#133: An American hypothesis


When the historians of the future get around to writing up our current era, one of the things likeliest to strike them will be the difference between what is actually happening and what most decision-makers think is happening. Historically, it is fascinating to speculate on how many of the worst decisions of governments have sprung from false interpretation and incorrect information.

From a contemporary perspective, what is evident now is an ever-widening chasm between conventional economic evaluation and the actual trend of events. Where conventional interpretation sees growing prosperity and contained financial risk, you don’t have to step very far outside the box to see a process of economic deterioration, elevated risk and, most seriously of all, a growing threat to the stability of currencies.

For regular readers, of course, this is familiar fare. We know that an economy hampered by a rising trend in the energy cost of energy (ECoE) is being subjected to an ultimately-futile process of denial based on credit and monetary adventurism.

Rather than revisiting this strategic theme, the aim here is to pose a theoretical question, and see where it leads.

Here is the question – what would a government do if it did recognise these realities, and came to understand that prosperity is already declining in the West, and may, before long, turn downwards in the emerging market (EM) economies, too?

It is beyond doubt that such a recognition would bring about drastic changes, both in assumptions and in policy. What follows is an examination of what those changes might be. It’s also safe to assume that these changes would be resented by those still wedded to the conventional, and that their mystification would lead rapidly to anger, suspicion and hostility.

It is suggested here that, if any government anywhere in the world is behaving in ways which are consistent with this pattern, it is the Trump administration. To what extent can Mr Trump be credited with – or, by some, accused of – acting on the basis of ‘new reality’?

What if understanding dawned somewhere?

If a government did discover the processes that are at work in the economy, the first conclusion that such a government would reach is that prosperity has become, at best, a zero-sum game. This would mean that, instead of the world becoming more prosperous in shared progression, the prosperity of one country can only be enhanced at the expense of others.

This, of course, is anathema to conventional economics, which pins its faith in David Ricardo’s “comparative advantage” theory. Essentially, Ricardo argues that we all get richer if we all concentrate on what we’re, so to speak’, ‘most best at’. From this, it follows that maximising trade between nations is to the benefit of all. This has long been an article of faith for economists.

What Ricardo did not have to consider, though, was the concept of a world with finite characteristics. It’s a reasonable hypothesis that constraints on the maximum availability of resources (such as land, water and, above all, energy) might render the law of comparative advantage inoperable. In short, once you postulate limits to potential prosperity, ‘all in it together’ quickly becomes ‘every man for himself’.

Trade, currencies and national advantage

If a government did arrive at the ‘zero-sum prosperity’ conclusion, it would concentrate on pursuing national advantage in trade. Governments already do this, of course, but they are in general influenced sufficiently by the Ricardian calculus to pursue national advantage in a mutual context. Whilst they want to skew trade agreements in their own favour, they do so from an assumption that there are mutual benefits to be accrued from such agreements.

The various trade deals pursued by the Obama administration illustrate this. Though these deals undoubtedly had a pro-American bias, they were nevertheless framed in an ‘internationalist’ way, based on assumptions of potential mutual benefit.

Our imaginary zero-sum prosperity government would differ radically, because its disbelief in mutual advantage would result in an instinctive preference, if not for outright protectionism, then at least for blatantly one-sided arrangements. The result would be a more aggressive stance on trade, characterised by an undisguised pursuit of national benefit, almost heedless of what the consequences for other countries might be.

This government would also want to leverage whatever benefits it might get from the relative strength of its currency. Under normal circumstances, a strong currency is bad for trade, making home-produced goods costlier than foreign alternatives. That matters a lot less, though, if you use tariffs to decide what you do and do not want to buy from overseas. For example, you might decide that a strong currency helps you purchase resources from abroad, but the strength of the currency needn’t suck in more manufactured goods because, if this starts to happen, you simply stick tariffs on them.

It need hardly be stated that the politics and the rhetoric accompanying this stance would be nationalist in tone. Moreover, this nationalist approach towards trade would be certain to show up, too, in other, non-trade aspects of foreign policy, including areas such as diplomacy and the management of alliances. Neither is it at all fanciful to assume that this nationalism would be replicated in domestic policies. Politicians often ‘wave the flag’ in pursuit of votes – the only difference about a government founded on a zero-sum prosperity assumption would be that the nationalism invoked would be the real thing.

The emphasis on nationalism described here need not, though, result in bellicosity. Indeed, it is likelier to take the form of isolationism or, at least, of a reluctance to expend “blood and treasure” in ways that do not benefit the country’s prosperity.

Thus far, we have envisaged a government determined to use trade to pursue national prosperity – and, implicitly, broader national advantage as well – on the basis of zero-sum world potential. As well as being implicitly inimical to free trade in goods and services, this argues for an equally restrictive attitude towards the movement of capital and labour.

For a start, the government we are envisaging would not want foreign investors acquiring domestic assets. At the same time, it would not want to see its businesses investing overseas rather than at home, something which they might well be inclined to do if costs elsewhere were lower, a differential that would be exaggerated by a strong currency.

Likewise, such a government would be inimical to the free movement of labour. If its preference was for businesses to invest at home – rather than moving their operations to lowest-cost locations – then it would be equally opposed to that cheap labour being imported through immigration. It would see large-scale immigration as the domestic face of a globalist calculus that it wished to disrupt.

Battle lines

What we are envisaging here is a government which – by interfering with the flow of trade, capital and labour – is challenging the most treasured objectives of the ‘globalists’.

In critical ways, some demarcations are being drawn here between our theoretical government and those who, either in principle or in pursuit of profit, work from diametrically opposite assumptions. A nationalist stance, reinforced by opposition to immigration, plays to a domestic audience often branded “populist” by its increasingly unpopulist opponents.

Essentially, then, any government operating on the premise of nationalism founded on a zero-sum prosperity calculus would face fervent opposition, both at home and abroad. Opponents would fall into two main categories – those who benefit from the globalist model, and those who are internationalist out of conviction. Those persuaded by internationalism out of conviction overlap extensively with those whose policies are self-defined as ‘liberal’.

What emerges from this is that the opponents of our theoretical government might be defined as ‘liberal globalists’. Since this essentially defines the long-established political and economic consensus of the Western world’s ruling elites, the government that we are envisaging would, of necessity, be ‘anti-establishment’, challenging both the vested interests and the conventional assumptions which favour globalism.

Donald Trump – theory into practice?

Just to recap, then, a government which became persuaded about zero-sum global prosperity could be expected to ditch huge swathes of what has been the economic consensus for more than three decades.

It would pursue policies of national advantage which would be hostile to free trade, and opposed to the free movement of capital and labour. It would abandon the substance (and, very probably, the rhetoric, too) of mutuality. It would face very stiff, often visceral opposition both from internationalist and from globalist persuasions.

So much for theory – what about practice?

The government which comes closest to our theoretical outline is the Trump administration. Mr Trump’s political platform can be described as ‘populist-nationalist’, and his opposition to globalisation is palpable. If Mr Trump has an identifiable enemy, that enemy resides, not in Beijing or in Moscow, but in Davos.

This interpretation has been influenced by a two-part essay by analyst Thierry Meyssan. His argument is that Mr Trump’s political stance, developed over the fifteen years before he entered the White House, is based on opposition to American ‘imperial’ behaviour and a renewed focus on domestic prosperity alone. As Mr Meyssan puts it, Mr Trump is “a politician who refuse[s] to engage his country in the service of transnational elites”.

It is certainly striking that, unlike his predecessors, Mr Trump shows no appetite for military interventions, in the Middle East or anywhere else. He certainly does not want America to be ‘the world’s policeman’, especially if what is being policed benefits globalist corporates a lot more than it benefits Americans

Ideologically, some of this puts Mr Trump in some positions which, at first sight, can look pretty bizarre. For example, it seems unlikely in the extreme that Lenin was ever one of the President’s favourite authors, but Thierry Meyssan is surely on to something when he cites this passage by the Soviet leader at the start of his second essay:


“Imperialism is capitalism which has arrived at a stage of its development where domination by monopolies and financial capital has been confirmed, where the export of capital has acquired major importance, where the sharing of the world between international trusts has begun, and where the sharing of all the territories of the globe between the greatest capitalist countries has been achieved”


Brought forward into the circumstances of today, references to monopolies, the dominant role of international capital and the free flow of capital between countries are indeed redolent of what Davos likes, and Mr Trump, instinctively and perhaps calculatedly, does not.

