Category: Stimulus spending

A love for the wild!

Why can’t we leave nature to do what’s best for our world!

Now, I would be the first to ‘tut-tut’ a little over my sub-heading. For here I am sitting in front of a computer in a room in a reasonably-sized home that undoubtedly has denuded the natural world formerly underneath the present foundations.

Plus, as the property boundary shown on the above picture confirms, about 50% of our acreage is no longer wilderness.

Ergo, it is impossible for humans to live on this planet without there being consequences that conflict with the natural order of the wild.

But homes to live in are one thing. A planned madness for the Lake District in Northern England is another thing altogether.

Read this latest essay from George Monbiot, republished with Mr. Monbiot’s kind permission.

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Fell Purpose

19th May 2017

The attempt to turn the Lake District into a World Heritage site would be a disaster

By George Monbiot, published in the Guardian 9th May 2017

If this bid for power succeeds, the consequences for Britain will be irreversible. It will privilege special interests over the public good, shut out the voices of opposition and damage the fabric of the nation, perhaps indefinitely. No, I’m not writing about the election.

In the next few weeks Unesco, the UN’s cultural organisation, will decide whether or not to grant World Heritage status to the Lake District. Once the decision is made, it is effectively irreversible.

Shouldn’t we be proud that this grand scenery, that plays such a prominent role in our perceptions of nationhood, will achieve official global recognition? On the contrary, we should raise our voices against it. World Heritage status would lock the Lake District into its current, shocking state, ensuring that recovery becomes almost impossible.

Stand back from the fells and valleys and try to judge this vista as you would a landscape in any other part of the world. What you will see is the great damage farming has inflicted: wet deserts grazed down to turf and rock; erosion gullies from which piles of stones spill; woods in which no new trees have grown for 80 years, as every seedling has been nibbled out by sheep; dredged and canalised rivers, empty of wildlife and dangerous to the people living downstream; tracts of bare mountainside on which every spring is a silent one. Anyone with ecological knowledge should recoil from this scene.

This photo was used as the frontispiece of the “State of Conservation” section of the bid documents. It is meant to show how beautiful the fells are. If we saw it anywhere else, we would recognise it as an environmental disaster.

The documents supporting the bid for world heritage status are lavishly illustrated with photos, that inadvertently reveal what has happened to the national park. But this slow-burning disaster goes almost unmentioned in the text. On the contrary, the bid repeatedly claims that the park is in “good physical condition”, and that the relationship between grazing and wildlife is “harmonious”. Only on page 535, buried in a table, is the reality acknowledged: 75% of the sites that are meant to be protected for nature are in “unfavourable condition”.

This is another photo from the bid document, showing St John’s Beck in Thirlmere. The beck is notorious for its flashy response to rainfall – rising dangerously fast. It’s not hard to see why. As the photo shows, it has been dredged and canalised on behalf of the farmers in the valley, and now contains almost no natural features that can slow the flow.

This great national property has degenerated into a sheepwrecked wasteland. And the national park partnership, that submitted the bid, wants to keep it this way: this is the explicit purpose of its attempt to achieve world heritage status. It wants to preserve the Lake District as a “cultural landscape”. But whose culture? Whose landscape? There are only 1080 remaining farms in the district. Should the entire national park be managed for their benefit? If so, why? The question isn’t raised, let alone answered.

I can see the value and beauty of the traditional shepherding culture in the Lake District. I can also see that the farming there, reliant on subsidies, quad bikes and steel barns, now bears little relationship to traditional practice. As the size of landholdings has increased, it looks ever more like ranching and ever less like the old system the bid describes. The bid’s claim that farming there is “wholly authentic in terms of … its traditions, techniques and management systems” is neither intelligible nor true. Remnants of the old shepherding culture tend to be represented ceremonially, as its customs are mostly disconnected from the farm economy.

