#147: Primed to detonate


After more than a decade of worsening economic and financial folly, it can come as no surprise that we’re living with extraordinarily elevated levels of risk.

But what form does that risk take, and where is it most acute?

According to SEEDS – the Surplus Energy Economics Data System – the riskiest countries on the planet are Ireland, France, the Netherlands, China, Canada and the United Kingdom.

The risks vary between economies. Some simply have debts which are excessive. Some have become dangerously addicted to continuing infusions of cheap credit. Some have financial systems vastly out of proportion to the host economy. Some have infuriated the general public to the point where a repetition of the 2008 “rescue” would inflame huge anger. Many have combinations of all four sorts of risk.

Here’s the “top six” from the SEEDS Risk Matrix. Of course, the global risk represented by each country depends on proportionate size, so China (ranked #4 in the Matrix) is far more of a threat to the world economy and financial system than Ireland, the riskiest individual economy. It’s noteworthy, though, that the three highest-risk countries are all members of the Euro Area. It’s also noteworthy that, amongst the emerging market (EM) economies, only China and South Korea (ranked #9) make the top ten.

Risk 01 matrix top

Risk and irresponsibility

Before we get into methodologies and detailed numbers, it’s worth reflecting on why risk is quite so elevated. As regular readers will know, the narrative of recent years is that prosperity has been coming under increasing pressure ever since the late 1990s, mainly because trend ECoE (the energy cost of energy) has been rising, squeezing the surplus energy which is the source of all economic output and prosperity.

This is a trend which the authorities haven’t understood, recognizing only a vague “secular stagnation” whose actual root causes elude them.

Even “secular stagnation” has been unacceptable to economic and financial systems wholly predicated on “growth”. Simply put, there‘s been too much at stake for any form of stagnation, let alone deterioration, to be acceptable. The very idea that growth might be anything less than perpetual, despite the finite nature of the planet, has been treated as anathema.

If there isn’t any genuine growth to be enjoyed, the logic goes, then we’d better fake it. Essentially, nobody in authority has been willing to allow a little thing like reality to spoil the party, even if enjoyment of the party is now confined to quite a small minority.

Accordingly, increasingly futile (and dangerous) financial expedients, known here as adventurism, have been tried as “solutions” to the problem of low “growth”. In essence, these have had in common a characteristic of financial manipulation, most obvious in the fields of credit expansion and monetary dilution.

These process are the causes of the risk that we are measuring here, but risk comes in more than one guise. Accordingly, each of the four components of the SEEDS Risk Matrix addresses a different type of exposure.

These categories are:

– Debt risk

– Credit dependency risk

– Systemic financial risk

– Acquiescence risk

One final point – before we get into the detail – is that no attempt is made here to measure political risk in its broader sense. Through acquiescence risk, we can work out which populations have most to complain about in terms of worsening prosperity. But no purely economic calculation can determine exactly when and why a population decides to eject the governing incumbency, or when governments might be tempted into the time-dishonoured diversionary tactic of overseas belligerence. We can but hope that international affairs remain orderly, and that democracy is the preferred form of regime-change.

Debt risk

This is the easiest of the four to describe, and comes closest to the flawed, false-comfort measures used in ‘conventional’ appraisal. The SEEDS measure, though, compares debt, not with GDP but with prosperity, a very different concept.

Ireland, markedly the riskiest economy on this criterion, can be used to illustrate the process. At the end of 2018, aggregate private and public debt in Ireland is estimated at €963bn, a ratio of 312% to GDP (of €309 bn). Expressed at constant 2018 values, the equivalent numbers for 2007 (on the eve of the 2008 global financial crisis, which hit Ireland particularly badly) were debt of €493bn, GDP of €198bn and a debt/GDP ratio of 249%.

In essence, then, debt may be almost twice as big (+95%) now as it was in 2007, but the debt ratio has increased by ‘only’ 25% (to 312%, from 249%), because reported GDP has expanded by 56%.

Unfortunately, this type of calculation treats GDP and debt as discrete items, with the former unaffected by changes in the latter. The reality, though, is very different. Whilst GDP has increased by €111bn since 2007, debt has expanded by €470bn. Critically, much of this newly-borrowed money has flowed into expenditures, which serves to drive up the activity measured as GDP.

According to SEEDS, growth without this simple spending of borrowed money would have been only €13bn, not €111bn. Put another way, 89% of all “growth” reported in Ireland since 2007 has been nothing more substantial than the effect of pouring cheap credit into the system, helped, too, by the “leprechaun economics” recalibration of GDP which took place in 2015.

Of course, the practice of spending borrowed money and calling the result “growth” didn’t begin after the 2008 crash. Back in 2007, adjusted (“clean”) GDP in Ireland (of €172bn) was already markedly (13%) lower than headline GDP (€198bn), and the gap is even wider today, with “clean” GDP (of €184bn) now 40% lower than the reported number.

Even “clean” GDP isn’t a complete measure of prosperity, though, because it excludes ECoE – that proportion of output that isn’t available for other purposes, because it’s required to fund the supply of energy itself.

Where ECoE is concerned, Ireland is a disadvantaged economy whose circumstances have worsened steadily in recent years. Back in 2007, Ireland’s ECoE (of 6.7%) was already markedly worse than the global average (5.4%). By 2018, the gap had widened from 1.3% to 3.2%, with Ireland’s ECoE now 11.2% (and the world average 8.0%). An ECoE this high necessarily kills growth, which is why aggregate prosperity in Ireland now is only fractionally (2%) higher than it was in 2007, even though population numbers have grown by 10%.

The results of this process, where Ireland is concerned, have been that personal prosperity has declined by 7% since 2007, whilst debt per person has risen by 78%. The conclusion for Ireland is that debt now equates to 589% of prosperity (compared with 308% in 2007), and it’s hard to see what the country can do about it. If – or rather, when – the GFC II sequel to 2008 turns up, Ireland is going to be in very, very big trouble.

These are, of course, compelling reasons for the Irish authorities to bend every effort to ensure that Britain’s “Brexit” departure from the European Union happens as smoothly as possible. If the Irish government really understood the issues at stake, ministers would be exerting every possible pressure on Brussels to step back from its macho posturing and give Mrs May something that she can sell to Parliament and the voters.

There’s a grim precedent for Dublin not understanding this, though – in the heady “Celtic tiger” years before 2008, nobody seems to have batted an eyelid at the increasingly reckless expansion of the Irish banking system.

Risk 02 debt

Credit dependency

As we’ve seen, adding €111bn to Irish GDP since 2007 has required adding €470bn to debt. This means that each €1 of “growth” came at a cost of €4.24 in net new borrowing. It also means that annual net borrowing averaged 14% of GDP during that period. This represents very severe credit dependency risk – in short, the Irish economy would suffer very serious damage in the event even of a reduction, let alone a cessation, in the supply of new credit to the economy.

Remarkably, though, there is one country whose credit dependency problem is far worse than that of Ireland – and that country is China.

The Chinese economy famously delivers growth of at least 6.5% each year, and reported GDP has more than doubled since 2008, increasing by RMB 51 trillion, from RMB37.7tn to an estimated RMB89tn last year.

Less noticed by China’s army of admirers has been a quadrupling of debt over the same period, from RMB53tn (at 2018 values) in 2008 to RMB219tn now. There also seem to be plausible grounds for thinking that China’s debts might be even bigger than indicated by published numbers.

This means that, over the last ten years, annual borrowing has averaged an astonishing 23% of GDP. No other economy comes even close to this, with Ireland (14.1%) placed second, followed by Canada (9.5%) in third, and South Korea (8.6%) a distant fourth. To put this in context, the ratios for France (8.1%) and Australia (7.5%) are quite bad enough – the Chinese ratio is as frightening as it is astonishing.

The inference to be drawn from this is that China is a ‘ponzi economy’ like no other. The country’s credit dependency ratio represents, not just extreme exposure to credit tightening or interruption, but an outright warning of impending implosion.

There are signs that the implosion may now be nearing. As well as slumping sales of everything from cars to smartphones, there are disturbing signs that industrial purchases, of components ranging from chips to electric motors, are turning downwards. Worryingly, companies have started defaulting on debts supposedly covered very substantially by cash holdings, the inference being that this “cash” was imaginary. Worse still, the long-standing assumption that the country could and would stand behind the debts of all state-owned entities (SOEs) is proving not to be the case. In disturbing echoes of the American experience in 2008, there are reasons to question why domestic agencies accord investment grade ratings to such a large proportion of Chinese corporate bonds.

How has this happened? The answer seems to be that the Chinese authorities have placed single-minded concentration on maintaining and growing levels of employment, prioritizing this (and its associated emphasis on volume) far above profitability. Put another way, China seems quite prepared to sell products at a loss, so long as volumes and employment are maintained. This has resulted in returns on invested capital falling below the cost of servicing debt capital – and an attempt to convert corporate bonds into equity was a spectacular failure, coming close to crashing the Chinese equity market.

Risk 03 credit

Systemic exposure

Debt exposure and credit dependency are relatively narrow measures, in that both concentrate on indebtedness. Critical though these are, there is a broader category of exposure termed here systemic risk, and this is particularly important in terms of the danger of contagion between economies.

The countries most at risk here are Ireland (again), the Netherlands and Britain. All three have financial sectors which are bloated even when compared with GDP. But the true lethality of systemic risk exposure only becomes fully apparent when prosperity is used as the benchmark.

At the most recent published date (2016), Dutch financial assets were stated at $10.96tn (€10.4tn), or 1470% of GDP. The SEEDS model assumes that the ratio to GDP now is somewhat lower (1360%), which implies financial assets unchanged at €10.4tn.

As we’ve seen with Ireland, measurement based on GDP produces false comfort, because GDP is inflated by the spending of borrowed money, and ignores ECoE. In the Netherlands, growth in GDP of €82bn (12%) between 2007 and 2018 needs to be seen in the context of a €600bn (32%) escalation in debt over the same period. This means that each €1 of reported “growth” has required net new borrowing of €7.40. Without this effect, SEEDS calculates that organic growth would have been just €8bn (not €82bn), and that ‘clean’ GDP in 2018 was €619bn, not €767bn.

The further deduction of ECoE (in 2018, 10.5%) reduces prosperity to €554bn. This is lower than the equivalent number for 2007 (€574bn), and further indicates that the prosperity of the average Dutch person declined by 8% over that period.

Though aggregate prosperity is slightly (3.5%) lower now than it was in 2007, financial assets have expanded by almost 40%, to €10.4tn now from €7.47tn (at 2018 values) back in 2007. This means that financial assets have grown from 1303% of prosperity on the eve of GFC I to 1881% today.

As the next table shows, this puts Holland second on this risk metric, below Ireland (3026%) but above the United Kingdom (1591%). Japan (924%) and China (884%) are third and fourth on this list.

Needless to say, the Irish number looks lethal but, since Ireland is a small economy, equates to financial assets (of €4.9tn) that are a lot smaller than those of the Netherlands (€10.4tn). Likewise, British financial assets are put at £23.3tn, a truly disturbing number when compared with GDP of £2tn, let alone prosperity of £1.47tn.

