.

    Of course any negative comments do have to be dealt with in that way, lest consumer and investor confidence decline and people start saving rather than consuming…..

  26. On the EU and the UK, there is an element of “the best-looking horse in the knackers’ yard” about this. I would start by reiterating that the British voters’ decision must be respected, not least because the hazards of not doing so may not be fully recognised.

    Trying to operate a single currency with multiple sovereign budget processes is economically illiterate, and is clearly a political decision superimposed in preference to economic rationality. The lack of automatic regional rebalancing is a grave weakness.

    If, as I believe, GFC II is coming, this could become dangerously relevant. Greatest economic risks in the Euro Area, as I see it, are Ireland and Italy (in that order) – and I am by no means persuaded that Germany (in particular) will be prepared to defend the economies and finances of either, even though the EUR has been beneficial to Germany. I’m minded to write SEEDS-based assessments of both Ireland and Italy at an early date, though the EA itself might cover more ground.

    Having said this, the strengths and weaknesses of the EUR are a purely relative issue, and neither the JPY (with monetisation in full swing) or the USD (with problems we can address some other time) looks any stronger, fundamentally, than the EUR.

    The UK situation, meanwhile, is looking positively surreal. I’m pretty sure that the British economy is crumbling, which in turn means that, with its huge banking exposure, the UK hasn’t too much chance of “dodging another bullet” in GFC II, as it (narrowly) did in GFC I. The dangers around GBP ought to be particularly worrying………..

    ….and yet – and this is the surreal part – there seems to be neither recognition nor debate about these issues. The media and opinion-formers’ coverage of Ben Broadbent’s remarks typifies this seeming inability to take these issues seriously. Perhaps the UK is just convinced it will “muddle through”, yet again, as it did in 1940, and in the crises of 1967, 1976 and 2008?

    • Perhaps quite simply not enough people in Britain suffered in GFCI , and it was all rather too well managed and smoothed-over?

      I’ve generally only met with incredulity when telling people that, as it all fell apart on their screens, people I knew at a hedge fun ran to the bank in Berkeley Square to get lots of cash for the immediate needs of their families.

      Can’t find the exact quote, but Winston had something pertinent to say about resorting to a dumb and stubborn refusal to face facts when they are all against you…….

    • I could certainly agree that the wrong people suffered during and after GFC I.

      No-one has yet given a convincing explanation for why a system that will not (and perhaps should not) rescue retail employees or steel-workers couldn’t have managed a rescue that saved banks without saving bankers.

      This question will come back to haunt us, either in GFC II, politically, or both.

      This said, I suspect that GFC II will dwarf anything expeienced so far.

  27. Bob

    As SEEDS interprets it, there is little or no “growth” in the UK economy, and hasn’t been for a considerable time.

    Here’s a summary, comparing 2017 with 2007 in constant (2017) GBP:

    – GDP – increase of +£206bn over 10 years – equivalent to 11% in aggregate, but only 3.3% per capita.
    – Debt has increased by £1.13 trillion over the same period, or £5.45 of borrowing for each £1 of “growth”.
    – borrowing has averaged 6.0% of GDP annually, to support growth of less than 1.5%
    – On the SEEDS basis, prosperity per capita is 9.2% (£2,230 per person) lower now than it was in 2007
    – debt per person has increased by £12,400 (19%) over the same period.

    • Doc, thank you for providing all this info, your time and efforts, your participation in the comments section and your sturdy refusal to use all this for your own profit.

  28. Tim,
    Why do you say gold is not a suitable anchor? If fiat currencies will be at the centre of the next crisis, then a basket of currencies (SDR) will not be able to restore faith in the system.
    Under such circumstances, what better alternative is there to gold? Is this not why it is still held by central banks, to stabilise the financial system when fiat inevitably fails?

    • BAU is collapsing because we are out of cheap to produce oil.

      Therefore when collapse comes it is permanent — there will be no reset.

      Collapse will not suddenly conjure up a new Ghawar….

      Contemplate the implications – if you dare

  29. Not sure how many people here have read the writings of Another, Friend of Another (FOA), and Friend of Friend of Another (FOFOA), on the concept of ‘Free Gold’.

    Date: Fri Jan 23 1998 19:01

    Do you really hold dollars?

    It is important to understand that few persons or governments hold US dollars! Look at any investment portfolio and what you will find are “assets denominated in US$”. This sounds simple, but it is not. You have heard the phrase, “money is moving into real estate, land, oil, stocks or bonds”. It is a bad meaning, as it does not what it says.

    All modern digital currencies do not go into an investment, they move THRU it. The US unit is only an exchange medium to acquire assets valued in dollars. US government bonds are the usual holding. No CB holds any currency! They hold the bonds of that currency. The major problem today, is that digital currencies have erased the currency denominations of all government/nation debt holdings! Even though a debt is marked as DM, USA, YEN, they are in “real time” / “marked to the market” and cross valued in all currencies! No currency asset, held by CBs today are valued in the light of a single issuing country, rather “all currencies are locked together”. To lose one large national currency, is to lose the entire structure as we know it!

    There is an alternative. Gold! It is the only medium that currencies do not “move thru”. It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say “gold moves thru paper currencies”. Gold can be used to revalue any asset, and not be destroyed in the process!

    • I have some gold … but unloaded most of it … because I realized that when the power goes off permanently… it will be worthless.

      There will be nothing to trade it for because there will be no energy to produce anything.

      And if anyone has stockpiled stuff — they will laugh at you if you offer to trade gold for a can of beans.

      I keep some only because it might be handy in the final days of BAU.

      This is an extinction event. And people are worried about how to protect assets….

      I am amused

    • Gold is no solution. It ceased to be like money many years ago. It is simply a commodity. It cannot substitute for currency as the currency has inflated way beyond the current value of gold so that even a small nugget would be useless in daily trading. You won’t be able to give your house away when the SHTF time comes.

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