Shepherding is not the only cultural legacy in play. The other is that the Lake District is the birthplace of the modern conservation movement. Inspired by the Picturesque and Romantic movements, much of our environmental ethic and the groups representing it, such as the National Trust, originated here. Attempts to preserve natural beauty in the district began in the mid-18^th century, with complaints against the felling of trees around Derwent Water. Today, the national park cares so little for this legacy that, as the bid admits, “there are no data available” on the condition of the Lake District’s woodlands.

The small group favoured by this bid sees environmental protection as anathema. Farmers’ organisations in the Lake District have fought tooth and nail against conservation measures. They revile the National Trust and the RSPB, whose mild efforts to protect the land from overgrazing are, with the help of a lazy and compliant media, treated like bubonic plague. As one of these farming groups exults, world heritage status “gives us a powerful weapon” that they can wield against those who seek to limit their impacts. If the plan is approved, this world heritage site would be a 230,000-hectare monument to overgrazing and ecological destruction.

30 years ago, this was a bare sheep pasture (with a couple of seeding birch trees). This is a photo I took (with my failing phone) on a hill elsewhere in Britain. It gives an idea of what parts of the Lake District fells could look like if they were allowed to recover.

This is not the only sense in which the bid is unsustainable. Nowhere in its 700 pages is Brexit mentioned. It was obviously written before the referendum, and has not been updated. Yet the entire vision relies, as the bid admits, on the economic viability of the farming system, which depends in turn on subsidies from the European Union.

Without these payments, there would be no sheep farming in the Lake District: it operates at a major loss. European subsidies counteract this loss, delivering an average net farm income of £9,600. Unsurprisingly, people are leaving the industry in droves: the number of farms in the national park is declining by 2% a year. And this is before the payments cease.

What is the national park partnership, that prepared this bid, going to do – march people onto the fells at gunpoint and demand they continue farming? Or does it hope that the government, amid the massacre of public investment that will follow Brexit, will not only match but exceed the £3bn of public money currently being passed to UK farmers by the European Union? Your guess is as good as mine. This omission alone should disqualify the bid.

The failure to mention this fatal issue looks to me like one of many attempts to pull the Herdwick wool over Unesco’s eyes. The entire bid is based on a fairy tale, a pretence that the rural economy of the Lake District hasn’t changed for 200 years. If Unesco grants world heritage status on these grounds, it will inflict irreparable harm on both our natural heritage and its own good standing.

The hills, whose clothes so many profess to admire, are naked. The narrative we are being asked to support is false. The attempt to ensure that the ecological disaster zone we call the Lake District National Park can never recover from its sheepwrecking is one long exercise in woolly thinking.

http://www.monbiot.com

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When one reads this one is left with a feeling of great sadness. A sadness that our ‘movers and shakers’ can’t resist the urge to meddle. Can’t understand the beauty that is found in nature in the raw.

Earlier on I illustrated how our own property has ‘interfered’ with the wilderness of this most beautiful Oregonian countryside. But as I hope to show you with the following photographs taken on our property back in 2014 that wild beauty can be hung on to in some measure.

Looking upstream along Bummer Creek from the driveway bridge.

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Looking farther downstream from the bridge.

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Finally, back to that Unesco proposition.

The details may be found on the Unesco site here: http://whc.unesco.org/en/tentativelists/5673/

I have sent a message to Unesco asking if the views of the public are being taken into account and, if so, how those views are to be communicated to Unesco. If you wish to contact them then the details are on this page: http://whc.unesco.org/en/world-heritage-centre/

Any replies from Unesco will be posted here.

UPDATE 0815 PDT May 22nd.

My email yesterday to Unesco was ‘bounced back’ as an invalid email address (despite me using the email address on the Unesco website!!).

But following George Monbiot’s reply to me, giving me the name of James Bridge (jbridge@unesco.org.uk) at Unesco, I have now sent Mr. Bridge the following email:

Dear Mr. Bridge,

I write as a British citizen, born a Londoner in 1944, to protest in the strongest possible terms to the proposal to turn the English Lake District into a World Heritage Site. This is your Tentative List reference http://whc.unesco.org/en/tentativelists/5673/.