The conclusion on this category of risk has to be that Ireland, Holland and Britain look like accidents waiting to happen. Something not dissimilar might be said, too, of Japan and China. Japan’s gung-ho use of QE has resulted in half of all JGBs (government bonds) being owned by the BoJ (the central bank), whilst huge financial assets (estimated at RMB417tn) underscore the risk perception already identified by China’s dependency on extraordinary rates of credit creation.

Risk 04 systemic

Acquiescence risk

The fourth category of risk measured by SEEDS concentrates on public attitudes rather than macroeconomic exposure. Simply put, we can assume that, when the GFC II sequel to the 2008 global financial crisis (GFC I) hits, governments are likely to try to repeat the “rescue” strategies which bought time (albeit at huge expense) last time around. But will the public accept these policies? Or will there be a huge popular backlash, something which could prevent such policies from being implemented?

It’s not difficult to envisage how this happens. If we can picture some politicians announcing, say, a rescue of the banks, we can equally picture some of their opponents pledging to scrap the rescue at the earliest opportunity, and take the banks into public ownership, pointing out that stockholder compensation will not be necessary because, in the absence of  a taxpayer bail-out, the worst-affected banks have zero equity value anyway. Simply put, this time around there could be more votes in the infliction of austerity on “the wealthy” than there will be in bailing them out. It’s equally easy to picture, at the very least, public demonstrations opposing such a rescue.

Even at the time, and more so as time has gone on, the general public has nurtured suspicions, later hardening into something much nearer to certainties, that the authorities played the 2008 crisis with loaded dice. One obvious source of grievance has been the management of the banking crash. The public may understand why banks were rescued, but cannot understand why the rescue included the bankers as well, whose prior irresponsibility is assumed by many to have been the cause of the crisis – especially given the unwillingness of governments to rescue those in other occupations, such as manufacturing, retail and hospitality.

The 2008 crisis was followed by a fashion for “austerity”, in which the public was expected to accept lean times as part of a rehabilitation of national finances after debts and deficits had soared during GFC I. Unfortunately, the imposition of “austerity” has looked extremely one-sided. Whilst public services budgets have been cut, the authorities have operated policies which have induced extraordinary inflation in asset prices. These benefits, for the most part enjoyed by a small minority, haven’t even been accompanied by fiscal changes designed to capture at least some of the gains for the taxpayer.

The word ‘hypocrisy’ has been woven like a thread into the tapestry of post-2008 trends, which are widely perceived as having inflicted austerity on the many as the price of rescuing the few. It hardly helps when advocates of “austerity” seem not to practice it themselves. Policies since 2008 have been extraordinarily divisive, not just between “the rich” and the majority, but also between the old (who tend to own assets) and the young (who don’t).

In short, the events of 2008 have created huge mistrust between governing and governed. This might not have mattered quite so much had the prosperity of the average person continued to grow, but, in almost all Western countries, this has not been the case. Whatever might be claimed about GDP, individuals sense – rightly – that they’re getting poorer. We’ve already seen the results of this estrangement, in the election of Donald Trump, the “Brexit” vote in Britain and the rise of insurgent (aka “populist”) parties in many European countries. Latterly, France has witnessed the eruption of popular anger in the gilets jaunes movement, something which might well be replicated in other countries.

For reasons which vary between countries – but which have in common a complete failure to understand deteriorating prosperity – established policymakers have seemed blinded to political reality by “the juggernaut effect”.

Where, though, is acquiescence risk most acute? The answer to this seems to lie less in the absolute deterioration in average prosperity than in the relentless squeeze in discretionary (“left in your pocket”) prosperity – simply put, how much money does a person have left at the end of the week or month, after taxes have been paid, and essential expenses have been met?

This discretionary effect helps to explain why the popular backlash has been so acute in France. At the overall level, the decline in French prosperity per person since 2007 has been a fairly modest 6.3%, less severe than the experiences of a number of other countries such as Italy (-11.6%), Britain (-10.3%), Norway (-8.4%) and Greece (-8..0%). Canadians (-8.1%) and Australians (-9.0%), too, have fared worse than the French.

Take taxation into account, though, and France comes top of the league. Back in 2007, prosperity per person in France was €28,950, which after tax (of €17,350) left the average person with €11,600 in his or her pocket. Since then, however, whilst prosperity has declined by €1,840 per person, tax has increased (by €1,970), leaving the individual with only €7,790, a 33% fall since 2007.

In no other country has this rapidity of deterioration been matched, though discretionary prosperity has fallen by 28% in the Netherlands, by 24% in Britain, by 23% in Australia and by 18% in Italy. If this interpretation makes sense of the popularity of the gilets jaunes (and makes absolutely no sense of the French authorities’ responses), it also suggests that the Hague, London and perhaps Canberra ought to be preparing themselves for the appearance of yellow waistcoats on their streets.

Risk 05 acquiescence

170 thoughts on “#147: Primed to detonate

  1. It’s always a good idea to not over play your hand of cards. It’s a skill few politicians have. If there’s one country, setting aside the UK that will be very badly impacted by a no deal Brexit it is surely Ireland and yet that seems to be Irish government policy.

    • Indeed so, and we’ve looked at this in a number of recent articles. The Irish situation is one in which ANY major disruption needs to be avoided as a matter of the highest priority. I don’t understand the Irish stance on “Brexit”, any more than I understood Irish financial policy pre-2008.

  2. Dr. Tim, don’t forget the imminent increase in contributions for those ‘auto enrolled’ into occupational money purchase pensions in the UK to 5% of gross annual pay up from 3%.

    • Thanks, I’m aware of this, though not really sure what this is meant to achieve. Even before returns on capital collapsed, saving 5% of income would not have been enough.

    • Its a trap, the unsuspecting in twenty years time will be denied state pensions as they will be means tested and found to have some (tiny) pensions savings which will take them over the threshold.

      My wife was offered a chance to auto-enrol in her early forties, as a low paid worker it simply did not make sense at all (even with matching contributions) so I can only see that the above is the real reason why

  3. Also, it seems that we are running out of options as to where to put our savings. Equities – might go pop any moment ad what is the outlook for dividends? Bonds – default risk increasing and rising interest rates. Property – UK demographics unenticing. Cash – ‘financial repression’. Gold – doesn’t produce an income so isn’t, in my book, an ‘investment’.

    Hey, ho!

    • …Gold – doesn’t produce an income so isn’t, in my book, an ‘investment’.

      One sees that sentiment a lot.

      However, Amazon and Facebook, to take just a couple of examples, pay no dividends and therefore also generate no income to their shareholders. Most people would still regard a shareholding in these companies as an Investment – even those people who subscribe to the statement above.

    • Mark,
      Forget trying to make “money” on any kind of investment.
      Today, just try to hang on to as much as you can of what you have got.
      There are serious losses coming up everywhere, so the winner will be the person who loses the least.
      Gold does not produce an income, that is true, but then again according to Jim Rickards, it’s money, it is not supposed to produce an income.
      It is however, a very good store of value.

    • In most asset classes, we’ve long been in a situation where the only upside potential has been in the “greater fool” theory. This is perhaps apt, because we’re in a climate of utter financial insanity…..

  4. Investments which don’t produce an income
    Max and Stacey have had some recent discussions along the lines that what poor people need is a way to save, safely. Suppose a family has managed to save several thousand dollars or Euros or pounds. Investing what they have saved in financial instruments denominated in those currencies is extremely risky, as this and previous posts prove. It turns out that the women of India hold more gold than the United States (I hope I remember that factoid correctly). Since gold has been a tradable commodity for a lot longer than any of us have lived on this planet, the women of India could turn out to be the big winners (relatively speaking) in a currency crisis. Or…they might be murdered in their sleep by people wanting to steal their gold. It’s risky any way you look at it.

    Don Stewart

    • I understand that, in the event of divorce or other marital disputes, the law in India explicitly protects a women’s ownership of her personal jewellery and ensures the husband and his family cannot claim it as part of any settlement. I expect this, along with the durability and easy convertibility of gold, in a society where buying and selling of precious metals is a lot more common than in the West, accounts for a good deal of the traditional appeal of gold to Indians.

  5. A better world?
    See Tad Patzek’s current post for a truly dystopian (in my view) future, contrasted with mass delusion a la ‘1984’.

    Once the global spy network has been able to determine that you are running low on soy milk in your fridge, is there any limit to how much ‘hedonic adjustment’ can be applied to boost the GDP?

    You may also be interested in Tad’s interview, available on YouTube:

    The interview is about an hour, and studiously avoids discussions of oil. One hour in length.

    Don Stewart

  6. Crucial Questions
    We financially oriented people tend to pose our questions, and think of answers, which revolve around the money which has already been created. But if we take Dr. Morgan’s work at face value, it seems that all of the money currently in existence (which mostly consists of debts) is actually worthless, and offers little to nothing in terms of future thriving. For example, the rose production system in Columbia has to be seen as not only having no positive value, it has to be seen as having a negative value. You can extend that analysis to much of the Internet.

    I propose a few questions which I think may be worth thinking about:
    *Which country has the most productive infrastructure (energy sources, geographical location, built environment, human resources, water, etc.)? Is it China because almost everything there is brand new? Or is it Amsterdam because everything there is centuries old and built to last?
    *Which country has the most appropriate human resources. Here I will point to this video:
    Stacey Murphy is an example of ‘urban frugality’. I don’t want to get into the details of what she does right and what wouldn’t survive a currency crisis….but the point is that she is getting a lot of value out of a little bit of land. Stacey, and people like her, are a real asset after a currency crisis.
    *Are countries even worth thinking about? Perhaps the UK and the United States couldn’t survive as functional entities after a currency collapse. If so, what institutions might survive? Amazon? Facebook? General Motors? Elon Musk? The medical establishment treating chronic diseases?
    *Would ‘Deep Russia’ survive, as Putin’s adviser thinks? (See Orlov’s current post).

    That’s enough questions from me. It seems to me we need to think beyond our usual fence lines.

    Don Stewart

  7. So if one country says it cannot pay its bills, it high inflation? and gets shut out of global debt markets, maybe gets some kind of overt or covert punishment from western financial powers. I have read some stories about Argentina debt defaults; it seems that while savings is wiped out, life goes on to some extent.

    But what happens when multiple countries say they can no longer pay their debt obligations? When most of those countries are part of the western dominated financial system? I suppose the answer is we have never really been here before except after wartime, and then we had lots of surplus energy to burn. Maybe there is enough surplus energy still in the system to weather one more major financial shock.

    • I’ve always been clear about one critical distinction between GFC I and GFC II – whereas 2008 was about the banks, GFC II will threaten fiat currencies. The first crash was caused by excessive debt, so, logically, the stress point was always going to be in the lending system, i.e. the banks. Money remained largely untarnished in 2008, which, amongst other things, made “rescues” possible.

      This time, though, recklessness has extended to include monetary policy. Safety is going to be a purely relative concept.

      With a situation like Argentina, what really happens is that the country’s currency collapses. The local value of loans in foreign currencies soars, and becomes impossible to service, let alone repay – and the outcome is default. In this situation, hard commodities, priced on global markets, retain their value, enabling the country to ‘get by’. Default can even be helpful, giving a country a ‘new start’, once its creditors ‘forgive and forget’ which, eventually, they do.