According to Mr Meyssan, the President’s election was based on a “promise to return to the earlier state of Capitalism, that of the ‘American dream’, by free market competition”. Thus interpreted, Mr Trump opposes the small number of “multinational companies [which] gave birth to a global ruling class which gathers every year to congratulate itself, as we watch, in Davos, Switzerland. These people do not serve the interests of the US population, and in fact are not necessarily United States citizens themselves, but use the means of the US Federal State to maximise their profits”.


Thus far, we have been examining two distinct issues.

The first is an interpretation of what a government might do, if it became persuaded that the scope for growth in global prosperity has been exhausted.

The second is Thierry Meyssan’s acute interpretation of Donald Trump as a nationalist opponent of globalisation and its attendant ideologies and policies.

What is surely very striking is how these two strands intersect. It’s doubtful if Mr Trump and his advisors are familiar with the energy-based interpretation of economics, certainly as discussed here, and modelled by SEEDS. But it’s by no means improbable that he has arrived at similar conclusions by different routes.

It certainly seems apparent that the consensus symbolised by Davos is vehemently opposed to Mr Trump’s apparent agenda. Moreover, if he has indeed picked a fight with “Davos man”, he could hardly have chosen a more formidable opponent. What we do know is that he has already thrown some big spokes into the wheel of a model which favours the global flow of goods, capital and labour on a basis geared towards the maximisation of the share of GDP which goes into corporate profits rather than labour.

If this interpretation is correct, we should anticipate efforts to break up some of the most powerful global corporations with large shares in their respective markets. Mr Trump might not have read Lenin, but he certainly seems to understand Adam Smith’s emphasis on the primary importance of competition, free, fair, and unfettered by excessive concentration. Once that is understood, trust-busting becomes logical.


Fascinating though the politics of all this undoubtedly are, the decisive issue is likely to be economic. Essentially, can nationalism deliver more for American voters than globalisation has achieved?

The reality is that, in pure economic terms, globalisation isn’t a hard act to follow. The essential premise of globalisation is that profits can be increased by locating production in the cheapest places, whilst continuing to sell goods and services in the (relatively) wealthy West.

There was always a huge contradiction at the heart of this philosophy – essentially, if well-paid jobs are shipped out of Western markets, how are Western wage-earners supposed to carry on with high levels of consumption? Thus far, the answer has been to make credit cheaper, and more readily accessible, than it has ever been before. This strategy has landed us with extraordinary levels of debt, unprecedentedly cheap money, and all of the risks associated with financial adventurism.

According to SEEDS, the United States has not bucked the trend towards lower prosperity in the West. Whilst not as badly affected as, say, Britain or Italy, SEEDS indicates that the average American is 7.7% ($3,380) poorer than he or she was back in 2005.

Though GDP data appears to contradict this calculation, two factors can be cited to support it. First, an overwhelming majority (93%) of all growth in American GDP in recent years has come from internally-consumed services (ICS) – such as finance, real estate and government – whilst the aggregate contribution to growth of hard-priced, globally marketable output (GMO), such as manufacturing, construction, agriculture and the extractive industries, has been zero. (The other 7% came from increased exports of services).

Second, growth in GDP has been far exceeded by an ongoing escalation in debt. Comparing 2017 with 2005, GDP has grown by $3.25tn, but debt has expanded by $14tn, a ratio of $4.30 of new debt for each $1 of reported growth. By definition – and, latterly, based on experience as well – pouring cheap credit into the system to sustain consumption in the face of deteriorating wages is not a sustainable way of running the economy.

In short, there is a compelling case to be made that Americans are significantly poorer now than they were twelve years ago – and, were this not the case, there has to be a strong possibility that Mr Trump would not have become President.

The first conclusion we can reach seems to be that, in linking prosperity with nationalism, Mr Trump has been pushing at an open door. We cannot know whether his policies can deliver more for Americans than globalisation, but it won’t be all that long before we find out. Obviously, nobody should underestimate the opposition that Mr Trump will go on encountering from those whose economic interests he threatens.


320 thoughts on “#133: An American hypothesis

  1. A couple of notes about preparing for and surviving the collapse of civilization as we have known it, or maybe just the civilization in Britain and Canada, or maybe just the collapse of your carefully worked out system of medications, or maybe the collapse of your food system.

    First up is the New York psychiatrist Kelly Brogan. Brogan is a unique psychiatrist who never uses drugs. Instead her specialty is weaning people off their drugs…a hazardous and painful process. Here is what she has to say:

    ‘As a former atheist (a belligerent one), I certainly never thought I would be writing this: In order to successfully come off of or avoid psychiatric medication, an experience of conscious expansion is required. It might be called a spiritual awakening, a deepening of personal connection to something greater, or simply a connection to meaning.

    As my patients move through this process, I watch for the window during which the ego breaks open. The mind then engages in its death throe efforts to freak them out, scare them, and convince them that EVERYTHING IS WRONG and nothing is going to be okay, ever. I wait for this because it is what initiation feels like, and I know that the light follows it.

    My patients don’t take psychedelics during their tapering processes; however, they do meet with the dark night of the soul that can be visited through the experience of psychedelic journeys. This brink of consciousness—when traversed, embraced, and subsumed—can represent a kind of death of a former self and a rebirth into a new, expanded self-agency.

    The survival of this trial is highly disruptive. In fact, the cost of one’s new life is their old life. And everything is subject to review, calibration, and reintegration.’

    What Brogan is saying bears a resemblance to what the well-known author and university professor Michael Pollan says in his current book about Psychedelics, which are now an acceptable topic in the US scientific community.

    A completely different path is illuminated by Brie Arthur, author of The Foodscape Revolution and the upcoming book on grains in the suburban landscape. You can follow her on Twitter at:
    Brie Arthur @BriePlantLady.

    Brie’s thesis is that, in the US, we have an enormous amount of land wasted in the suburbs growing an excessive amount of turf grass and boring and useless perennials. The Foodscape Revolution is about how this land can be used to produce BOTH food and beauty and care for the natural environment. The land can either be professionally managed by a landscaping company, or individual householders or small co-ops can band together. When she tackles the subject of grains, she is moving from the undoubtedly healthy but not very calorie dense vegetables into the calories which have supported civilization for the last 10,000 years.

    None of these people have any clue about preserving monetary value through a currency crisis…if that is even possible. But it is also possible that focusing on what you CAN do, which will also help you survive a crisis, is a good idea. Take the drugs, as an example. The British government is taking extra steps to insure the continuation of drug availability in case of a hard Brexit. Can you imagine them bringing Kelly over as a consultant on how to use Brexit to create a ‘drug free’ Britain?

    This is definitely not Donald Trump’s brand of Realism.

    Don Stewart

    • It’s debt-financed, and helped by familiar shortcomings in calibration.

      This year, about $1tn will be spent on stock buy-backs alone, and the fiscal deficit will be not far behind. You don’t even need to add in other forms of borrowing by businesses (including cash-burners) and households to see how all this new debt can add 4% to a $20tn economy.

    • So they’re playing the music then and can’t tell the difference.

      I hope you found that article about the UK’s worth amusing from the Telegraph.

    • Official stats, too, accept this type of number as a component of national “wealth”!

      The really frightening thing is that decision-makers and so much of the commentariat seem to believe it, too.

      It puts me in mind of somebody sitting in a waterlogged boat, singing a cheerful song as it draws ever nearer to Niagara Falls.

    • As a young professional person with a young family trying to make my way with no financial support from parents. I feel like I have turned up late to a game of Monopoly and all I can now do is pass Go and pay rent, because everything has been bought up.

      There are 3 things I am anticipating:

      1. Gradually go bankrupt through increasing costs and declining wages.
      2. The Chance deck gives me something to help (I play the lottery)
      3. Someone flips the board and we start again.

      Working hard and being honest doesn’t seem to be working out for us.

      I voted Brexit purely in the hope it will help flip the board.

    • It’s been grotesquely unfair when seen in inter-generational terms. It might be some (small) comfort to recognise that the gains of the “winners” are largely on paper, and cannot be realised, especially now that younger generations have been blocked off from prosperity.