Would you please provide me with the details of where or whom within Unesco I can write setting out in detail my objections to this proposal?

Your soonest reply would be very much appreciated.

Sincerely,

Paul Handover

I won’t hold my breath over getting a quick reply.

This interconnected world.

There is no question that we are living in interesting times!

Back in the old country there was a popular saying: “There are liars, damn liars, and politicians.” I am insufficiently aware of politics in both my new home country, the US of A, and my new home state, Oregon, to know if that saying is equally pertinent to life in America as it was in Great Britain – I suspect that it is.

So what’s getting ‘my knickers in a twist’ today? Namely the state of the world economy.

There seems to be so much spin and counter-spin that getting to the truth of what is going on, economically speaking, is not straightforward.

Which is why a recent article posted by Raúl Ilargi Meijer over on The Automatic Earth jumped out at me. To my eyes, it really did cover the truth of what’s going on. And to double-check my analysis I shared it with Dan Gomez, no stranger to global finances, and he found it useful. Indeed, this was Dan’s reply: “That’s pretty much it. This should be the top of the world news every week until governments become accountable. All the other big issues of the day pale compare to the backlash from this sclerotic thinking. Good luck to all of us.”

Raúl has very kindly given me his permission to republish this. It’s not an easy read but that doesn’t detract from the value of the essay.

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Why This Slump Has Legs

January 18, 2016 Posted by Raúl Ilargi Meijer

Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth’”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

Now of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth’”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

And global debt from a longer, 65 year, more historical perspective:

It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

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If you found your mind wandering somewhat as you tried to stay focussed on the essay, just go back and read the closing two paragraphs.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

As I said at the start: we are living in interesting times!

A view from the Radical Middle

Promoting the thoughts of Per Kurowski.

A few days ago, I published a delightful story sent to me by Richard Maugham about Helga’s Bar. It was a tongue-in-cheek look at the crazy world of finance and banking that we seem to be living in at present.

One of the regular readers of Learning from Dogs is Per Kurowski and he left a couple of comments. The first being,

As a former ED at the World Bank, 2002-2004, living close to Washington, writing articles and being an assiduous blogger, I’ve been in the middle of many discussions about those many of the challenges our world faces. And my friend, I am sorry to say, our prospects to solve these problems, do not seem good.

One of the main reasons for that negative outlook, is that I have been able to witness how the discussion of many of these problems, no matter how urgent these are, so often get hijacked by a political agenda, or by a group that decides making a business, or a living, out of it.

If we cannot break out of this mold, unfortunately, the world is toast, and this, not only from a global warming perspective.

which was then followed up by,

By the way, I managed to sit down a prominent and important bank regulator in my chair yesterday, though he was invisible and quite silent!

I then replied,

Per, just love that. Any chance of you penning a guest post that could set the background to that video in terms that make it easy for the punter to understand?

So here is Per’s interview (sound volume is a little low) and his views.

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Paul… well here is “a brief summary of my thoughts on banks and risks”

Capital requirements for banks which are lower when the perceived risk of default of the borrower is low, and higher when the perceived risk is high, distort the economic resource allocation process. This is so because those perceptions of risk have already been cleared for, by bankers and markets, by means of interest rates and amounts of exposures.

All the current dangerous and obese bank exposures are to be found in areas recently considered as safe and which therefore required these banks to hold little capital. What was considered as “risky” is not, as usual, causing any problems. This is not a crisis caused by excessive risk taking by the banks, but by excessive regulatory interference by naïve and nanny type regulators.

And, if that distortion is not urgently eliminated, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… like the US Treasury or the Bundesbank.

Bank regulators have no business regulating based on risk perceptions being right, their role is to prepare for when these perceptions turn out to be wrong.