      This time, though, really will be “different”, with few if any currencies truly “safe”. What we face in GFC II is value destruction (technically, the exposure of prior value destruction) on a scale vastly larger than GFC I. This suggests a wave of huge defaults. OK, so the authorities create enough money to “prevent” these defaults – but the sheer maths of this make it very questionable how much real value money could still retain.

    • Things seem to have turned catastrophically bad during November and December. Sales of basic and advanced microchips slumped, and so did demand for critical components like the high-tech motors used in disc drives. Industrial purchasers in sectors like data-centres and gaming seem to have slashed their purchasing of critical components,. People involved have called this ‘extraordinary’, as indeed it is.

      Slumping sales of smartphones and cars are one thing, but a collapse in these component sectors are quite another.

      Logically, the RMB should slump, making Chinese imports unaffordably expensive, forcing China into rate rises and bringing down the debt edifice.

      We shall see….

  8. Pingback: Primed to detonate: the “what?” and “where?” of global risk via /r/economy | Chet Wang

  9. It seems to me that the Eurozone members are far more at risk than the UK as they do not have monetary sovereignty (which it turns out is an unwritten but essential requirement for democracy). Worse still, for the Eurozone members Neoliberal austerity is baked into the EU constitution as the solution to budgetary problems. The EU barely survived GFC1 so can the EU survive GFC2 without fundamentally changing its constitutional rules and move from austerity driven Neoliberalism to something else? The EU has indicated the next crisis will be met with bail-ins not bail-outs but given the unhealthy relationships between bankers and politicians and the general finance/corporate capture of government globally then how likely is that?

    As much as people talk about free market capitalism all we have really seen over the last decade has been a re-distributive form of corporate hospitality socialism for the 0.01% and a number of the main beneficiaries have been those who caused GFC1 in the first place.

    One can’t see the people putting up with any more bailouts so perhaps the latest Franco-German treaty regarding much closer military cooperation for their joint security makes some sense as we could well see German troops on the streets of Paris once again putting down the populist rebellions and French troops on the streets in Berlin.

    • Simon

      I agree with your implicit point about bail ins. Although that’s the system I don’t think it will be used. With banks there shouldn’t be a question of technical insolvency because the central bank will be lender of last resort (albeit bending the rules on collateral quality).

      Although there’s deposit insurance there would be many (both individuals and small businesses) who have deposits higher than this who would be at risk, despite only “parking” money at the bank. If these people get hit if a bank is actually, as opposed to technically, insolvent then mayhem will ensue throughout the system; the collateral effects may be huge.

      Injecting more capital and moving the debts over to a resolution vehicle can be done under the radar with less “collateral” damage than a bail in and I would bet this is the preferred option.

    • If GFC II is anything like GFC I, we can expect lots of completely crazy ideas, and not just in finance. Using German soldiers in France and vice versa seems wildly unlikely to me – in fact it would be insanity – but we’re in a situation of “never say never”.

      Bail-ins would be insane, and how would they work – do you take money from the accounts of the ultra-wealthy without limits, or cap it so that only those with up to, say, £1m are robbed?

      Some distinguished economists say that bank depositors are investors, just like those who hold bank stock or bonds. But I am firm in my view that depositors are customers, and that’s how the public would see it. Moreover, a country in which depositors can lose money ceases to be a “respected” or “safe” economy, and starts to look like a “banana republic” instead.

    • Tim

      German troops may well have already been deployed in Paris under the direction of French police. Plenty of photos of APCs bearing the EU flag but no-one has released information on the nationalities of the personnel deployed.


      In the face of such populist uprisings keeping your own military and police force on side is difficult. This is one of the more concerning aspects of the creation of an EU army as it can be deployed against populist demonstrations without announcing or making obvious that German or Dutch troops are policing Paris or Rome.

    • As I’ve said, using other countries’ troops is crazy, but not impossible. I’ve been disturbed by the extent of the violence seemingly being used against protestors by French security forces. History suggests that using German troops in France (or any other country occupied during 1940-45) would be particularly provocative.

      What intrigues me more is what happens in future elections. Let’s imagine that, with elections looming, polls start showing that Macron hasn’t a chance, and that the most likely winners are either “right wing” and/or “left wing” (more likely, I think), anti–establishment parties. What happens now – does Macron bow to the consequences of unpopularity, which is pretty much what his predecessor did?

    • There are too many inter-related questions in all of this. I get the strong feeling that Modern Monetary Theory is likely to gain a lot of ground in the very near future, however it is largely misguided in that it remains trapped within the capitalist and Marxist modernist paradigm that labour produces economic values.

      In ‘The Mirror of Production’ , Jean Baudrillard deconstructed this concept decades ago and showed that use value is merely the horizon or effect of exchange value and that therefore because it was the market system that effectively imagined or invented economic values then there could be no such thing as ‘surplus’ value that Marx claimed capitalism to be robbing workers of. Ask any young artist or ceramicist how impossible it is to find ‘fair’ value for their labour. Sadly for the impressionist painters all their economic value was realised or imagined by markets years after their deaths. In many respects from a postmodern perspective capitalism was better at inventing and imagining values than state controlled socialism. Blair and Brown were fascinated by bankers in that they broke the Marxist labour/use/economic value production schema in that using systemic connections financiers could make £millions from virtually doing nothing.

      Economic values are metaphysical and more a question of faith than anything else hence their properties of being value collapsible. One does wonder however to what extent people faith in the ‘value’ of fiat currency has changed since our conceptions of money have changed from an image of physical cash to digital ones and zeros. People now see money as being created at the simple push of a button. Indeed all the debt in the world could be electronically printed away in milliseconds and everyone paid in full. Would anyone end up ‘hurt’ by it. We will probably find out very soon.

      All modernist politics tend to gravitate around the modernist labour/production paradigm of both capitalism and Marxism with an eye on unlimited growth model and that full employment will automatically produce more wealth. This reaches its limits in the system’s obsessions with its own potential losses and in the ways it always seeks to mitigate and recover any perceived loss that escapes it, even if that means legalising prostitution and cannabis. Every day of bad weather is mourned in the potential loss to GDP which is calculated and paraded in the media.

      Even the Green Party are obliged to present their policies in terms of how many jobs they will create. Fuller employment must necessarily be accompanied by fuller consumption as the rewards or rationalisation of labour. Of course taking surplus energy and finite resources into consideration we realise that these productive and consumptive luxuries we have become accustomed to are not systemically affordable both in terms of resources but also in terms of the fact that they are being paid for by systemic debt accumulation and also hidden environmental debts that will have to be paid some day.

      Perhaps we could return to a model of ethical production and ethical consumption and stop wasting so many resources just to guarantee further labour and production in a vicious circle of waste where the system of production is better conceived of as a fantastically elaborate short term waste production and disposal system.

      No main stream politics is taking any of these ideas on board and all seem to think that they can return to the old modernist ideals. At the end of the day we will have to accept that maybe we will all have to work less for less rewards and understand that having more time for our families, communities and our other interests are all rewards in themselves.

    • Indeed, and of course it’s in human (and political) nature to avoid hard choices. Reality, though, has a habit of intervening. So I suspect that hard choices are going to be forced onto politicians (and us) when GFC II exposes the nonsense practised since GFC I.

      What I’d particularly like to see now is more realism from insurgent (aka “populist”) leaders, and from “the Left”.

    • Bob

      I often wonder what would have happened if Gordon Brown had not bailed out the banks. So certain institutions would have gone bankrupt and depositors with over £85,000 with a given bank would lose that money. Seeing that they could have kept their money is a number of different banks one assumes you would have been safe up to £500,000 is cash deposits. Other than that it is banks share and bond holders who would have lost out but that’s the nature of risk investment isn’t it? The dead banks could have then been nationalized or a state bank could have been established to take on the mortgages of vulnerable home owners and SMEs who were by no means zombies, they were just caught out with the wrong debt in the wrong time and place. A nationalized bank setting customer interest rates would have forced the other banks into following those rates. It could also have been used to stimulate investment in new growth areas which traditional banks are not quick to recognize. I believe Civitas has some papers on a national investment bank. Instead we saw Brown following the laws of Neoliberalism to the letter and only pleading for the nationalized banks to start lending which fell upon deaf ears.

      There was a hell of a lot of firepower used up in the UK IN GFC1 for no apparent economic gains other than recapitalising the banks who would never come clean as to how much money that would take. In the case of RBS we saw a contemptuous attitude to SMEs that effectively put them out of business without hesitation in their desperation to try and get some value back on the books.

      I wrote at the time of QE that it would be far better used by investing in local communities in order to build the amenities that would be required for Cameron’s vision of a big society. This could have meant communities themselves determining what they needed in terms of a very participatory democracy and defining what needed to be built. Then all the building work and resources could have been sourced locally in the community and the effects of QE would have risen up through society directly. This would have been real people’s QE not grand vanity infrastructure projects like HS2 which only benefit large corporations and foreign manufacturers.

      I for one feel frustrated in that I feel we have already missed so many opportunities and will likely carry on doing so.

    • Simon

      I agree with what you say. Unfortunately the only way out as I see it is a bust that will cause a reset.

      Having said this I do think Brexit (if we do actually leave the EU) may shake up the politics. It has exposed incompetencies that I would never have dreamed of and a political system that is seriously wanting.

      We have a system of representative democracy which does mean a distance between the elected and the electors but what has been revealed is a chasm rather than a necessary distance.

      A small example of incompetence is the gaffe made by Hunt in the letter to the Japanese. I would have thought this sort of letter would be vetted by the desks in the FO because you can say things to an American you can’t say to a Japanese. It is just diplomacy 101. It’s one minor failure that just shows how deep the rot goes and it goes very deep.

    • Wasn’t there also a problem not too many years ago when the Taiwan flag greeted dignitaries from mainland China?

      I suspect that GFC II will indeed be the reset that was ducked in 2008 – and at least four times larger.

  10. Hi Tim

    Thanks for not only an insightful article but one that I found fascinating.

    It really does show the shaky facade of the whole system.

    With regard to the UK I believe that one of the main advantages of Brexit is that it shown many of the cracks in both the political and economic systems and I hope that this presages major change.

    With the EU I don’t think this will happen. The “project” is sacrosanct and chages will only be made if they are forced upon the EU which bodes ill for potential fall out – which will of course affect the UK.

    As I see it the Chinese are on a tightrope. A capitalist economy creates wealth and wealthy people want an appropriate place in the power structure. Can you have a capitalist economy and the Chinese political structure co existing? i have my doubts.

    • Thanks Bob – glad you like it, as this one took a bit of putting together.

      With “Brexit”, I think we’re at the start of profound change in Europe. Insurgents (aka “populists”) are already on top in Italy, and other countries. The European elections in May could swing towards the insurgents, who might poll 40%. Establishment politicians masquerading as “populists” are in trouble, not just in France (where Mr Macron’s government looks like a lame duck), but also in Holland (where, as this article suggests, yellow waistcoats might be lying in wait), whilst Mrs Merkel might have chosen her moment of departure well.

      The UK is high-risk. Its financial system is far too large for comfort, and “Brexit” is masking deeper and more fundamental problems.

      My own hunch is that China is in the process of falling off its tightrope. As well as the rapid deterioration in November and December, there are signs that China is pulling out of overseas investments amidst a wider “batten down the hatches, conserve cash” mentality which seems to be spreading worldwide.