  2. I have never really paid too much attention to this “Brexit” thing.
    OK, I did not have a vote on the issue, but I have always just viewed it as a stepping stone to where the UK is heading anyway.
    So Brexit or no-Brexit, I see the UK as on the slippery slope to financial and economic oblivion.
    I view president Trump in much the same way.
    Although some have speculated that he is playing a covert geopolitical game of 3-D chess with the deep state, I sort of find that hard to believe.
    What I do believe, is that he does not have the intellectual capacity for such deep strategic thought.
    That does not imply that he is an Idiot, or is mentally challenged in the way that George W Bush was, I simply see him as being more impulsive and pragmatic in his own simple sort of way.
    The law of averages would suggest that he will get a few things right, but just as many things wrong.
    However, just as with Brexit, the USA also has its path ahead laid out for it, whether with or without Donald Trump, the USA is heading for Civil War and bankruptcy.
    Whether it is under Trump’s watch or someone else’s, it’s going to happen.
    Of course, that is not to say that I will be sitting here in my favourite Biergarten with my chilled glass of Weissbier enjoying watching the Anglo-Empire burn, because here in Europe the break-up of the EU bureaucratic quasi state, is also on the cards. The anti immigrant riot of last weekend in Chemnitz is just the beginning of what will become an increasingly popular participation sport. ( seeing as the German national football team is doing so poorly )
    Of course, we here know, that declining prosperity is the fundamental driver behind all of this, and as we all know, we cannot increase the prosperity of 7-Billion people on a planet of finite resources.

    • Globally, our problem is the rising energy cost of energy, combined with unfettered growth in population numbers.

      The world in general seems to think it can borrow and spend its way out of this problem, even though the problem itself is founded in physics, not money. What the Anglo-American economic model does is add “…and privatise” to the folly of “borrow and spend”.

  3. Maybe, much as Lord Byron wrote published some poems and ‘woke up one day to find himself famous’, Donald Trump tried to cut some deals in his usual style, and woke up to find himself an economic Realist? 🙂

    • Xabier, You may just well be right !
      But, I think that his Realism will be more through accident than by intent !

      It’s like me playing pool.
      I just smash the balls in the hope of pocketing at least one somewhere, whereas a good player ( one who knows what he is doing ) will say, ” No.8 ball – top left pocket”, and he do it !

    • I agree with you Johan; the idea that an egomaniac like Trump could take on the Deep State on his own is absurd; after all he is nearer to them than the people who voted him in.

  4. Good Read:
    Hierarchy is the Enemy of Learning

    To use two recent examples from my own modest self:
    *Don’t desperately try to fix the drug supply chain…get rid of the drug dependency
    *Don’t try to reform the global food system…grow your own, preferably communally.

    I have been this pessimistic about the continuation of BAU before…in 2007 and the years immediately following the crash. But the system turned out to be more patchable than I thought it was. In 1959, when I was in college and computers and systems science were coming into being, I and my peers seemed to be at the polar opposite: just wait for the old guys to die and it will all get better. That didn’t work out very well. The baby boomers took over and few of my generation had any clue what was happening among this huge influx of young people.

    So…I’ve been wrong before. You’ve been warned, in case you had any doubts on the subject.

    Don Stewart

  5. ‘It puts me in mind of somebody sitting in a waterlogged boat, singing a cheerful song as it draws ever nearer to Niagara Falls’

    ‘We’re all right Jack by any chance?’

  6. Productivity question :


    Does answering emails outside of work add our productivity? I’ve a feeling that is doesn’t because they’re being sent – mostly by other members of the same company – who can’t wait for the answer for a problem or no longer wish to work out the problem themselves or are looking for reassurance.

    It seems to me that email has created ‘non work’ that just adds to people’s workloads.

    • Thanks Johan – a really good read. I also like one of the comments attached to it:

      ‘The millennial work ethic makes perfect sense. Why should they lift a finger to support the selfish fucking baby boomers that rang up 300 trillion in debt and unfunded liabilities?’

      Here in the UK our very own DVLA (vehicle licensing) department has had a chequered history with sick leave at one stage running at 3 weeks pa – documents going missing leading to millions of pounds worth of car theft and data being sold to criminals so they can find out where you live (only £2.50 a car Guv).

      I guess the productivity gains we need are those which involve doing more for the same or less energy.Obviously those companies which employ people who drive in to work and then spend huge amounts of time on their mobile phones is not a god use of resources.

  7. Donald
    I was around when email was invented. It was used on the private network run by the US government, and the private networks run by a few corporations for internal use. I would say that the signal to noise ratio of those early messages was very high. E.g., some scientist would report the results of an experiment long before the journal article could be published.

    Today, the signal to noise ratio is vanishingly small, not because there are fewer experiments being performed, but because email has turned into a frivolous matter generating enormous volumes.

    My children and grandchildren would object strenuously to the use of the word ‘frivolous’. To me it simply means that ‘the recipient isn’t willing to pay for the content’. In the early days, the government scientists and the corporate scientists WERE willing to pay for the content.

    The problem that Silicon Valley faced was monetizing something that people weren’t willing to pay for…e.g., the selfie you took at Mt. Rushmore. They solved that problem, first, by selling advertising, and, second, by selling information about you to advertisers and potentially to governments bent on repression. Some industries, such as the porn industry, have been nearly destroyed by the ‘free information’ movement. For example, I heard an interview with a young female producer of porn who begged people to ‘buy your porn’ rather than visit the ‘free’ sites which feature overwhelmingly amateurs who upload their videos. The ‘quality purchased porn’ people flourish best when they can sell DVDs. But the market for DVDs has collapsed…according to the female producer. She has turned her talents to producing both soft and harder core porn for the late night television market…which is dependent on subscriptions but also selling advertising (and information??).

    It would be interesting to hear what the 1930s economists who developed the National Accounts (GDP, etc.) would think about these giant industries built on content which people aren’t willing to pay for.

    As the product became eyeballs and information, then more activity, as opposed to economically productive activity, became the goal. And so we get to the point where we are today. Enormous amounts of wasted time. And people are surprised that the internet hasn’t boosted productivity!!

    Don Stewart

    • and it does not stop there either.
      My sister in Scotland has just had the streets in her town dug up by Virgin Media laying Fibre-optic cable.
      I ask myself, is this a sound investment in infrastructure ?
      Well if it were for the use of business to make them more competitive in the world markets then Yes, maybe.
      .. but as I see it, it will only be used by fat couch potatoes to spend even more time in front of the gogglebox, watching more and more useless reality TV shows, ( albeit in stunning HD picture quality ! – Wow – what a bonus ! ! ! )

  8. Trump and Realism
    I was just up at the bookstore, and can report that a casual inspection of the books on display reveal a change. For many months the books have hammered on the theme of ‘Putin and Trump’ in cahoots…how the Russian Mafia put Trump in the White House, and etc.

    Today, I saw a new book which details how Trump has gutted the Diplomatic Establishment in the US. The blurb indicates that the author talked to virtually every senior diplomat in Washington, active and retired. The gist of the book is that Trump has put the military in charge of international relations and dismissed and dismantled the diplomats.

    While I didn’t read the book, I would guess that it can be summarized as:
    ‘You are our enemy. You can submit to our will, or you will be destroyed in war.’

    The same variations play out in terms of trade negotiations:
    ‘If you fail to submit to our will, then we will use the dollar denomination of debt in your country to bankrupt you.’
    Which is another way of talking about the leveraging of the US dollar as the reserve currency.

    In both cases, it is ‘submit or be terminated’. It sounds like Rome in its power.

    It is worth remembering that Ronald Reagan, according to Paul Craig Roberts, came into office with the same sort of attitude toward the Soviet Union, but ended up negotiating arms reduction treaties. Those treaties are now in shambles. While Russia has fulfilled its promises, the US has not…and most likely never will. Reagan was apparently repelled when the exact workings of the black box that triggered nuclear war was actually explained to him.

    Whether Trump will stick with his initial instincts remains to be seen. Is he just negotiating? Does he care how many Syrians die or become refugees? Was Hillary actually the less warlike candidate?

    Don Stewart
    PS I completely fail to understand why Britain and France are always the first to sign up for attacks on Syria. There are lots of ways to get gas into both countries without going through Syria. Russia has begun to predict the village, the day, and the time when the next ‘fake chemical poisoning’ will take place.

    • Somebody in the Telegraph was very dismissive of my concerns for the World economy as I raised the possibility of a GFC 2 – I’ve just been back too quote what he said but my comment has been removed – how odd.

      Still that’s life – now two more headlines

      Foreign investors ditch UK bonds at record pace, threatening the pound

      Germany aligns with the UK against Brussels on £100 trillion derivatives danger (all to do with transactions being left in legal limbo after Brexit)

    • Fiat currencies fuck up hard working people. Especially in a globalized world.

      Competition is war, and war is for apes.

    • Dr. Tim,
      do you think that falling EM currencies can be seen as positive for the UKL ?
      Short term at least anyway ?

    • The only way that would work would be if GBP was seen as a safe haven currency. I suppose it’s possible, for those who have no real idea about the state of the British economy – but, even then, I think “Brexit” prospects dominate market sentiment around GBP. My hunch is that GBP might spike on news of a “Brexit” deal, only to fall back on reflection. I certainly wouldn’t want to be holding it during a crisis.