A nation that cares more for history, what it has got, the haves, the “not-risky”, the AAA rated or the “infallible” sovereigns, than for the future, what it can get, the not-haves, the risky, the small businesses or the entrepreneurs, is a nation on its way down.

Per.

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You may read more from Per on his blog here, and also read Per’s Tea with FT blog! So let me close by saying that Per’s summary seems like a blast of sanity in an otherwise crazy world!

Financial bailouts explained!

A remarkably simple explanation, courtesy of a Greek Hotel, about financial bailouts!

Last week-end I was indebted to Neil Kelly for supplying a more humorous look at life for Learning from Dogs. This week-end I turn to friend, Bob D., a corporate airliner Captain out in the Middle East. Here is Bob’s contribution for today. (Editor’s note: at the time of posting this, 1 euro = 1.3405 US dollars, ergo €100 = $134 – read on, this will make sense.)

authentic-greek-hotel — No connection with the hotel in the story!

For those interested in world events….

How the Greek bailout package works.

It is a slow day in a damp little Greek town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

And that, Ladies and Gentlemen, is how the bailout package works.

The Greatest Crash – footnote

The story that could run for an awfully long time!

I rather revealed my newness as a US resident by posting my review of David Kauders’ book The Greatest Crash over 2 days last week, one of them being Thanksgiving Day. Despite that 1,895 people viewed my review which was entitled The end of an era.

A week has now passed since that review. I was curious to see what sorts of headlines had been making the news in the last 7 days. It’s just a random trawl through those items that have captured my attention.

Let’s start with the Financial Times, November 27th,

The eurozone really has only days to avoid collapse

By Wolfgang Münchau

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

Wolfgang concludes his article thus,

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Then my print copy of The Economist that arrived on the 26th had this lurid cover page,

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

The leader article contains this paragraph,

Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.

and a few paragraphs later, this,

This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.

Then on Sunday, 27th, MISH’s Trend Analysis blogsite reveals,

ICAP Plc, the world’s largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro

ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

Then Bloomberg published an article by Peter Boone and Simon Johnson, the latter of Baseline Scenario fame, that opened as follows,

Investors sent Europe’s politicians a painful message last week whenGermany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

and concluded,

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

Finally, on the 29th the BBC News website carried details of the Autumn Statement made by British Chancellor, George Osborne, to Parliament.

Osborne confirms pay and jobs pain as growth slows

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.

The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.

Just look at that figure of public sector job losses – 710,000!

Well that’s more than enough from me but it does surely endorse the opening views that David Kauders expounded in his book, as carried in my review, and reproduced here,

Starting with the first sentence, David sets out the core problem;

This book argues that it is impossible to expand the financial system much further.

expanding this a few paragraphs later,

This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.

A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,

Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.

You can understand why I called this Post a ‘footnote’ not an endnote.

The end of an era, part two.

A review of David Kauder’s recently published book, The Greatest Crash.

Details of the availability of the book are included at the end of the review.

Extracts from the book included are with grateful thanks to Sparkling Books.

Part One of this review was published yesterday which needs to be read before Part Two.

——————-

Chapter 5 continues by examining the over-bearing consequences of excessive public spending, excessive Government regulations, substitute taxation, weakness of Treasury forecasts, and so on. While these are UK issues, there is no doubt that similar restraints of free enterprise exist in many other western nations.

In Chapter 6, ‘Group Think‘, David looks at the strange ways in which we form opinions. It’s a topic that has been discussed and written about widely but the point behind this chapter is that people have in great part lost the ability to discern truth from fiction, with terrible implications when it comes to understanding how individuals are affected by government and bureaucratic institutions.

The chapter closes;

One of the remarkable points that I have found in writing this book is that many of the detailed errors, incorrect policies et al, have already been amply documented by others. But we never learn. The delegated society, the strength of lobby groups and vulnerability of our political system to pressure, the sheer volume of noise in the media and on the Internet, the immediacy of the demands of daily life, all combine to make our collective memory rather short.

Amen to that!