      On a purely technical point, I think market capitalism was abandoned in 2008, when banks, businesses and others were spared the market’s consequences of failure, and a programme of huge subsidies was put in place. Those on the Left who would like to overthrow “capitalism” may have missed the boat……

  11. Collapse in China or Collapse of a Bubble or Both?
    I read somewhere recently about the amount of time the average person spends watching a screen, while not at work. (The sum of the two is truly frightening). As I recall, the average American spends 6 hours per day watching a screen, besides whatever they do at work. There has to be a limit to the hours per day. And we know that there has been a technological change toward more computer and phone based screens and away from passive televisions. We also know that the revolution reached the far corners of the world. I was in the coffee shop yesterday when a man came in with a small boy. I helped him find an outlet for his electronics. They live in the West Indies, judging by his accent. He got the little boy set up with some little yellow cased screen, and the boy happily set about playing his games. The man went up to the counter to order, and I chatted with him a little. He said, ‘It’s amazing. I can just sit him in front of his computer and he gets engrossed and I don’t have to pay much attention to him.’

    I suspect that the adoption of these new screens will follow an S curve, just like hula hoops or any other craze. And I would guess that we are now on the upper side of the S, with mostly just maintenance purchases from this point on. There may continue to be innovation in terms of the software which tickles the dopamine, but the hardware may be a slow growth industry from now on. If my suppositions are correct, then what has been a growth industry will look more like clothing…fads and fashions will come and go, but the consumption of fibers won’t change very much.

    Of course, this doesn’t mean that particular companies won’t suffer. Which leads to consolidations and layoffs, and so people don’t have the money to buy cars and new apartments. Whether it turns into a currency crisis seems to me to depend on the leverage in the overall economy. And there, the statistics don’t look promising. Maybe the industry and the spy apparatus can use the G5 network to goose demand again…but I am skeptical.

    Don Stewart

  12. Collapse of Fossil Fuels?
    I speculate above about the possible saturation of the market for hardware sold to consumers for purposes of tickling their dopamine. Is the market for fossil fuel powered vehicles similarly at risk. I don’t know, but there are possibilities.

    I suggest you take a look at Alice Friedemann’s site (Energy Skeptic) and look at the graph of energy densities. You see a whole bunch of batteries on the left side, way down the scale. At the right you see natural gas powered engines. But, right next to the natural gas, you see the Li-Air battery. The Li-Air battery has the theoretical ability to have almost the energy density as natural gas. And since electric motors are much more efficient than heat engines, the destruction of much of the fossil fuel industry is just one technological leap away.

    If you look at the stories about Li-Air, you will find prominent mention of an MIT study (funded by Toyota and some Russians) which discovered the basic problems which had been forestalling the deployment of Li-Air batteries. I’ll let you read the puff pieces about the batteries, as well as Alice’s reservations about the supplies of Lithium.

    The last I heard, Toyota was still talking about 2022 for Li-Air motors. (They had once said 2020).

    Such a revolution would overshadow the maturation of the phone/computer games industry, I think. Oil is the largest commodity traded across the world, with coffee in second place.

    Don Stewart

  13. Ireland’s reaction to brexit and the economic literacy they’ve shown to date generally indicate that their political class are hopelessly compromised by incompetence &/or corruption, the strongest evidence for which would be their reaction to the 2008 crisis. After their developer/banker/politician elite profited wildly off a building boom ponzi scheme that played fast and loose with the rule of law in several ways, they somehow escaped with convincing ordinary people that they, their children and grandchildren had to pay for the heist. Most of those burdened have not even been born yet, so this episode of disaster capitalism must be a textbook example of a beautifully executed plan and speaks volumes about the political infancy of the Irish people. (the worldwide general level is already poor, so that was sad given that the bar was even already set as low as the floor)

    But even if Irish politicians were actually working in the best interests of their own people, they are in a difficult situation, given that the EU have no good reason to reward a former member of their club that chose to leave. Equally although that former member is in a position to hurt Ireland most in it’s own self-destruction, no amount of grovelling to England will get any advantage vs not doing so. Because the Empire-worshiping extremists of the conservative party calling the shots in the UK parliament would only demand more if the Irish looked like they would fold. They have proven this with form for years, culminating in cameron’s final disastrous shuttle ‘diplomacy’ to Brussels for more special treatment than anyone else in the club.

    Most people have not noticed or understood the significance of the EU recently signing a trade agreement with Japan which was the culmination of years of negotiations. As the 3rd largest economy in the world, it’s not the fact that japan have about twice the population of the UK to replace us in trade when we crash out, (which already softens the blow of all lost trade) but their financial heft that is disproportionate. Then there’s subtlety, in that the 10% tariffs currently on Japanese goods coming into the EU will now be phased out soon and not just on the car industry, so the whole point of Japanese companies being in the UK to access the EU market to avoid those tariffs (that Thatcher negotiated so long ago) has just evaporated. Wake up & smell the coffee, the procession of foreign companies leaving or sequentially scaling down will escalate every day, while protesting that it has nothing to do with brexit; uncertainty scares off businesses, its that simple.

    • You seem to know a great deal about the situation in Ireland. My recollections of 2008, when I was in the City, are of astonishment at the sheer folly that was being exposed. Quips were made that “the only differences between Iceland and Ireland are one letter and six months”, and “the Celtic tiger is now a rug” (dealing room humour can be cruel, but is usually incisive). From where I sit now, which is looking primarily at the numbers, I find that Irish debt is, in real terms, almost twice what it was in 2008, whilst most of the intervening “growth” in GDP doesn’t convince even conventional economists, let alone someone who has my focus on ‘prosperity’.

      Ireland has a very particular economic model, which involves attracting multinationals with favourable tax terms, and this only works as a function of EU membership. Logic states that, as the EU is a single market and a customs union, it necessarily has “hard” borders with non-members. This implies a “hard” border on the island of Ireland once the UK becomes a non-member, but, of course, there are tricky political as well as economic considerations here, so I can understand the desire to avoid a “hard” border.

      Unfortunately, nobody seems to have found a workable solution. The Ireland “backstop” causes much understandable anger amongst Unionists and Conservatives. But this might not be such a sticking-point if the rest of the UK exit deal was less punitive. So I can see why Ireland wants to stand firm on the border issue, but think Ireland could be pushing the case for a more generous settlement with the UK on other issues.

      My central point on Ireland, though, is that risk is extreme, such that any disruption is to be feared. An untidy “Brexit” has clear dangers for Ireland, yet the EU seems to listen to Dublin on the border issue, but not on broader issues around the terms being offered to the UK.

      Finally on this, claims made by both sides of the “Brexit” debate ignore the fundamental UK economic issues not caused, or addressed, by whatever the “Brexit” outcome is. The UK economy has major structural weaknesses and has, under successive governments, been mismanaged. These weaknesses won’t be cured, either by going ahead with “Brexit” or by calling it off. In other words, it’s a huge distraction.

  14. Politics and Cunning

    Stronberg argues that the Green New Deal resolution in the US has provided way too many targets for the proponents of Fossil Fuels Forever to shoot at. That the whole thing should be talked about in generalities for quite a long time, resulting in the establishment of agencies which will adopt specific policies.

    I’m of two minds on the subject. I admit that Stronberg is right about the plethora of targets and the knee-jerk reactions about ‘socialism’. On the other hand, for such a major change in our economy to occur, it is necessary for people to be able to imagine an alternative. They need to have some idea how they are supposed to get to work…and taking a bus isn’t likely to sound very good to them. People who commute by bus (such as cleaning people) in my area may routinely take 2 hours to get to work and two hours to get home. People can do arithmetic tolerably well and that is not acceptable. What we actually have is a randomly dispersed population and widely spread job sites, so that it is necessary to connect every point with every other point. The days when all the jobs were in the urban core are long gone.

    If we look at Brexit, it was just an arm-waving exercise in what the people of Britain might like. It did not lay out a credible vision of exactly how the British would manage to get the imports which sustain them if such a thing occurred. (At least, as one not-very-well informed American looks at it.)

    So the difficulty is that change really is hard. One has to convince a majority of the people, and very likely a majority of the Davos crowd, that something other than perpetual QE and something other than meters of sea level rise, is actually possible and offers them some honorable role. And one also has to deal with ‘regulatory capture’. If a ‘Brexit Agency’ had been established in Britain, would it not have rather quickly fallen under the political sway of those wedded to the existing system? I have read some opinions that Mrs. May is being smart…just let everything get worse until finally the only choice is ‘Brexit in Name Only’.

    If the proponents of Brexit had attempted to lay out a program in the detail of the Green New Deal resolution, might the results of the referendum been different? After soberly looking at the difficulties inherent in political change, one gets some slightly more tolerant ideas about politicians and their ‘sausage making’ proclivities.

    Don Stewart

    • The way I read “Brexit” is as a protest vote.

      Though there have always been some strongly pro- and some strongly-anti EU, membership didn’t rank highly on any list of popular issues, far lower than health, for instance.

      But people in the UK are, on average, a lot less prosperous, and more deeply in debt, than they were, say, ten years ago. They are deeply mistrustful of “the establishment”. The high command in politics, business and finance backed “Remain”. This was voters’ chance to kick them where it hurt. They took it.

  15. Hi. Actually I have no special advantage in information on Ireland, the points I mentioned are documented in the various court cases and other publicly available facts as reported by independent, internationally acclaimed news sources such as the Guardian. It astonishes me how certain cultures tolerate parasitism via corruption in their rulers, but I try not to judge because I don’t pretend to know the complexities of their histories that generate the variables in play.

    I’m guessing that the EU are at one with Ireland in strongly prioritising the peace process because they both have a disproportionate desire to avoid war, given their more recent experiences on their own land. All the small celtic nations cursed with proximity to a large aggressive neighbour that has doomed them to vassalage in their recent history have no reason to think being at least a nominal partner in the EU will be worse than the ‘union’ with England. If London cannot even invest or otherwise care about most of the midlands and it’s entire north, what would they care about the celts? The last few decades have proven that their cut of the national cake is what burned crumbs they can scavenge off what fell on the floor.

    The Chinese gamble is fascinating, they have gone all in on investing fiat money conjured out of the air on massive trade infrastructure aimed at tying the Eurasian continent together as never before. So they are basically hitching to Russia, its satellites and the EU via voluntary trade instead of war and effectively replacing the US. (The UK has excused itself from the EU at this crucial time, so will be alone when the US is also retreating from former allies) If China’s trade investment pays off in time, (before it collapses from the debt incurred) it will have been an audacious and brilliant play, the new trade will stave off implosion. If they fail, they at least had a go and maybe it wasn’t a choice to have done nothing anyway, their centre may not have held,what with the pressure of their population to join others in developing too.

  16. Why does trade have to be completely free and frictionless. Having gone walking in the snow early this month I was reminded in a painful way that friction is a fairly useful thing. In terms of the free trade trilemma one is demanded to give up monetary and political sovereignty merely in order to have less friction in trade.