    • The situation with the UK economy is clear – to anyone who knows what to look for, and graphically so based on SEEDS – and tragic. I really wish that there was a solution, but I’ve failed to identify one at this late stage.

    • @Dr Morgan @Bob J

      As far as the sellof of UK bonds is concerned (i.e. “canary in the coalmine”), I’m also concerned about the sellof of Japanese stock as outlined in this article from Financial Times:

      Why the yen will make a fool of forecasters


      So far this year, foreign investors have exited Japan by selling > $ 35 B of Japanese stock

    • The JGB market has ceased to exist as a real market, the only buyer being BoJ, using QE funds. But the BoJ cannot similarly backstop the stock or corporate bond markets – though China is trying exactly that right now – so this is indeed very significant.

  9. Correction my comment hasn’t been taken off – the Telegraph had printed two similar articles. This was the response to my concerns regarding the World economy.

    ‘Forecasts of imminent global financial Armageddon are ten-a-penny and can be heard from habitual shroud-wavers and enthusiastic crash trolls, convinced they have a special talent for predicting the future, every day of every week of every year. They are almost always wrong’

    I responded pointing out the gross overvaluation of assets and the debt bubble we’re all sitting on.

  10. Practically all of the UK’s fossil fuel energy is now imported. Considering that the WTI prices of coal, oil and natural gas have risen since the late 1990s, this is a dramatic reversal of fortune.

    The only option remaining for achieving a reversal of ECoE would be a large and rapid expansion in the use of nuclear power, along with the reconfiguration of the UK economy to run on electricity.

    These articles suggests that the high capital and operating costs of nuclear power are largely a product of regulatory ratcheting.



    This study by Weisbach suggests that light water reactors have the highest EROI of any electricity source.

    Click to access Weissbach_EROI_preprint.pdf

    This strongly suggests that the present high cost of nuclear power is due to poor regulation, which elevates labour costs, build times and requirements placed on components, in a way that pushes costs through the roof. This happened for the simple reason that the public were concerned about the danger of nuclear accidents following Three Mile Island, Chernobyl and Fukushima. The problem is that we have run out of viable alternatives.

    I would suggest the creation of a state owned National Nuclear Development and Construction Company, along the same lines as the French AREVA, following the UK’s withdrawal from the EU. This would be publicly funded and charged with the role of building a new fleet of fifty or so large light water reactors. With government borrowing the money, financing costs will be lower. With such large economy of scale, component supply lines can be developed domestically and the build process can be standardised allowing rapid construction. A new approach is needed to licensing and regulation that maintains safety whilst keeping total costs down.

    With an abundant supply of cheap electricity, roads and railways and easy access to the sea lanes, the UK could then be in a good position to rebuild itself as a high tech manufacturing nation. This may require a more mercantile and nationalistic attitude than we are accustomed to.

    • Thanks, very interesting. I need to read your links and reflect, but my initial thought is to doubt very much if the UK has either the time or the resources to follow through on this. The British economy, according to my SEEDS model, is now in grave and worsening trouble.

      I’ll reflect, though, over the weekend……

    • Back in the 1980’s my father told me that we should start the switch to nuclear and keep on repeating this (he hated wind turbines) well into the 2000’s…

      I agree with Tim that it’s probably too late now for a major change. With the relatively cheap oil around in the 80’s 90’s and early part of the 2000’s there would have been little incentive to change.

      Everyone was too busy having a fossil fuel party especially the deregulated rich City kids.

    • @TonyH,
      very informative comment.
      One other factor that needs to be considered though, is that the UK no longer has the required technical skills to do this.
      Due to the feminisation of the Education process over the last 25yrs or so, the UK no longer has the STEM’s graduates required to perform such a task.
      ( STEM’s subjects are deemed to difficult for our Snowflake generation ).
      This also would scupper any attempt at turning the UK into any kind of High-Tech manufacturing nation. Go into any University / College in the UK today and the only students that you see on the STEM’s courses are foreign students, primarily from Asia.
      So unless the UK is going to buy reactors from Russia, it ain’t gonna happen !

    • @TonyH@Johan

      As I see it the UK has very little choice; it has to become a high tech manufacturing nation. Given that we should import the skills necessary.

      The problem isn’t the skills it’s getting the politicians to think more than five minutes ahead; we just seem to bumble on year after year. There is also the still neoliberal attachment to privatise everything and thinking that a small state will conquer all. If you look at some states (South Korea and Japan come to mind) the role of the state as an enabler and pump primer has been pivotal at times in their history but we seem to prefer chaos.

    • Bob (and others):

      How much time do you think the British economy actually has?

      According to SEEDS (though we can back this up from conventional metrics), prosperity is already more than 10% below peak, and is continuing to fall. It’s become a credit-based economy, complacent about energy, which is now also paying the price for favouring capital gains over investment. As this downwards trajectory continues, a series of ‘deterioration climacterics’ will be crossed.

      Bluntly, time has run out.

    • @BobJ,
      You make a very good point. Dr. Morgan himself has often lamented on the poor quality of politician in the UK. So politics is a hurdle too.
      However, if becoming a High-tech manufacturing nation again is the UK’s only salvation, then I am afraid that the UK will be damned.
      Engineers and Scientists are not respected in the UK in the same way that they are in Germany or Austria. It’s a cultural thing, so unless the UK is willing to provide an elevated social status, free mansions and a Hummer full of hookers to each and every engineer that they get into the country, then nobody will come.
      For too long the UK has honoured Lawyers and Accountants, and has trodden on the people who actually do things.
      This is now the result of that philosophy. Chickens –> Roost.

    • @Tim@Johan

      Put bluntly I think we have little choice; although we are far down the road to perdition the alternative is an ever worsening situation and cannot be a reason for lack of action.

      I agree with you both; like the Irishman said when asked directions “I wouldn’t start from here” but we have no alternative to make the best of an extremely bad job. However, and regrettably, I keep coming back to the same answer: collapse may not be a sufficient condition for salvation but it is a necessary one. The question then remains: does sense come out of chaos? Faites vos jeux!

    • Though (comparatively) little use is made of some of its capabilities here, SEEDS is a very powerful technology, predictively as well as analytically. I’m convinced that what it is telling us is well ahead of the pack.

      The trouble is that there are no realistic assumptions which can be input to deliver ‘happy ever after’ for the UK economy.

      The single most dangerous purely economic risk is a currency crash.

    • “The only option remaining for achieving a reversal of ECoE would be a large and rapid expansion in the use of nuclear power, along with the reconfiguration of the UK economy to run on electricity.

      This strongly suggests that the present high cost of nuclear power is due to poor regulation, which elevates labour costs, build times and requirements placed on components, in a way that pushes costs through the roof. This happened for the simple reason that the public were concerned about the danger of nuclear accidents following Three Mile Island, Chernobyl and Fukushima. The problem is that we have run out of viable alternatives.”

      A very interesting post, thanks. Three Mile Island and Chernobyl did indeed create a political will for tighter nuclear regulation, but that regulation paid off at Fukushima when the over-engineered reactors performed extremely well given the questionable political decision to build them in an earthquake zone.


      I think it is that regulation and over-engineering that keeps nuclear power politically viable. I think if Fukushima had been an accident comparable to Chernobyl then building further nuclear reactors in the UK would be politically almost impossible, whatever the EROEI.

  11. I read that Toyota sold some bonds to the ECB at a zero interest rate. Does this mean that when China and Japan governments run out of faux money, the ECB will print some more for the corporations??? (A little tongue in cheek!) It’s all to Byzantine for my feeble brain.

    Don Stewart

    • @houtskool

      I believe we’re comparing apples to oranges…

      From my knowledge, Toyota (& numerous other corporations (who had an “entity” based in Europe) were entitled to issue bonds purchased by ECB with little interest on these bonds. Many corporations have used this “trick” to get a lot of cheap funding for their operations, for share buybacks, for dividends to shareholders,… a real party.

      Now, as far as Swiss National Bank is concerned, the Swiss Franc was pegged to the euro. At some point, SNB decided to “unpeg” franc to the euro. Within a few days, value of franc rose by > 15-20%. And to limit the rise of franc, SNB “printed & sold” a lot of francs (which lowered its value) by purchasing US dollars, Japanese Yens,…

      And, the proceeds of this massive “sale of Swiss currency” was used to purchase stock in Apple, Microsoft,… stock which is part of the current assets reported in SNB’s balance sheet…

    • Yes JM, i know that buying stocks with surplus created francs is a different ballgame. What i meant, and should have added, is that central banks play a major role in our current financial system. A role that is, in my opinion, much much bigger then most of us understand. When they quit, the supermarkets will be empty within one week. Their efforts will suffer from diminishing returns, in an exponential way. So, when things go south like in 08/09, we will experience a monetary earthquake. Financial markets know they’re backed by these idiots. They cannot print cheap surplus energy though. CB’s backstop everything, gov bonds, corporate bonds, stocks, everything is being held together by the fiat idiocy.