Chapter 7, ‘Academic differences of opinion‘, was surprisingly short at just 6 1/2 pages. One would have thought the subject worthy of a much longer review especially as David was exploring the fundamental differences between Keynesian and Ricardian economic theories and opportunities for alternative theories. Must say that that I laughed out loud (David’s book is a little short on humour!) at the sentence on p.127 that ran, “One correspondent writing to the Financial Times proposed that economics should be declared a failing discipline, economists as not fit for purpose, and a physicist put in charge of sorting their theories out.”

Chapter 8, ‘The dark side of capital markets‘, is the penultimate chapter and quite a technical one at that. But David manages to trip through esoteric aspects, well esoteric to the lay reader, in a manner that keeps one involved. Here’s an example from early on in the chapter.

Capital markets follow a long cycle beyond the experience of most practitioners, detectable only by understanding history and then applying this understanding to contemporary conditions.

It didn’t mean much to me. Then the next sentence;

The principles are identical for any market where prices depend on the supply of credit: equities, bonds, property and commodities are all markets where the prices must relate to the availability of credit.

That, at least, was understood but still the penny hadn’t dropped. Then came;

Bond prices prosper when credit is lacking while the other three prosper when credit is abundant.

That then made sense to me but still only at some academic level. David then followed those sentences with these two paragraphs;

The whole market cycle consists of bull market followed by bear market, as surely as night follows day. The bull market in assets is driven by an increasing supply of credit and economic expansion, since more credit leads to higher prices. The bear market in assets is driven by less credit and economic contraction; there is no purchasing power to keep asset prices high. Only fixed interest bonds are contra-cyclical, declining in price as credit expands and rising in price as credit sinks.

There are two useful theories for analysing the whole market cycle: conversion flow and Dow theory.

So in half-a-page of text, the book effectively educated me and then showed the relevance of that learning to the world I was living in. Cleverly done!

Chapter 9, ‘The attitude change‘, is, without doubt, a clincher of a close to this fascinating book. The sentiments conveyed in this chapter are so unexpected that, forgive me, it would be wrong to explicitly refer to them. Buy the book!

Let me just say that the last chapter fully endorsed me calling this review The End of an Era.

Overall conclusions

This is an important book from a writer who has both the academic and professional experience to enable him to form the views that he expresses. Only time will tell if the whole scenario that is envisaged by Mr. Kauders will play out as he expects. My personal view is that it will.

For individuals and business alike, reading The Greatest Crash will inform you in a manner that I would argue is critical when one notes the precarious and potentially unstable period we are living through. The decisions readers make after reading the book are beyond the remit of this review and, of course, David Kauders, but, at least, read the book!

Prof. Myddelton in the book’s introduction wrote, “But one of the things we need now is new thinking on the fundamentals.” Perhaps not new thinking on fundamentals, as the Prof. puts it, but a reinstatement of core fundamental values.

I am not alone from sensing that the world, especially the western world, is transitioning from an era of greed and materialism, seeing a world of unlimited resources, to a different societal relationship with planet Earth, the only planet we have. A transition across all layers of society towards the values of truth, integrity and compassion; values whose day has come.

The Greatest Crash reinforces immensely my notion that this truly is the end of an era.

——————

Want to buy The Greatest Crash? The ebook was published in October worldwide, the paperback published in the UK on the 1st November UK, the hardcover being released any day now in the UK. For North America both the paperback and hardcover versions are being published on 1st February, 2012.

Full details from the Sparkling Books webpage here.

The end of an era, part one.

A review of David Kauder’s recently published book, The Greatest Crash.

Details of the availability of the book are included at the end of both parts of my review, part two is published tomorrow.

Extracts from the book included are with grateful thanks to Sparkling Books.

Personal introduction.

Back in the late 90s, when I was living in England, I attempted to bolster my self-employed income by investing and trading in equities. It was a frustrating game, game being the right word! One day I was lamenting this to a close friend and he gave me the name of David Kauders at Kauders Portfolio Management and suggested I might like to contact him.