    When I go to a shop I prefer to use cash, but failing that I use a card machine and input my pin number as I think that’s good security. There is such a thing as contactless payments which is probably the equivalent of frictionless trade at the micro level. Put in such terms would it really be that different in terms of sense in giving up democracy just to make contactless payments as it would in the name of frictionless trade and saving us having to enter a pin number?

    Do we really want completely free and frictionless trade and contactless house sales etc? Are they really worth giving up democracy for? It will not be long before your fridge is contactless ordering food for you in order to make shopping more frictionless. This again involves a loss of sovereignty. Anyone else starting to see a pattern here?

    • In China they already work on a ‘Social credit score’. Maybe that will be our future fiat currency. As long as we submit, we can buy stuff. Better start hugging with your local farmer, or start fixing his roof.

  17. Tim,
    Have you included Sweden in your analysis? The currency (SEK) is collapsing, CB has one of the most extreme policies in the world (negative interstate rates and QE), private debt is high, real estate bubble that probably peaked last year, growth is slowing, etc.

    • Unfortunately not. As well as the global model, SEEDS covers 28 countries, though one of these (Iran) is incomplete as I’ve not found debt data for the country.

      Sounds bad, I must say……

    • Yeah, the future seems rather shaky to say the least…

      The banking system is interconnected with neighboring Scandinavian countries. Also, the major banks in Sweden went on a shopping spree in the Baltic countries a few years ago so if/when Sweden’s economy goes down it will probably bring others to the party as well.

    • Thank you. Yes, I have full assessment for NZ, except that financial asset data isn’t available. I was asked to add NZ to coverage, a couple of years ago I think, model 2.22.

      Debt to prosperity (end 2018 est): 293% (end 2007: 260%). Not too bad.

      Credit dependency: NZ has borrowed an average of 3.7% of GDP over ten years, and the ratio seems to be falling – again, not bad.

      Acquiescence risk: quite high. The average person’s prosperity, after tax, is -11.8% since 2007, ranked 10th worst out of 27 countries evaluated. Nowhere near as bad as France etc., of course, but quite enough to suggest popular discontent.

      Hope this helps!

  18. The effects of less surplus income, along with the accumulation of wealth by the few promoted by neo-liberalism, are having clear effect on the number of homeless people here in the UK. That’s compounded by the lack of council houses and the failure to build more homes in the light of mass immigration in recent decades – also compounded by QE inflating the value of assets such as real estate.

    Now this cuts to benefits and the increase in homelessness are having a huge knock-on effect for the NHS.


    • The impact of deteriorating prosperity tends to start at the bottom and move up. We’re seeing this in countries like Britain, where increasing numbers of ‘middle class’ people, formerly comfortably off, are now feeling the pinch.

      This has important political implications which we’ve discussed here before, and which I might explore in more detail in the future. Interpretations of the political outlook need to (but seldom do) take account of the bottom-up worsening of prosperity. From this perspective, Trump and the “Brexit” vote were quite predictable.

  19. Excellent essay; and, as ever, intelligent and informed comments.

    My only advice, unsolicited, to the possibly rather anxious, is: CARPE DIEM. Anyone here is among the most highly privileged on the Earth, so enjoy yourselves (sanely).

    Gold? In a real societal crisis you might very well be tortured and murdered for it. Forget it.

    Pensions? They support not you but your ‘carers’; and once you are dependent, life is worth nothing. If not dependent, you will have done everything you can by the age of 60, if you have truly lived, and so anything more than that is mere ‘extra time’ and not to be fretted about at all. An ‘early’ death/destitution is no real tragedy and it is mere sentimentality to think so.

    By the way, the point came up about artists, etc, receiving ‘fair value’ for their labour: as a craftsman and painter, I have had no trouble at all in making a good profit and earning c £100 per hour for painting and £40 or more per hour for book binding. Most artists and craftsmen are simply chumps when it comes to money, and love to moan.

    As the great traveller and writer Freya Stark said, we have all been booked on a train journey, at birth, to a destination over which we have no control at all: enjoy the view from the window as it unfolds, and your fellow passengers, and play your part well. As someone who suffered and contributed a great deal, she knew what she was talking about…… That woman had guts, and lots of good sense, apart from being the mots wonderful writer.

    Isn’t it going to be most fascinating to see how this all unfolds?

    • @Xabier

      Being nearly 74 I’m coming round to your way of thinking. It’s fscinating how your views change over time; I find I care less and less about less and less, which rather demonstrates, if not proves, your point.

  20. By the way, and I’m sorry I don’t have the exact source, an important stat for Iran is that the government itself said that 40% of their agricultural land will be unviable within the next two decades. Iranian friends have confirmed their water supply problems.

    • I wasn’t aware of this, but water supply is shaping up to be a really big crisis. You may know of the extreme tribulations of Cape Town, and the problems that are acute in the west of the United States, most obviously in California and Arizona.

      Water supply is one of the big ‘demonstrators’ for the energy-based interpretation of the economy. The solution is in some ways obvious – desalination, which, incidentally, is projected anyway to be the source of a growing share of world water supply.

      Given cheap and abundant energy, there’s no technology simpler or more reliable – but its energy intensity is the snag. This can’t be solved by neoliberalism, socialism or financial adventurism. It’s more important than almost any other issue one can name. As well (no pun intended) as being vital for human and animal life, it’s critical for food supply.

    • Interesting near future dystopian fiction I read a while back set in the coming water crisis.


      Fractured west coast US due to water conflict between cities, economy gone down the tubes, and lots of action between city militias and corporate private military. It’s grim, gritty, and based on current trends – my favourite type of sci-fi.

    • @Dr. Morgan
      The saddest thing about water is that we could ameliorate (not eradicate) the problem by fixing agriculture. Agriculture in California accounts for something like 80 percent of the water use. And we do know how to cut agricultural use by half. Similar situation in Arizona. Yet the response is tepid…some little city in Arizona makes it LEGAL to divert storm water into the front yard with a curb cut so that less front yard irrigation water is required to keep the landscaping growing. So one small act of virtue no longer gets you a jail sentence???

      A ‘civically progressive’ but ‘politically conservative’ town near me hired a staffer to try to get people to put in ‘rain gardens’….landscaping at downspouts designed to sink the water into the soil rather than get it into the street as rapidly as possible. The staffer failed. People with half million dollar houses were unwilling to spend 400 dollars to manage water more effectively.

      The scale of the disconnect between the financial mindset and the real world mindset is staggering.

      Don Stewart

  21. Train Ride; Enjoy the Scenery
    I don’t know if we are supposed to find the scenery amusing or depressing. For example,

    At least some of the mainstream media would have us believe that there is a sharp difference between the Democrats and the Republicans in terms of border security. After all, the federal government was shut down for a number of weeks, and now Trump has issued a Declaration of Emergency to do what he wants to do. But, of course, the facts indicate that both parties are engaged in PR campaigns (or virtue signaling, take your pick).

    And for all the discussion about Fascism, the actual Fascism being practiced is not Declarations of Emergency (as the article points out, that’s the way we do business now in the US). The real Fascism that is rapidly emerging is the censorship of dissident voices not strictly controlled by the mainstream media and their billionaire owners (see Dmitry Orlov’s current blogpost). And, of course, the demonization of a scapegoat (in most cases, the Russians).

    Since the US is plainly unable to behave, politically, in a rational manner, it MUST be that devil Putin who is behind our stupid behavior.

    Don Stewart

  22. Thank you for another interesting post Dr Morgan. Is it possible to break down the impact of rising ECoE within a country’s economy, such as by economic sectors?

    • Thanks. It would be feasible to do that, though I tend to concentrate on global and national situations because I have to set priorities.

      This said, I’ve done some sectoral work on the US economy, and the results are interesting.

  23. This was one of the most interesting articles I have read in ages. Thank you Tim for writing it.

    As a layman, I knew GFC1 wasn’t properly fixed, but I couldn’t really explain why – your article has illuminated what I was missing.

  24. Russia; Britain; China ; Risk
    Max and Stacey discuss Britain’s threat to China and Russia to use the ‘hard force’ of an aircraft carrier. They laugh a lot. An aircraft carrier is now a big, fat, sitting duck…according to the Russians and people who look at the new crop of missiles.

    They also discuss a new book which outlines the Belt and Road initiative. The book describes it as a great leap forward. Stacey thinks it’s real. Max thinks the debt in China is a huge obstacle. Stacey describes the US as threatening eastern European countries who indicate they might participate.

    And finally, Putin outlines the current state of affairs and plans for the future. It’s in Dmitry Orlov’s current post, which may well be behind a pay wall. Briefly, Russia has enough money to cancel all foreign debts, and is running a surplus on non-oil and gas sales alone. Oil and gas are icing on the cake. The new generation of weapons insures that if the West starts a war, it will be the last thing they ever do. The new generation of weapons is deployed, being deployed, or being tested. Putin describes the European countries who fall in behind the US as ‘oinkers’…piglets. Putin outlines many domestic initiatives…military spending will not be increased.

    What this all equates to is, I think:
    *Delusion on the part of Britain thinking they can threaten China and Russia with a carrier.
    *The Belt and Road will be a big flop or a big win for China. I can’t see the US being successful just trying to stall it. I have no reason to doubt that Dr. Morgan is correct in his assessment of the financial situation.
    *Russia seems to have escaped the ‘escalate military spending’ trap. They have gone all in on the Mutual Assured Destruction strategy…which is relatively cheap. Ronald Reagan thought that he had bankrupted the Soviet Union with an arms race. Whatever the truth of that claim, it seems that Russia is not biting that bait. NATO can foam at the mouth and brandish conventional weapons…but they are probably never going to lure Russia into a conventional war. Putin has made that point and reiterated it several times.
    *The Russian spending seems like it makes sense…but I could be wrong on the details. Putin is the anti-Macron.

    Art Berman recently posted a talk to a Caspian group. The speaker said that the Caspian area had plenty of natural gas to replace coal in Europe. I suppose also to propel trucks, as Putin predicts. The Caspian group stretches from Russia to Iran. If I were Europe and China and India, I would align my interests with the Caspian group, and not the US.

    Besides the financial risks, it seems to me that there are risks of making strategic errors. For example, Europe could become dependent on US LNG, which is currently being produced as a by-product of tight oil…which I doubt is a reliable long term arrangement. Neither is continuously escalating military spending in the US the solution to any real problem. The biggest strategic error of all would be a NATO provocation which started a nuclear war…but it would be over really quickly.

    Don Stewart

    • Chinese debt escalation is out of control, and nearing a crescendo. Over the last ten years, annual borrowing has averaged 23% of GDP. But in January 2019 alone, China borrowed 5% of GDP. China is repatriating capital, and cancelling a raft of overseas investments. We’re seeing the early signs of this in global property markets. One huge ($1bn) property project in CA has already been scrapped. A second ($1.6bn) is likely.

      China bulls say this retrenchment is just a response to the ‘trade war’, but that’s contradicted by borrowing numbers running back ten years. Annual GDP growth of 6.5% isn’t hard if you borrow 23% of GDP annually.

      This ponzi is nearing denouement – and that will change everyone’s assumptions.

    • @Don

      The UK threatening China with an aircraft carrier and planes that will not be in service for at least 2 years and which have yet to pass full testing in the US in dumb to say the least given Brexit and the need to increase trade with China.