      I feel the need to mention this, many of my collegues don’t even know what a central bank IS, and why they excist.

    • @houtskool

      Yes, indeed, many people are unaware of central banks and their functionality. Usually, central banks are intended to act as “buffers” and, through proper monetary policy, modulate employment and growth. But, since GFC I, they’ve jumped in the bandwagon and became premier driving forces in the economy (assets buyback from distressed banks, providing cheap money to jump start the economy,…). Great but this should not have lasted long, which is not the case.

      And, nowadays, “Davos Old Boy’s Club” have teamed up with central banks and they both exert full control on the economy and governments. For instance, they were able to unwind measures set up after GFC I (see article “Inviting the Next Financial Crisis – The New York Times – 2018-08-25”) to protect people from GFC II.

      BTW, very bizarre, FED is a private bank owned by retails banks in US, Swiss Central Bank is a private bank owned by regional “cantons” & investors through stock available on the Zurich stock exchange (both of which have to answer to their shareholders…), BoE & Bank of Canada are owned by the govt,…

    • @Houtskool

      Re the bail out of the two Italian banks I would have thought that the EU bail in procedures should have been adopted unless their circumstances fell out side somehow.

      However, it doesn’t surprise me because, although the bail in procedures were meant to obviate bail outs by the taxpayer, I believe that if ordinary depositors lost money (which is inevitable sooner or later) then we’d have riots in the streets. Bondholders are investors and have to accept some risk but have a return but depositors are just parking money and have no return. Although bail in is policy I don’t think it will ever be adopted on any scale and that back door state bail outs will continue.

  12. Tim what did you think of Tim Worstall’s piece in CapX –

    The only bit that seems to be badly worded is the section on the minimum wage:

    Perhaps we do want those in work to have higher incomes – if so a better solution is transfers such as working tax credits, not lumping more costs on employers’

    Nothing wrong with his solution it’s just his use of the word ‘perhaps’

  13. Meanwhile, in the US

    Kunstler is a provocateur, but enjoyable to read in a sort of malicious way. I also think he is pretty truthful. As to the crowd in Indiana not buying the triumphalism of Trump’s speech, Art Berman has made a couple of interesting tweets in the last couple of weeks. One shows that the energy content of Permian Basin oil (the only oil basin in the US showing any growth) is 7 percent less than the average US refinery feedstock. Both the Bakken in North Dakota and the Eagle Ford in Texas are 4 percent less. So the big boom in US production, measured in barrels, is inflated and doesn’t count the collateral damage. Meanwhile, and perhaps relevant to the Indiana crowd reaction, the increase in US gasoline consumption is now flat to slightly negative comparing summer of 2018 to summer of 2017. At the beginning of 2018, the increase was running around 1 percent.

    So we fortunate people in the Home of the Free and the Land of the Brave have a dysfunctional government and declining energy by any realistic calculation. Meanwhile, the Huddled Masses Yearning to be Free in Europe can only look on with envy.

    Don Stewart

    • Don, once the pension funds and other yield-craving investors realize the shale oil cos are not going to be able to pay back their loans, realize there is no greater fools left to sell the bonds to, and stop shoveling their cash into the shale cos, the shale oil cos won’t be able to borrow to continue pumping shale and paying dividends on their shares anymore. Only the CBs of the world will be left to shovel the necessary funds into those companies to keep the shale oil flowing and maintain the illusion of – forget growth – at least “stability”, oil supply at an even keel. Here’s hoping that the CBs will purchase oil co bonds directly and hide them away for ever on their balance sheets, at par, in a repeat performance of their purchase of MBS from the banks. The only other alternative once the Saudi America propaganda fails is nationalization, which will send a very disturbing message to the markets. (This sucker is going down!) Either way, it means cannibalizing existing purchasing power by printing money.

    • Well the information on shale oil is al out there but investors appear to be suffering from the same blindness that investors (banks) suffered from before the crash in 2008.

      I wonder when Saudi Arabia is going to come clean about their oil reserves

    • @ tagio @ Don Steward

      I’m always amazed how shale oil producers are able to keep business going on…

      1-2 years ago, I did compile cash flow (10 year period) of shale oil producers. If I recall OK, I believe only one producer was having a positive “operating cash flow”; others didn’t. Which means that those other producers were not able to earn enough money from their operations to cover maintenance & investment costs ( positive free cash flow, I believe) and to redeem shareholders with dividends and get a positive net cash flow.

      But they were still able to make some maintenance, investments and dividends to shareholders by constantly borrowing money or issuing new shares. This has been going on for > 10 years and I’m amazed people still invest in these producers…

      And, if I recall OK, I believe that the single producer (Chesapeake ?) who had a positive operating cash flow didn’t have sufficient funds to invest in maintenance and get a positive free cash flow, and forget about having a positive net cash flow.

      So, it should be quite obvious to not invest in this sector but, by George, these guys are really very good salesmen…

  14. Quote from Statue of Liberty
    Send me your tired, your poor, etc.

    That poem was written in 1883, when the US had just passed the Chinese Exclusion Act, which remained in force until 1943. The population of the US in 1883 was 116 million people. Now the population is 327 million. In 1883 the government still officially recognized a ‘frontier’ which was open to homesteading.

    It may be sobering to look at the Ecological Footprint website:

    You can look at a world map and move your pointer across the countries and get the spare capacity or the deficit. The US has a large deficit. Which means that it cannot support itself sustainably. The country with the largest surplus that I found was Guyana, in South America, which was the scene of a recent large oil discovery. Some countries in central Africa also have surpluses. Check Chad in Africa, just south of Libya. You will see that the capacity line has been declining steadily, which means life is getting harder. And so we have refugees crossing the Mediterranean into Europe, where all the countries have deficits.

    Now a sane person might question the wisdom of an immigration policy which encouraged people to move into a country with a deficit. Of course, the entire world is now in deficit, so we are between a rock and a hard place. Everyone cannot emigrate to Guyana. And as financial and energy arrangements disintegrate, and as climate change disrupts the capacity line, and as population increases steadily, we are likely to see more desperate migrants. But moving desperate people to the US and Europe can’t be the solution, unless one intends to reduce the load from the current population by a large amount. Or else the US and Europe find out how to corner more of the world’s resources, leaving less for the other countries.

    I did not know that James Comey, after one of his spats with Donald Trump, had quoted the poem on the Statue of Liberty. There was an article about it in the Atlantic magazine. It is perhaps an indication of just how absurd politics is in the US (and in Germany and Britain) to fail to recognize the disconnect between moving more people to the US, which already has an ecological deficit. I don’t see Comey proposing any solutions.

    The last US president who actually said something sensible was Lyndon Johnson. When told that Mexico wanted more foreign aid, he exploded: ‘Not until they get their birth rate under control’. If you look at Mexico, you will see a deficit also. Note that these deficits are per capita. IF Mexico had actually done something about birth rates, their subsequent history might have been different.

    I realized, when looking at them, that these ecological footprint maps fit very nicely into the analysis for which SEEDS focuses on the energy and finance pieces.

    Don Stewart

  15. Mexico
    If you move the slider to 1962, you find that the population of Mexico was around 41 million. It has more than tripled. By manipulating the sliders, you will also find that IF Mexico had not experienced a population increase, they would currently be in surplus, even at the higher GDP per capita figures.

    If politicians and the public are unwilling to look at the facts, then the deep pessimism of Bill Catton, the author of Overshoot (who died recently), will have been justified.

    Don Stewart

  16. @ Jean Marc
    I think a lot, maybe most, institutional investors buying shale oil bonds and stocks understand the reality. I find it hard to believe that their analysts don’t look at the underlying fundamentals and know the score. I suspect they are gambling that they can make 6% or 8% on the bonds or 4% on the shares and get out in time by selling to a greater fool. A very dangerous game, but the money managers are charged with making money. Now that there is no real organic growth anymore, all that is left is these financial games played with massive, cheap leverage.

    • @ Tagio

      I agree: large investors know about the risks involved investing in this area.

      But, a great number of “ordinary citizens” (with little knowledge) have invested their retirement savings in MLP’s (Master Limited Patnerships), through sales people luring a great return (with tax incentives) investing in MLP’s (see https://global.pimco.com/en-gbl/resources/education/master-limited-partnerships-mlps). A quick search on MLP’s will direct to a number of articles pointing to “ordinary citizens” having lost a lot of $ in this venture.

      Also, “ordinary citizens” have purchased equity in shale production through stock exchanges.

      Furthermore, nowadays, these sales people have rebranded their sales speech: they propose to invest in Special Purpose Acquisition Companies SPAC’s (see https://www.reuters.com/article/us-usa-shale-midstream-idUSKBN1950E6), investment vehicles targeted to lure “ordinary citizens” in this new bonanza.

      So, I agree that large institutional investors know about the business; but there’s a lot of “ordinary citizens” (who solely read headlines in newspapers) who have no knowledge at all of the risks involved in shale production.

  17. @Jean Marc
    I have a ‘financial advisor’ who I mostly ignore. He has suggested several times that I put money into shale. I refuse, and explain that it is a ponzi scheme. He responds that those who have invested have mostly made money. By the time their high coupon bond comes due, they have raised more money so they can redeem the bond.

    What’s to worry about? Or, as a trader said just after the 2008 collapse, ‘you have to keep dancing so long as the music is playing’.

    Don Stewart

    • @ Don Stewart

      I agree this is kind of a Ponzi scheme: new investors are brought in to redeem bonds issued to previous investors.

      And, also, pls see my comments to @Tagio about shares in MLP’s and SPAC’s sold to “ordinary citizens” who lost a lot of $ when shale production went “belly up” in 2016-2017

    • One of the things that gives me wry amusement is hearing defences or criticisms of “capitalism” – because free market economics was abandoned during 2008-09 – when too much stood to be lost if market forces had been allowed to run their course.

      I mention this because one strange result has been to abolish fundamentals in capital markets. In times past, investors would have avoided, not just ponzi stocks, but cash burners more generally, and any stock with excessive leverage, especially where that leverage had been taken on for purposes like stock buy-backs (which are legitimate, to my mind, only where they return operating cash surpluses, and/or divestment proceeds, to stockholders).

      If you look at economic fundamentals, even if only as measured using failing conventional metrics, you cannot justify market levels anywhere near where they are today. Instead, markets have become plays on cheap money.

      This is as absurd as anything in the annals of financial folly. But it must end in the same way. Either markets crash, or the value of money does.

    • I see all this but not being savvy in finance it’s hard to describe except to see that it has to end badly. The FIRE sector has its own separate existence with respect to the economy and crosses it only when engaged in stripping wealth out of it for the Financial world’s own ends.
      It also doesn’t help when the vast majority of economists are deliberately clueless about how the economy operates, that it doesn’t turn on taxes or borrowings but is assumed to do so, largely because it suits the FIRE sector to have us believe such stupidity. So we the people are screwed from both directions. WE NEED the economy to crash and the sooner the better just in case there will be something to save.

  18. Report from China by Albert Bates
    (I was able to read this without being a Bates patreon supporter.)

    The gist of it is that Albert has been invited to speak to a ‘rural development’ conference in China. The first talk he hears is a blast at ‘Anglo-American, Neocolonialist’ style ‘modernization’. Plain talk that all the government slogans over the last 10 years have been meaningless. A straw-bale house held up as a better model than destructive industrialization.

    Albert is, of course, flabbergasted. He finds that the Chinese sitting next to him are not shocked.

    See the pyramid of assets in the first slide…does that ring any bells for fans of Dr. Morgan?

    Don Stewart

  19. I made this comment on Ugo Bardi’s blog, in response to some ‘fake news’ from the British Press. It is also relevant to the concerns on this blog….Don Stewart

    A few thoughts about media falsehoods, Seneca Cliffs, and the Micro reflected in the Macro

    Dan Siegel is a Los Angeles Psychiatrist who has been studying the formation of and management of minds…which are not the same thing as brains. His latest book is Aware: The Science and Practice of Presence. He traces a theory from Quantum theory to the Mind. You can read about in the chapter titled The Nature of Energy, The Energy of the Mind. I won’t try to defend it or critique it in any detail.

    I will simply note certain parallels between the way the micro world demonstrably works and the way we empirically see the macro world of the Mind working. From page 191:
    Quantum physics invites us to examine:
    *the probability nature of reality
    *the potential influence of measurement and observation on probability
    *the relational nature of reality and the entanglement of quanta and its nonlocal influences
    *the arrow of time or directionality of change that may manifest only at the macro state level of reality.

    Now four parallel empirical observations at the macro state:
    *Haste Makes Waste and A Stitch in Time Saves Nine are BOTH true. But we won’t know which one was true in a particular instance until we make a measurement, which in the macro world may be considerably later.
    *If the Powers That Be can influence us to express an opinion NOW, then that sets in motion a chain of events at both the micro and macro levels. If the British Press can get us to agree about the awfulness of the Russian government, then our own ability to be in the undecided state, or in the state of flexible response, is diminished. Used car salesmen know this. The interminable political polling in the US where we are asked ‘do you agree that Donal Trump has low moral values?’, or the converse, is an attempt to move us off of neutral and flexible and into a stance with deep ruts which will require a lot of energy to get out of.
    *While the average English person has no real contact with Russian citizens, they do have contact with their own thoughts. And they are wedded to the notion that their own thoughts are pure. So the political manipulation is to get those who shouldn’t be making any decisions because they have no skin in the game, to prematurely make decisions which favor the elite who control the media.
    *While quantum events alone have no time component, once the quantum events interact with the macro world, the arrow of time insures that the action will not be easily overturned. Once a person agrees that fossil fuels can sure make life easier, it becomes ever harder to get the person to foreswear fossil fuels. The process is similar to entanglement…once two electrons are entangled, it takes twice the energy to flip them.

    The Seneca Cliff may follow from the inertia which is generated when people prematurely decide something, frequently in response to prompting from the Elite controlled Media. If people kept Haste and Waste and Stitch in Time both pending for longer periods, there would be less build-up of entanglement. But, alas, that is not the world we live in. And so we experience Seneca Cliffs.

  20. Headline and article from The Daily Telegraph. It’s a premium analysis so I’ve had to copy it over.

    Seems like we never ever learn –

    ‘The ticking time bomb that could blow up into a financial crisis’

    When hedge fund managers from FrontPoint Partners drove through a Florida suburb in the run-up to the financial crisis, they quickly realised the US housing market was built on sand. Anyone could grab a 2,000 sq ft slice of the American dream in the Sunshine State.

    These toxic subprime mortgages were then bundled together in collateralised debt obligations (CDOs), given top ratings from credit agencies, and sold on in a neat, explosive package to buyers unaware that the US housing bubble was about to burst.

    The famed hedge fund depicted in Hollywood blockbuster The Big Short would cash in on the market’s over exuberance.

    “The buyers of so-called triple A, double A, triple B, double B tranches in these collateralised loan obligations (CLOs) are making an investment off data that is dubious at best,” says Robin Doumar, founder of credit manager Park Square Capital.


    Doumar is not casting his eye back to the housing bubble but calling out a new one that could be emerging in the risky leveraged loan market, which fuels private equity buyouts and bankrolls companies with poor credit ratings.

    “With the stack of securities being sold to investors in a CLO, I don’t think anyone is doing their homework on what is the underlying pool of collateral, and in that regard I think it is very similar to The Big Short.”

    With the 10-year anniversary of the Lehman Brothers collapse this month offering a ghostly reminder of past excess, some believe that the surge of covenant-lite loans in the leveraged loan market could be another ticking time bomb.

    “It’s as if the financial crisis never happened and the lessons from it are ancient history,” says Jonathan Rochford, portfolio manager at credit manager Narrow Road Capital.

    Amid fervent demand from lenders, these below investment grade loans have been stripped of their basic investor protections, like covenants, in recent years. Investors have piled into these risky but lucrative high-yield loans to obtain higher returns.

    Rochford explains that companies are “emboldened to seek ever weaker covenants and are taking advantage of the current conditions to borrow more at lower margins”.

    “The US high-yield market has grown larger and riskier since the financial crisis. Issuers of debt have the whip hand as buyers compete to gain an allocation in the face of surging demand from CLOs and retail funds.”

    Covenants require a borrower to pass financial tests, usually on a quarterly basis. These tests can stipulate how much debt a company can have or the earnings it needs to generate.

    But cov-lite loans now make up around 80pc of new issuance in the booming leveraged loan market, which surged past the $1 trillion (£770bn) milestone in the US earlier this year. In the UK, the leveraged loan market hit a record £38bn in 2017 and will have grown by a further 4pc this year if the current rate is sustained, according to the Bank of England’s latest financial stability report.