      From what I have read of the F-35 it is pretty useless at all the multi-roles it is meant to fulfil and only really functions as a high-tech quarterback directing older purpose designed aircraft and that its high kill ratio in Red Flag exercises is derived from points scored from this supportive coordinating role. In which case you wonder how useful an aircraft carrier of quarterbacks is going to be as a valid offensive team! That new UK carrier has been designed to only be able carry F-35s so its pretty useless on its own as any kind of threat.

      If you have not read them there are some excellent articles on POGO covering the F-35 and more.

      In 2001 EVEREST E. RICCIONI wrote a telling piece on MICC procurement in the US “Is the Air Force Spending Itself into Unilateral Disarmament?” Its a convincing case that in chasing the most advanced tech solutions the US is getting less and less bang per buck in its procurement strategy because of yet another ethical decline in business and politics. These themes are later developed by Dan Grazier.

      Apologies if you have already read them but here are the links if you have not.




      I sometime think Putin is biding his time waiting for the F-35 to come into full service and the ageing F-16s and others to retire before he ups the ante.

  25. Dr Morgan,

    On China, any tips on who to follow, other than you, for news and comment?

    Secondly, how do you see the popping Chinese ponzi playing out both domestically and internationally.

    • The best blogs to follow on this story are Wolf Street and Christoper Balding. The latter is a terrific expert on China, and I believe lived and worked there until recently. As so often, Wolf gets the best stories on China.

      Your second question is more complex, but the fall-out will be systemic, because:

      (a) China has accounted for 36% of world growth over the last decade

      (b) Chinese funds have helped prop up inflated asset markets (especially property); and

      (c) China is a huge buyer of natural resources.

      Additionally, there are so many ‘fans’ of China, many of whom can’t see beyond reported “growth”, that I suspect there’s huge denial about the scale and imminence of what’s coming.

      I’m expecting a financial crisis there which will overwhelm the authorities’ efforts to prevent and contain it. You’ll be aware of how markets twinge at every twist in the Sino-American ‘trade war’ story – well, that story will be dwarfed by the implications of a Chinese crisis.

  26. Systems Thinking; Water, etc.
    If we make a list of all the things that are currently going wrong, from chronic disease to water to ponzi schemes to nuclear war potential, the number of remedial measures required is countless. And the amount of money (representing both human resources and energy and materials) is beyond the capacity of the biosphere to produce.

    So how did we get into this fix? And the answer is, largely but not completely, that fossil fuels have enabled us to live in ways we did not evolve to live. For example, fossil fuels permitted us to conceive of the idea of paper money that could replicate itself endlessly with an exponential growth rate. (I’ll ignore the notion that nuclear energy might extend our ability to do that.) Fossil fuels also permit us to imagine that medical type problems can be solved with the type of remedial action I described in the first paragraph. But take a look at these two statements:
    *The answer is Fasting. What is the question?
    *Scientists have discovered a revolutionary new treatment that makes you live longer. It enhances your memory and makes you more creative. It makes you look more attractive. It keeps you slim and lowers food cravings. It protects you from cancer and dementia. It wards off colds and the flu, It lowers your risk of heart attacks and stroke, not to mention diabetes. You’ll even feel happier, less depressed, and less anxious.

    The second quotation refers to sleeping, and can be found in Matthew Walker’s book Why We Sleep.

    Both of these solutions cost nothing. The reason they are affordable is because they are the way Nature evolved us to live. It is true that only rich people can go to spas which specialize in fasting. It is also true that only rich people can go to clinics which specialize in sleep. But even the poorest among us can fast and sleep. This should set in perspective the debate touched off by Bill Gates tweet about how marvelous capitalism is performing because more people are making in excess of one dollar and 90 cents per day. What is it we as a society are trying to accomplish? Living the way we evolved to live or earning enough money to patch up the consequences of living in ways we are not designed to live?

    If we examine the specific case of water, we see similar issues. Some Czech scientists have been trying to rouse people to redesign our landscape to store more water. Which essentially means modifying the existing industrial landscape to mimic nature’s way. If the Czech initiative actually works, it will be because we are able to use enough fossil fuels, and have the wisdom to use them correctly, to allow an uneasy co-existence between the truly natural and the natural-mimic. IF it works the way the Czech’s propose, it will also go a long way toward solving global warming, because water would be in the soil rather than in the air as water vapor.

    As another simple example. Nature arranged for teenagers (adolescents) to naturally go to sleep a few hours later than adults. So, the clan has gone to the falls for the annual harvest of salmon, and there is a large encampment with people each clan sees only once a year. The young people need mates, from outside their own clan. And at evening campfires the adults get drowsy and leave the young people to find each other. And so the young people may not go back home into the same clan they came from. Avoiding in-breeding.

    Solving these problems in a fossil fueled economy can require extraordinary expenditure of money (which represents human effort and natural resources).

    When one talks this way, the immediate objection is ‘Lots of people have to die if we go back to the Stone Age’. But underlying the objection is ‘I don’t want to live that way’. If you read Walker’s book, you will learn that a good night’s sleep is essential to the task of creating wisdom…for example, balancing short term and long term objectives. And our fossil fueled modernism has enabled a ‘war on sleep’.

    This post does nothing to solve the problem of keeping a ponzi going. I hope it sets the collapse of ponzis in some context which can be thought about (by those well-rested) and adjusted to.

    Don Stewart

  27. Living Well vs. Inviting Catastrophe
    Coaches of competitive athletes pay attention to sleep. The Olympic Committee has put out a statement on the importance of sleep. Consider these statistics for National Basketball Association players:
    Sleep more than 8 hours: Increases of 12% in minutes played, 29% in points per minute, 2% in 3 point percentage, 9% in free throw percentage.
    Sleep less than 8 hours: Increases of 37% in turnovers and 45% in fouls committed.

    This is related to Ugo Bardi’s Seneca Cliff. When we don’t live as Nature intended, things go badly…and in catastrophic ways.

    Don Stewart

  28. Nafeez Ahmed and prospects for a third world war

    I would add that Dr. Morgan’s analysis of ECoE underlies everything. As I claimed above, it requires exogenous energy to deviate from the ways Nature intended us to live. So long as energy got cheaper and cheaper, we could deviate further and further. Now that energy is getting more expensive, we will be forced back down the curve. Maybe we experience a Seneca Cliff, or maybe we have a Long Emergency. Putin proposes to build world-class Oncology Centers…he does not propose to avoid cancer altogether (so far as I know). Which simply highlights the delusion of output measures such as GDP. If we could imagine a goal of ‘maximum health using natural means’, then we would have experienced a Paradigm Shift. There are many people who have done that…I get endless invitations to their Webinars. But the mainstream is firmly wedded to output and consumption delusions.

    Don Stewart

    • Don, the big ape on top of the rock keeps masturbating. Don’t eat what lies in the sand just in front of you before thinking about it.

  29. A little science and then the scary part
    Sleep works in a coordinated way to help you get through a world of perils, but also opportunities. Sleep helps us get rid of toxins generated by just living or toxins which have crossed the blood/ brain barrier, it helps us craft a manageable story about reality, and it helps us imagine what the opportunities are by engaging with far-flung regions of the brain. If a Hedge Fund Manager is sleeping well, s(he) will be able to formulate the question ‘What would a Hadza do?’ And then sift the evidence for and against while they sleep.

    Focusing for the moment on getting rid of the toxins. Dr. Maiken Nedergaard at the University of Rochester made one of the most spectacular discoveries of recent decades. …a kind of sewage network called the glymphatic system that exists within the brain…just as the lymphatic system drains contaminants from your body, the glymphatic system collects and removes dangerous metabolic contaminants generated by the hard work performed by neurons in your brain, rather like a support team surrounding an elite athlete…Associated with the pulsing rhythm of deep … sleep comes a ten to twenty-fold increase in effluent expulsion from the brain.’

    If you followed the NBA statistics on turnovers and fouls, you know that failure to let the sleep cycle complete its work has repercussions in the waking world. I also call your attention to Putin’s recent statement that dealing with Donald Trump ‘gives me ulcers’. ‘Those few memories you are able to learn while sleep-deprived are forgotten far more quickly in the hours and days thereafter.’ So…is describing Donald Trump’s behavior as ‘erratic’ accurate? Would a sane and sensible world leader get ulcers trying to follow the latest erratic movement?

    Is Trump caught in a cognitive bind trying to put together what he thinks he learned a long time ago and the inconsistent evidence from current reality? Is he having trouble seeing opportunities as well as problems? Matthew Walker had this to say after trying to change Harvard University: ‘theories, beliefs, and practices die one generation at a time’. Absence of sleep contributes to that effect.

    What do Ronald Reagan, Margaret Thatcher, and Donald Trump have in common? All three professed to need only 4 or 5 hours of sleep per night. The first two died with Alzheimers. Reagan thought that deficits did not matter. Thatcher thought that Britain didn’t need to make anything for itself.

    Don Stewart

    • Don: I agree about sleep completely, and have been very influenced by the Matthew Walker book.

      However re Trump: he is no more than a full blown narcissist driven by fear.
      Seems simplistic I know but his behaviour is totally driven by a compensatory craving for love he lacks himself. This analysis is not inconsistent with anything we have ever seen of him.
      Any attempt to reconcile his choices with how (we) sane people rationalise is futile.
      So many people poke around in the dark looking for some complex modus operandi because it has not been widely understood that the narcissist/megalomaniac does not have feelings/love/compassion/empathy like most of us.

      And the great paradox: if I am right, how could such a person be in this position??
      I don’t think my proposition in inconsistent with Tim’s hypothesis on populism.

    • @Martyn
      Not an argument. Just a suggestion about recurring patterns.

      Yesterday I was in the bookstore and picked up Never Enough, by Judith Grisel. Judith, from the age of 13 through 23, never turned down a drug. Now she is a behavioral neuroscientist. So she writes about addiction from both a personal and professional viewpoint. The title comes from a companion who remarked that ‘there will never be enough cocaine’. Addicts are willing to sacrifice everything for another hit. (I’ll let you draw the parallels to billionaires wanting more money.) Judith says that if she were going to be stranded on a desert island and could take only one thing, it would be a marijuana plant because marijuana, at least for a little while, turns a drab world into technicolor. Of course, after a while the drab world, when one is not high, is even more awful.

      In contrast to all of the other controlled substances she talks about are LSD and its companions such as peyote. LSD is not addictive and does not give one a hit of dopamine. Instead, it seems to open the mind to different ways of experiencing the world. Many indigenous cultures discovered the plants which give LSD like symptoms, and include them in their religious practices.

      The thing that strikes me is that sleep does the same thing. Every night of good sleep includes the REM sleep which allows us to rearrange the world in our imagination. So that, for example, a child who is about to start walking gets a huge dose of REM sleep to help them explore how they need to rearrange their physiology in order to walk upright.

      I have an Oura ring which monitors my sleep and gives me recommendations. Last night, I had a lot of deep sleep and not so much REM sleep. Should I be worried that I wasn’t getting enough REM sleep, or confident that my body simply needed more of the deep sleep? Is my body capable of making the ‘decision’ that it made when I learned to walk? Or is the body no longer reliable and we human adults need to somehow ‘engineer’ the result we want?

      In terms of Dr. Morgan’s work, let’s speculate a little bit. We might be going along fat, dumb, and happy, when things begin to go wrong. We will attempt to rearrange the way we are living in our REM sleep. Are there things we an do to assist our REM sleep, such as deliberate study of different ways of living? Are there things we can do to hinder our REM sleep, such as watching late night screens? Do we need to try to engineer more REM sleep, or is sleeping the way our distant ancestors did and let Nature do it’s thing as good as it gets?

      My suspicion is that we can’t engineer REM sleep any better than Nature does it for the toddler. I think we can deliberately expose ourselves to different ways of living, so that the REM sleep has more raw materials to juxtapose and figure out new combinations.

      And I am pretty sure that people who deprive themselves of REM sleep are not going to be as flexible and innovative when it comes to confronting changing circumstances. Can LSD and similar substances help? All of our ancestors used them when they were available. But they were sacred substances, not recreation.

      Don Stewart

  30. The power base, fiat currencies, will survive. That is, not in their current form. All savings, pensions,, debt, mortguages etc to be called null and void when the time comes. Sooner, not later, and, when we do not expect. The new tax base will be possession.

    Living standards will decrease by 70 +%

    Yellow vests will be shot with live rounds during several months until reality returns.

    If we’re lucky.

    Imagine; ‘money’ , just like the internet, dissapears. A fake, delusional bits & bytes based completely fucked up society returning to reality…

    To me, it would be a lot of fun to see all those stupid faces looking at ballot boxes that were empty for decades, ‘money’ that wasn’t even there, fogs as far as the eye can see…

    If we make it, that is.

    A ‘beautiful deleveraging’ is not in the cards my friends…

    • ” . . . a society returning to reality … ”
      No, Houtskool.
      More like, “a society being dragged, kicking and screaming, back to reality !”

  31. Hi Tim

    I’m just reading a paper by a German born economist at Oxford University, Richard A Werner from 2016. “Shifting from Central Planning to a Decentralised Economy”


    Interested to hear your views on it as I think we need to synthesise a number of critical perspectives in order to address the political and economic issues that GFC2 will present.

    He also did a good piece on Brexit around the same time.


    • Thanks, especially as I’m working on something to which this relates.

      What I’m trying to do now is to sketch out the likeliest lines along which the coming crises will develop.

      One of the factors visible now is what I might almost call a ‘creeping infantisization of authority’ – simply put, more and more people in positions of authority are behaving like very young children. For instance, the UK Parliament, sometimes described as a mad-house, is actually starting to look more like a kindergarten (though this isn’t remotely a purely British phenomenon).

      Perhaps the diminishing role of adults in central government contributes to a case for decentralization?

    • Thanks Tim

      It seems historically there has always been a response to economic hardship of movement to extremes. One of the aspects of the internet that I find heartening is that hopefully this is unlikely to happen and that we will not move to extremes of Marxism of Nazisim although nothing is guaranteed and there are always those who wish to hijack any popular protest for such extreme ends.

      I had really thought that in the millennium we had globally realised the pointlessness of war and global conflict but none of us had factored the entrenchment of certain what you might call globalist deep state interests. Hopefully good, morality and ethics will prevail but its looking more and more unlikely which only leads me to think the future is rather darker than I would like.

      In these uncertain times even though we are not precisely aligned politically then we all need to stand together for what we fundamentally feel is right for humanity and the world in general.

      I seems rather sad that I even have to state such obvious things.

    • “It seems historically there has always been a response to economic hardship of movement to extremes. One of the aspects of the internet that I find heartening is that hopefully this is unlikely to happen and that we will not move to extremes of Marxism of Nazisim although nothing is guaranteed and there are always those who wish to hijack any popular protest for such extreme ends.”

      If anything the Internet has accelerated the divergence to extremes, as people with dissident views are able to find others who share their views much easier than in the past.

    • “I had really thought that in the millennium we had globally realised the pointlessness of war and global conflict but none of us had factored the entrenchment of certain what you might call globalist deep state interests. Hopefully good, morality and ethics will prevail but its looking more and more unlikely which only leads me to think the future is rather darker than I would like.”

      This viewpoint is a utopian idealism enabled solely and uniquely by the bubble of fossil fuel energy that allowed for unprecedented prosperity. People weren’t fighting or warring because the pie was growing and they were getting a piece.

    • @djerek

      I see that your are one of those incredibly intelligent people who believe that it is immoral to spend public money on health, education or anything of social good but think that you can kick-start an economy by going to war. You are a war criminal if you think such things but will never admit it like Tony Blair. I despise you fully.

  32. Tim, thank you for another excellent assessment. You mention the infantisization of authority, but may I be bold and suggest that we have infantisization of the citizenry. I believe that one of factors contributing to this phenomenon is hyper-consumerisation: the customer (citizen) is always right, and has demands that must be met. I use the term consumerised democracy to describe our current state in which voters’ increasingly ‘pick-and-mix’ with either little or declining loyalty to any political party. I would be very interested in ‘your take’ on the situation.

    • Thanks Kevin.

      I keep returning to this remark from Eric Ambler:

      “In a dying civilization, political prestige is the reward not of the shrewdest diagnostician, but of the man with the best bedside manner. It is the decoration conferred on mediocrity by ignorance”.

      In other words, when times are hard we turn, not to those who can tell us what is wrong, but to those who tell us comforting bedtime stories.

      Of course, Ambler was writing in 1939, and he had in mind the descent into chaos that was the 1930s. Someone in Britain described Baldwin, MacDonald and Chamberlain as “the three mules”, though much the same could have been said elsewhere.

      These are very different times, but there are similarities. Whereas the menace in the ’30s was a descent into the chaos of war, what threatens now is a descent into chaos caused by reckless financial responses to deteriorating prosperity.

      When following the “Brexit” debate, I’ve been struck by the childishness, petulance and sheer foolishness of so many Parliamentarians, but much the same could be said of many other countries, with France and Ireland coming to mind.

      Politics seems to be descending into Shakespeare’s “second childishness” (the penultimate of his seven “ages of man”).

    • Dr Tim, and Kevin,

      Infantilisation of the citizenry has been under way for decades. Associated, relevant factors are the consumerist sense of entitlement, the culture of instant gratification, and dumbing-down.
      “Perhaps the diminishing role of adults in central government contributes to a case for decentralization?” But why should people in regional or local government, or in non-governmental organisations, be less infantilised than those in central government? Maybe the infantilisation of MPs is no worse than that of parish councillors, but receives much more exposure in the media?

    • “Maybe the infantilisation of MPs is no worse than that of parish councillors, but receives much more exposure in the media?”

      So blame all of the world’s ills on parish councillors.

      Well done the CIA we all believe you.

  33. When I first opened a bank account all I had was a cheque book and £50 guarantee card. We can fast forward to the chip and pin system but did making sales transactions easier actually lead to more trade? One can only spend what one has as disposable income or spend on credit. The ease or less friction of transactions makes no difference as if we were only limited by available shopping hours in terms of what we might buy. Shops can open 24/7 but we can only spend what we can afford and their opening hours does not impact upon that extreme limiting factor of how much we have to spend.

    It seems to me that a lot of concepts such as the EU etc, are entirely dependent on the notion that making trade or spending easier will automatically lead to a greater volume of trade or sales. This is obviously not the case. Contact less card payments do not effect my spending as such, all they do is supposedly make it ‘easier’ and it is debatable whether that is a good thing or not. The EU in terms of seamless markets etc has consistently failed to meet any satisfactory empirical conditions that would confirm any of its founding logics and the response has been that if it failed to produce the desired results that this was a failure due to the lack of real integration and openness as opposed to realizing that there were constraints on what people or nations had to spend.

    This view which gravitates toward ever closer integration censures the far more radical view that trade was always limited in terms of what was affordable to any given entity at any given time. Does anyone seriously believe that by dictating that everyone shift to contact less payments rather than chip and pin that this would necessarily lead to increased sales? That appears to be the macro logic that we are locked into.

    • One of the most telling weaknesses in the EU, it’s always seemed to me, has been the artificiality of some limits to ‘friction-less’ trade.

      By way of illustration, imagine a British (say) motorist, who goes on-line and finds that petrol is cheaper in, let’s say, Greece than it is in Britain. Ideally, he could order his fuel from, say, Shell in Greece, pay the Greek price including taxes, and then pop along to his local Shell station to collect it. The same could apply to, for example, wine or cigarettes. Obviously, this doesn’t work. There are all sorts of similar examples, in different countries – in Spain, for instance, a customer can’t order a car from Germany to be delivered to Barcelona, or for that matter an LHD car from England. If a customer wants something a bit different – say a Brabus or a Caterham – he can’t readily get it.

      This isn’t, in itself, all that significant (though I might suggest in passing that, if this had been possible all along, it might have engendered warmer feelings towards the EU in British voters).

      But it raises the question – ‘friction-less trade for whom?’

      I don’t want to get into “Brexit” – ! – but I’m baffled by the way politicians in various countries are behaving. The idea of “ruling out a no-deal “Brexit””, for instance, is plain daft – what incentive is there for Brussels to offer Mrs May a better deal, if they know she has to either accept whatever they offer her, or suspend “Brexit”?

    • In terms of the foundation of the EU it was originally based on Ricardo’s theory of comparative advantage under which easier trade with fewer barriers does lead to more trade.

      You might argue that the fact that we now have a regime of fiat currencies has lead to a fundamental disconnect between money and resources and that it’s this fact, and the monetary adventurism it allows, rather than the actual payment mechanisms is leading us down the wrong road.

  34. In a thoroughly postmodern ironic post script to my last comment I might suggest that we believe we can ‘improve’ hurdling by removing the barriers to hurdling.

    • Simon,
      the speeding up and easing of consumer transactions was beneficial in an expanding economy where consumers would have more discretionary income to spend in due course,

      but yes, now wages are stagnant and due to increasingly more discretionary income being diverted to fixed costs consumers pot’s of spendable money empty so quickly it seems of little benefit,

      the processing of cheques with a guarantee card were laborious, contactless and digital transactions do allow businesses and banking to reduce labour costs though, look at automated checkouts at supermarkets for instance.


      you could take a van down to Greece and fill jerry cans with petrol and then bring it back but there are understandable safety regulations about how much petrol you can purchase in one transaction at a petrol station, the containers you put it in and the transportation of large volumes of inflammable liquid on the road and also aboard a ferry or train through a long tunnel,

      the logistical costs and quantity limitations make small scale petrol importation financially unviable, it still doesn’t stop you filling up your tank and a couple of cans before leaving a cheaper price region and entering a more expensive price region,

      cars are physically, mechanically, problematic with LHD & RHD markets, within a LHD region you can go to a cheaper country and purchase a new car then trailer it back to your own country where you register it, a second hand car you would just drive back and re-register it,
      for LHD markets a friend was importing SH cars from Japan, a LHD market, via N Ireland for the VAT advantage then onto England where they would be adapted to EU market spec: fog light, MPH speedo etc. registered and then sold for UK use.
      we were buying new Japanese motorcycles in the manufacturers crate from a German dealer who delivered them to us in England via an independent haulier, we would uncrate, assemble, PDI & register them and sell them to UK customers,

      with booze & fags you could do a run over to France, it was best doing fags as a foot passenger with a rucksack, alternating the courier, times and routes so as not to get spotted as a regular where the Customs & Excise could then accuse you of being a commercial operation and sieze your goods,

      a car load once or twice a year could be justified, van ferry tickets are prohibitively expensive, classed as commercial, by fitting one window, a bed and some cooking gear you could re-classify it as a camper and use the Caravan Club membership deal on ferry ticket bookings,

      so everything is/was possible but always hindered by understandable regulations & logistical costs,

      say with new vehicles, you would have to find a dealer who would sell you the vehicle unregistered and as delivered by their supplier, many had corporate policies that protected their monopoly as an outlet and only sell the vehicle registered, on the road, PDI’d etc. but there are/were people prepared to play ball,

      the over arching issue with the EU and frankly governments in general is that the interests of governments and big business have always come ahead of the interests of consumers,

      consumers have no representation in the neo-liberal model, they can only express themselves through their purchasing habits and by using their ingenuity to circumvent barriers and if their individual activities en masse are noticed and deemed a threat to cosy government and corporate arrangement then laws and ammendments will be swiftly put in place to knobble the cheeky serfs.