    A concerning emergence of exchange traded funds worth just under $8bn now allows retail investors to spin the wheel, according to data from ETF.com. Corporate titans have been gorging on debt in the leveraged loan market.

    Taxi ride service Uber tapped the market in March, French telecoms giant Altice has built an eye-watering mountain of debt from junk bonds and loans, while Blackstone will reportedly market the $8bn in risky loans it needs to fund its acquisition of a 55pc stake in Reuters’s financial and risk division next week.

    American Airlines, Four Seasons and Dell are other household brands to rely on leveraged loans. Doumar is far from being alone in fearing the explosive growth of this market. The credit ratings agencies, accused of being asleep at the wheel in the run-up to the crisis, are now among the first to sound the alarm.

    The quality of covenants has sunk to a record low, according to Moody’s. The ratings agency believes that leveraged loan investors “face significant future risks”.

    Its Loan Covenant Quality Indicator in the first quarter of 2018 climbed to a record 4.12 on a scale of one to five, with a higher score indicating weaker protections for investors. It argued that there has been “shift of power to borrowers” who have taken advantage of “favourable market conditions” and left investors with an “unprecedented” lack of protection.

    The International Monetary Fund also conjured up the ghosts of the last crisis when warning investors on leveraged loans. Lower-quality companies are enjoying “ample” access to credit and the market is “reminiscent of past episodes of investor excesses”, the lender of last resort said in its global financial stability report in April.

    The two organisations agree that the widespread abandonment of these protections will likely lead to more defaults in the next downturn. Cov-lite loans being of a lower quality will “exacerbate the next default cycle” and a surge in defaults would send shock waves that would reach the real economy, the IMF predicted.

    The intense demand in the leveraged loan market has fuelled the deterioration in the covenants. The balance of supply and demand leans heavily towards the latter. A borrowers’ market exists in which companies can issue loans without these basic red lines in the knowledge they will still be gobbled up by investors.

    Moody’s warned last month that investors are “under pressure to keep buying” and continue to “cede control” of loan terms. These loans track interest rates higher and therefore, hunger for them is increasing as they shield investors from Federal Reserve rate hikes in the US.

    The IMF warned that this “reach” by investors for stronger returns had driven the decline in loan quality. Derek Gluckman, a vice president and senior covenant officer at Moody’s, believes it is a trend that is likely to continue.

    “Until it becomes a big enough issue that people stop voting with their dollars we continue to see investment in the asset and there continues to be deterioration in these covenant protections.” The market has become “comfortable with covenant-lite” loans, he says. “It’s difficult to put the genie back in the bottle.”

    Taron Wade, director at LCD, S&P Global Market Intelligence, explains that an “evolution” in the investor base, first in the US and more recently in Europe, has also underpinned this shift. Institutional investors and CLO managers are now the main lenders rather than banks, which typically demanded a more active role.

    She adds that the loan market has become more like the bond market, which has few financial covenants and is also institutional investor-driven. Doumar believes the surge in cov-lite loans is just the tip of the iceberg.

    “The bigger problem is the overall erosion of documentation, which has become almost a joke. It has crept into the documentation that more and more cash from the company can be dividended out to the private equity firm when the lenders have not been repaid.”

    Furthermore, the US appeals court ruled in February that CLO managers, the biggest buyers of these risky corporate loans, will no longer be required to have “skin in the game”.

    CLO managers are now exempt from the post-crisis rules that stipulated that they have to hold some of the loans that they were packaging up to sell on.

    It might have started innocently but as the market has evolved in the last 10 years we’ve seen it transition to a much more aggressive structure
    John Puchalla, a senior vice president at Moody’s
    Cov-lite loans were once only given to the sturdiest companies that could be trusted to be handed more lax loan terms. Companies were lured by cov-lite loans in the aftermath of the crisis by their flexibility. While covenants offer investors protection, companies, in particular those vulnerable to economic cycles, such as the car industry, can struggle to meet the rigid terms of the loans in a downturn. Staving off default by meeting covenants led to companies self-harming.

    In the crisis, companies “were trying to do anything and everything” to meet the covenants and avoid default, John Puchalla, a senior vice president at Moody’s, explains. But a search for flexibility quickly morphed into an opportunity to ditch safeguards.

    “It might have started innocently but as the market has evolved in the last 10 years we’ve seen it transition to a much more aggressive structure with fewer covenants and it has also led to a deterioration in debt structure,” Puchalla says.

    A common defence of the leveraged loan market is the current default rate is stubbornly low and is set to sink further.

    But Patrick Marshall, head of private debt at Hermes Investment Management, describes this as a “skewed argument”. “The reasons defaults are low is that there are not any covenants to trigger a default and when a company does finally default in a cov-lite situation you can be sure that your recovery will be far lower.”

    He explains that covenants act as flashing amber warning signs for lenders, allowing them to step in to discuss and rectify an issue early on. Rochford argues that the cov-lite loan boom will “flatten and lengthen the default cycle” as zombie companies “struggle on for longer” without covenants to trigger a much-needed intervention from lenders.

    Moody’s has also warned investors to brace for far lower recoveries – the amount clawed back from defaulted loans. It forecasts that recoveries on first-lien loans – the first to be repaid in the event of a default – will be 60pc, well below the long-term average of 85pc.

    The collapse of Toys R Us offers a grisly reminder of how a company can buckle under a pile of risky debt. Prior to the retailer’s collapse Moody’s deemed that it had been “hamstrung” by its “significant levels” of buyout debt.

    Doumar says: “I think that CLOs are relying on historical default data to sell the securities to the market and I think you can throw that empirical data out of the window because it has absolutely no relevance today.

    “The default statistics and the recovery rates will be far worse than what CLO issuers have been touting.” Wall Street legend Sir John Templeton famously said “this time it’s different” are the four most dangerous words in investing.

    As investors ditch protections in a desperate hunt for stronger returns, they could have made the same mistakes all over again.

    • Thanks, this was good. I had been wondering how the frackers were managing to secure funding with negative cash flows for so long.

    • All well and good but as always it will be the middle and lower classes who will be expected to bear the brunt of any changes and the 1%/elite/establishment who will continue to live the life of clover

  21. Hello Tim,

    Another good read…


    “In the modern world, our perceptions of reality are largely shaped by economic and financial considerations, and our policy conversations are largely built around intellectual categories and evaluative criteria that pertain to the economics discipline. Yet a long-term view shows that ‘The world in 2018’ is in a significantly different place than what economists typically claim, and than what many of us want to believe.”

    The best.


  22. Looking at the various comments about frackers, cov-light loans and other issues, it seems there’s a mindset that investors needn’t worry too much about these things, because they’ll get bailed out in the end by a tide of cheap money from central banks.

    This looks like ‘extreme moral hazard’.

    • Well I fracking wants to get going in the UK – but do they understand the real economics (or perhaps UK shale oil is easier to extract).

      At the very least communities are going to be disrupted and there’s bound to be pollution.

    • ‘Extreme moral hazard’, correct. Prosperity can only be reached by taking from others through financial black jack tables. And with other peoples money of course; ‘ managed money’


      Don’t be mad at them doc, because the physical plane to prosperity crashed already. They fly the monetary plane, a logical outcome of leveraged debt on a finite planet. Governments support this behaviour, because when they don’t, lampposts is their next seat in front of the parliament.

      No one throws in the towel, it would mean instant poverty for those who do. The monetary plane will resume its flight until gravity sets in.

  23. Hi Tim

    I found this article very interesting:

    The thesis of the author is that Brexit will in effect complete the neo liberal experiment that started with Margaret Thatcher ( a hard Brexit is implicit).

    There is also the view that the capacity of the state to manage things has been eroded and has allowed private firms to extract rents from the state which actually increases the cost of public services, not reduce them as is the rationale for privatisation.

    I must say that I see a greater involvement of the state post Brexit, helping to drive down the automation/AI route and the reformation of agriculture but this does rely on capacity.

    • It’s an interesting thesis, and makes a certain amount of sense. My problem with so much of this, though, is the acceptance of conventional economic interpretation. ZH also has an article on the use of inflation for debt destruction in the EMs.

      My view is that hardly anyone really understands the fundamentals as interpreted by SEEDS, especially where the UK or Ireland are concerned. I’m thinking about a detailed analytical piece about Britain, or something about the extremity of risk in Ireland.

    • The thing is that the article highlights what are failures of governance and these compound the secular, energy basis of the SEEDS analysis.

      The article on debt destruction was also interesting.

    • Indeed, and economic policy in the UK has been disastrous, specially under Blair/Brown.

      It’s interesting to speculate on how far failed policies ensue from faulty information and interpretation.

      I’m still deciding whether to write up the UK (again, but in detail), and/or Ireland.

    • I think this article is “Fifth column” attempt to sideline real progress with Brexit. It falls into the Trap George Lakoff discusses that negative commentary just reinforces the existing mainstream narrative. It’s not going to help.

  24. From yesterday –

    Italy’s economy has stalled abruptly over the summer and the industrial sector is on the cusp of outright recession, threatening to drive the country’s knife-edge debt dynamics into dangerous territory.

    The sudden slowdown comes as mounting political alarm pushes risk spreads on 10-year Italian debt to a five-year high of 290, a sign that capital outflows are picking up again.

    Markets are increasingly nervous as the insurgent Lega-Five Star government draws up sweeping plans for tax cuts and welfare spending in the 2019 budget, risking a bare-knuckled fight with Brussels over EU fiscal rules.

    Italy’s debt trajectory is acutely vulnerable to any change in the pace of nominal GDP growth or any shift in the fiscal outlook. Spreads have risen 175 basis points since April, shadowing the pattern before the 2011 crisis.

    Something’s got to give – will the EU?

    • Some very good points made. The benefits of Shale oil were always dubious although the UK Government (perhaps in a panic about energy) wants to pursue it.

      Regarding medical care where the author states it will have to get smaller and more complex – that’s very much in line with what a senior consultant said here (with regards to funding our NHS) that many procedures are going to simply disappear.

      Some farming in the US is ridiculous – like for example the huge subsidies paid to grow corn – which in turn can be used to produce corn syrup whose sole purpose is to make Americans fat. (Film ‘king Corn’)

      Of course once fattened up these poor citizens then go down with diabetes – joint problems – and suffer from pain (Opioid crisis?)

      Of course as now the average American is heavier more fuel must be used to transport them about in cars and planes.A nice little earner for oil companies and of course the medical profession. Pure insanity.

    • Those huge subsidies to grow corn have undersut Latin America’s ability to compete and so their corn production has tanked. 8 million Mexicans moved off the land and entered the USA as a result. Venezuela stopped producing corn and because they had oil revenues were able to import it. That is a big part of its troubles today, no oil revenue so no corn. Brilliant!

    • With all its side effects (obesity diabetes etc) and the effect on other countries it almost sound like the corn subsidy is a form of social and geopolitical engineering.

    • That’s a whole other story. I carry on about the lies and false framing of economics, but before that I saw it was the same with the food industry, gaming the system so that an epidemic of diabetes etc resulted, all based around the profit motive.
      Profit motives should have no role in health and education, anything related to what the government has a duty to do for the good of the country and every one of its citizens.

    • I think the billions of dollars spent advertising unhealthy foods compared to amount spent on promoting a healthy diet speaks volumes.

      I wonder how much transportation fuel would be saved in the world if every adult lost say10 kilos.

      I’m sure someone can do the maths – but I’ll have a look to see if any already exists.

    • @Donald

      The problem with Italy is not so much that the economy is on the cusp of recession, rather that there has been virtually no growth for the last twenty years. What you have is growing poverty and de indusrialisation and with no end in sight, indeed, if the notion of hysteresis has any validity then Italy has been in trouble for years.

      The Euro has been a complete disaster for Italy and IMV they will have to leave it sooner or later, preferably sooner and that would add mightily to the woes of the EU.

      I was of the view that the EU will change markedly within the next ten years; now I’m reducing that to five.

    • I recall Italy on my last visit in 2008 – before the GFC. Quite sombre with lower work opportunities. I remember from my decade there 1968 -78 the vibe was noticeably more upbeat, forward looking.
      I also went to Madrid in 2008. The vibe there was quite upbeat.

    • Yes 5 years sounds realistic. With the added strains of reducing prosperity I can’t see how a single currency can be maintained as many countries will need far more exchange rate flexibility.

      I think the UK is letting the EU get away with too much at the Brexit negotiations. It’s no use the EU trying to punish the UK in the light that their own economic model is flawed.

      On day the politicians might grow up a little.

    • I did some rough calculations on the amount of fuel saved if the fine citizens of the US shed 10 kilos each. In road transport it would equate to 16.1 million barrels of oil per year.

      Ok less than one day’s daily US consumption but I haven’t taken into account fuel saved by Jets.

      It would be worthwhile though in terms of their health and could overall mean less trips to the doctors. The health bill for diabetes is astronomical in the US.

      If the propensity to get this disorder was dramatically reduced then Medicare wouldn’t be under so much pressure.

      However heavily subsidised poison (corn syrup) is king in the US –

  25. Tim, I’d really appreciate some further analysis from you using the SEEDS framework on the economic situation here in Ireland. Apart from some concern in regards to Brexit there is astonishing complacency among my acquaintances and in the media in regards to the financial risks we are facing, which you have mentioned in comments on previous posts. We’ve been here before of course. I clearly recall the complete disregard to the prospect of a financial crash in 8/09 and the astonishment when it did arrive. Construction is back in full swing here I counted 27 tower cranes in the Docklands the other day. Ironically it is Receivers acting for banks and our bank rescue fund (NAMA) that are behind the latest office and apartment developments. To be finished just in time for the next crash I suspect.

    • A SEEDS-based analysis of the Irish economy is pencilled-in on the agenda, and can certainly be moved forward. I can’t promise that it will make pleasant reading, however……..

    • I think there is hope that a lot of UK companies (especially banks) will re-locate to Dublin post Brexit (in the hope to have access to the EU while continuing to service UK clients).

      The problem will be the backlash against them if it is felt that the EU has deliberately ‘punished’ the UK for having the temerity to leave. At the end of the day while not a huge market compared to the US, China or the EU, the UK is still (even with devaluation) the second biggest economy in Western Europe so there will be blowback across the continent as a result. With Italy teetering it would not take much to bring the house of cards down.

  26. I note from an article in the Spectator that the EUs attitude is described as spiteful. I had hoped to hear from EU industry how they regard the UK’s departure. I think that Barnier’s approach is some what shortsighted.

    • The UK negotiating stance is bafflingly craven. Reliable estimates suggest that a mishandled “Brexit” could cost 1m jobs in Germany alone, whilst SEEDS calculates a level of risk in Ireland which is truly frightening, and could/would be triggered if “Brexit” goes badly.

    • In all honesty the EU is getting to a point where Brexit is just one concern.

      You have the Visigrad grouping which has national sovereignty as its core, now maybe joined by Italy. The Sweden Democrats are also forecast to take a large share of the vote there and they are anti immigrant. And of course Frau Merkel has AfD in her own backyard.

      Macron is ineffectual (an “empty suit”) in France and it may well be that the FN will make it into power at the next election.

  27. Latin Americans and Corn
    I don’t know very much about the political attitude toward food production in Latin American and other relatively poor countries, from personal experience. I do know some local farmers and economic development people who have expressed opinions. Their opinions tend to be that the governments are mostly almost ashamed that any of their citizens might be producing food on small plots. The governments are quite confident that borrowing some money (in US dollars) and spending it on the trappings of a highly developed country can leapfrog their citizens to a US or EU level of prosperity. Many in the governments are also corrupt…a little money under the table and El Giganto Corporation now owns tens of thousands of acres and the peasants are dispossessed!

    Some local small farmers went to one of the Caribbean islands to try to help the small farmers there increase their output while decreasing their footprint. They found hostility on the part of the officials and apathy on the part of the general population.

    I remember, 40 years ago, when the company I worked for decided to get into a then-glamourous business. We had a consultant who advised us to ‘first, begin to sell out of your van’. In other words, learn to be cash-flow positive and then expand….don’t start with ‘invest a few billion dollars’. The company I worked for rejected the positive cash flow, organic growth model, and went ahead and spent the money and suffered the consequences. I perceive that the same thing is happening in many of the EM countries. Possibly also in the Belt and Road blockbuster investments.

    Don Stewart

    • What I term ‘TotemPole Economics’ – large-scale, big-money projects = 1st-World status.

      When what is really needed is, as it were, a small offering to the Spirit of the field, some wine, honey and a candle…..

      Our lamentably primitive brains are (mostly) captive to social hierarchy calculations.

  28. ‘Developing’ or ’emerging’ economies are also dominated by Big Man Syndrome – the spider sitting at the centre of a web of patronage (often still tribal or regional): big project=big bucks=big bribes and wide redistribution to re-affirm the status and capabilities of the Big Man.

    If the Big Man can’t do it, he soon gets displaced…..

Comments are closed.