      I’m not rabidly pro Europe, my main bug bear with europe is the corporate capture, the neo-liberalism that has penetrated it’s thinking as it has penetrated so much of all western governments and trading bloc’s,

      neo-liberalism is the unification of corporate and government power over and above the interests of the plebs who are just seen as chickens to be herded and plucked at will,

      the plebs aren’t allowed to organise, unionise, have advocates, they’re fed weasel words about how free and delightfully individual they are and how they can do anything they like so long as it fits within the rigid framework set by the government/corporate alliance,

      Benito Mussolini did say that Fascism had become a derogatory term and it was probably better to refer to it as Corporatism,

      Remaining or Leaving the EU will have no effect upon neo-liberalism/corporatism, if anything leaving will cut off the British serf from a few additional wrinkles he could use ingeniously to modestly improve his situation,

      this is why I voted Remain, I did not wish to cut off my nose to spite my face in a futile gesture that will do nothing to break the neo-liberal/corporatist capture of everything,

      our government, corporate media etc are currently squabbling over how best to preserve their interests, they couldn’t give a shit about the peasants,

      at the moment the peasants in Britain are moody, sullen and grumbling but not actually rebelling so they will be ignored,

      in France the peasants are rebelling, hence they are being shot in the face with tear gas canisters,

      in Britain we are at an impasse, the government and media ignoring the peasants, the peasants mutinous but not triggered into action,

      it took very little to trigger the Poll Tax march riot, it was a minor incident that triggered the South London riots a few years back, I even remember the Brixton riots and how they started to spread nationwide,

      a no deal Brexit seems likely, the government shows no sign of being able to organise a piss up in a brewery let alone the fallout and readjustments required by a no deal Brexit,

      the British public take a painfully long time to come to their boiling point but when they lose their shit all their anger and frustration comes out in one big wave,

      the government has already hinted about the possibility of Martial Law,

      currently I see no sign of a way beyond the current impasse without passing through a period of conflict,

      I’m glad I don’t live in a major population centre.

  35. Hello Tim,

    Every where I’ve looked this last week the indicators and anecdotal evidence of the state of the economy in Europe and the far east is dire

    I see dominoes wobbling everywhere, but China and Germany in particular seem to be doing badly.

    Do you have any further thoughts on this and what it could mean/portend for us in the UK and the rest of the world as we move further into 2019?

    • Yes, I do.

      For starters, the global system is unstable. You can’t pour ever-rising amounts of cheap debt and cheap money into the system without creating a bubble and a crash. This time, the authorities have almost no shots left in the locker. When asset prices plunge, huge amounts of debt used to buy those assets gets pushed into default, starting a cascade effect.

      I continue to be taken aback by how rapidly the situation in China is deteriorating. It’s long been a ponzi economy, borrowing 23% of GDP annually to provide “growth” in GDP of 6-7%. If any Western country was doing this, markets would have woken up to it long ago. The consensus seems to think that China “is different” but, on such fundamentals, it isn’t. Even stated-owned enterprises (SOEs) are now going bust. Balance sheet “cash” is turning out to be imaginary in far too many cases. “Shadow banking” is huge. China has started repatriating capital at rates that threaten asset (and especially property) markets around the world. The biggest property price falls are happening in places where the Chinese influence has been greatest.

      Germany is something of a one-off, because of the scale of the benefit it gets from the euro. But that benefit is eroding, and whether Spain and Italy could ever repay the 1 trn euros owed to Germany through the Target2 system has to be highly doubtful. Any euro area crisis – likeliest locations are Italy, Ireland and France – will turn up on Germany’s doorstep.

      Though the UK economy is credit-addicted, Britain’s main risk is contagion. When GFC II erupts, who will want to own sterling, with UK financial assets at 11x GDP (worse than Cyprus in 2008), and an economy that doesn’t earn its keep, and relies on borrowing as well as selling assets to foreign investors?

    • I think I should add that things are deteriorating NOW. China is the big one, obviously, but things are topping out and turning down almost everywhere you look.

  36. The world without industrial agriculture

    Here an academic and 5 real farmers in South Carolina do revolutionary things and get great results. ‘I went cold turkey’ and ‘what we have been told is just wrong’. Their results speak for themselves.

    I would like to call attention to a couple of items. First, by buying fewer inputs the farmers lower their breakeven production requirement. In a year with crop disease, these farmers would not go bankrupt. High input farmers could very well go bankrupt…or just get deeper into debt.

    Second, we can begin to see what agriculture might look like in a post-fossil fuel world. In a world without Haber Bosch, the nitrogen will have to come from legumes treated as a cover crop and killed at the appropriate time. That is, one grows a legume crop, kills it when nitrogen in the soil is at a maximum, and then plants the cash crop to take advantage of the nitrogen. So continuous, high yield agriculture will likely be a casualty of the collapse of industrial civilization. But that doesn’t mean we can’t grow food.

    Third, what about all that equipment? Are we back to peasants working the fields? Perhaps, but perhaps not immediately. It is quite possible for a farmer to dedicate some land to growing biofuels and keep the machinery working. There are tractors still working which are 60 years old.

    It would really help the transition if we could devise wise policies to begin the transition now. But the prospects for that happening don’t seem very good, given our miserable response to the challenge of climate change. The best that may happen is that more farmers will figure out that high-input agriculture is a financial loser, and begin to wean themselves away from Big Ag. Such a course of action also reduces their dependence on Big Finance and Big Government.

    Don Stewart

  37. Tim,

    On China, were we not all assured, as you say, that China was different. The central party control over the levers of power were supposed to mean that they could snuff out any problems.

    So do you think that the situation is as it is because they’ve lost control or is it to some extent to do with their desire to bring credit and debt under control. ?

    • There are all sorts of risks out there, but China is the big one. Other risky economies (such as Ireland, Britain, France and Canada) pale into insignificance beside China.

      I don’t know why anyone ever believed in the infallibility of the centralised control system – it hasn’t worked too well in other places (like East Germany), has it? The belief that somehow China “is different” seems to reflect the stereotype of “the inscrutable Chinese”. I’ve never believed in such stereotypes.

      The aim in China has never been profitability, as it is in the West, but the maintenance of stability, and this, above anything else, means continuity of, and growth in, employment. This isn’t just about population growth, but migration from the countryside to the cities. According to Leninist theory, the (rural) ‘peasantry’ has always been poor revolutionary material – the (urban) ‘proletariat’ is far more likely to cause trouble. So urbanization increases risk.

      Maintaining employment means an emphasis on volume, not profit. It means that price discovery, and returns on capital, are not of first-rank importance.

      My interpretation is that it’s dawning on Beijing just how dangerous a debt-fueled emphasis on ‘volume at all costs’ really is. I’m not sure there’s much evidence of a plan for how to deal with it. Additionally, of course, this is the worst possible time to be faced with trade restrictions from the US, especially with America’s own economy weakening behind the smoke-and-mirrors of cheap money.

    • In a petri dish, that’s where we are now, instead of the endless growth of capitalism, communism, populism, whatever….

      When even hopium failes on us, we return to reality

      Like a pinguin on an empty beach, with polar bears hiding behind the rocks, and killer whales hiding behind the waves.

      Rocks of perception, waves of eternity, a beautiful spectrum of life.

      Adapt or die, a rather harsh statement isn’t it?

  38. Losing control, in China and the US Senate
    Those who think they have power frequently don’t realize the difficulties the leaders are likely to run into. The Chinese leaders hitched themselves to a powerful meme…everyone gets rich…and that meme got away from them. Dianne Feinstein, the Senator from California, had the meme that ‘the public voted for me and now I am in control’. When a twenty-something Representative from Queens and a school girl from Sweden upset her plans, she insults a group of school children…because she has convinced herself that questioning her own judgment is intolerable behavior on their part. (You can search on Feinstein and Green New Deal to get the video.)

    I have begun to think that the poem about ‘the center cannot hold’ is not as relevant to us as the notion that ‘peasants are coming with pitchforks’.

    Don Stewart

  39. Brexit; Debt Crisis
    A thoughtful article by a native of Zimbabwe who is a graduate student at Oxford:

    In Britain, it seems that the concrete proposal to Brexit has exposed the lack of consensus about what the people of the island hope to achieve. In the US, it seems to me that the Green New Deal resolution has similarly exposed the lack of consensus. Just as in Britain, we have trillions of dollars to rescue banks, subsidize the military machine, and subdue foreign governments, but no money to spend on the general welfare…according to an allegedly ‘liberal’ senator. An Oscar award plea to make the next election about love instead of hate drew an angry response from our President. So listening isn’t one of our virtues. The blogs I glance at are full of the authors suggestions for what the Green New Deal really needs to be about…but I don’t detect much coherent thought which starts from the basis of physical reality. If we are really as poor as Dr. Morgan’s numbers indicate, then we are going to either have to pick our targets carefully or else we will suffer the poverty which will inevitably result.

    Don Stewart

    • Adapt or die, dear Don. It really is not that difficult.

      Our tickets on the monetary plane are (way) overbooked. So either we hang on to its tail, which is a quite uncomfortable position to be in, or we enter the physical plane that has only seats for a few hundred million of us.

      Your ticket is your mindset. Are you ready?

  40. Hello Tim,

    Li Keqiang’s proposals to the Natonal People’s Congress this week. Are they problem solved or scale of problem acknowledged?

  41. How much is a trillion dollars?
    From Woody Tasch:
    If someone had lent Jesus $1 trillion at zero percent interest on the day he was born, and it was to be paid back by him and those who came after at the rate of $1 million per day, payments would still have more than 500 years to go.

    Don Stewart

  42. Whither Britain?
    The Automatic Earth has a story on the Skripal affair in today’s March 5 edition, which you can find with a search. Ilargy opines that:
    ‘Britain would fall apart if it could no longer unite vs Russia.’

    The article itself lays out all the reasons to believe that the official British story is nonsense.

    All this must be very painful for the British. Almost as painful as watching the antics in Washington is to Americans.

    One difference is that the British proclaim that they are doing something about climate change. In the US we brag that we are doing nothing and saving the money.

    Don Stewart

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