I followed my friend’s recommendation and met with David. What he outlined at that meeting all those years ago was mind-blowing, no other way of putting it. Essentially, David predicted a financial and economic crisis of huge proportions. He convinced me of the likelihood of that crisis and in November 2001 I became a fee-paying client. As the world now knows that prediction came to fruition. My anticipated residency in the USA meant continuing to be a client was not possible, and I ceased being a client of Kauders Portfolio Management in June 2010.

Thus not only am I deeply indebted to my friend for referring me to David but also unable to write this review from an unprejudiced point of view.

The Greatest Crash

The book, released in paperback in England in October 2011, published by Sparkling Books, is subtitled ‘How contradictory policies are sinking the global economy‘. Frankly, that subtitle doesn’t do much for me. A clearer message that comes from the book is this: the economic world has reached a ‘systems limit’. Indeed, the term systems limit is used widely throughout the book.

In his introduction to the book, Professor D. R. Myddelton, Chairman of the Institute of Economic Affairs, writes,

Adam Smith said ‘There’s a deal of ruin in a nation’, and it would be a mistake to despair. But one of the things we need now is new thinking on the fundamentals. That is what David Kauders provides in his book ‘The Greatest Crash’.

Without doubt, David achieves that.

Starting with the first sentence, David sets out the core problem;

This book argues that it is impossible to expand the financial system much further.

expanding this a few paragraphs later,

This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.

A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,

Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.

In the next chapter, ‘Evolution by trial and error‘, David writes about economic cycles and reminds his readers that the long economic cycle is often “beyond the practical experiences of our working lifetimes“. Then later suggesting that because we have seen the greatest period of inflation ever since the end of World War Two, ergo “the unwelcome lesson from history is that the greatest deflation should follow.”

In Chapter 4, ‘An Era of Wishful Thinking‘, the spotlight is put on the horrific policy errors that have been made for decades, try these three examples (there is a longer list in the book),

Policy makers believed that debt could expand indefinitely, at no cost.

Nobody realised that interest rate rises would make existing borrowing unaffordable and cause a wave of defaults.

The world was swamped with so many detailed requirements and standards that nobody could understand how they all fitted together. It was assumed that ‘transparency’, i.e. extensive detail, would solve the inability to comprehend how the parts made the whole.

Part Two of the review, continuing with Chapter 5 is tomorrow.

Full details from the Sparkling Books webpage here.

Hearing clearly?

Perhaps intuition is all we have to hear clearly.

John O’Donohue, in yesterday’s post, touched on the essence of today’s theme, “The greatest philosophers admit that to a large degree all knowledge comes through the senses. The senses are our bridge to the world.”

Dogs, of course, demonstrate powerfully how their senses provide a ‘bridge to the world’.

This odd collection of writings (ramblings?) that comprise Learning from Dogs is based around the ‘i’ word – Integrity. The banner on the home page proclaims Dogs are integrous animals. We have much to learn from them. Ergo, dogs offer a powerful metaphor for the pressing need for integrity among those that ‘manage’ our societies.

Thus my senses are more tuned, than otherwise, to the conversations in the world out there that support the premise that unless we, as in modern man, radically amend our attitudes and behaviours, then the species homo sapiens is going to hell in a hand-basket!

End of preamble!

Professor Bill Mitchell is one person who recently touched my senses. As his Blog outlines he is an interesting fellow,

(Photo taken in August 2011 in Melbourne, Australia)

Bill Mitchell is the Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia.

He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

He also plays with a Newcastle swing blues band – The Blues Box. You can find music and other things on his Home Page.

Professor Mitchell’s Blog is not for the faint-hearted, it can be pretty technical at times. Nevertheless, I have been a daily subscriber for a couple of months now.

On the 24th, Prof. Bill wrote a long article under the heading of ‘What if economists were personally liable for their advice‘. I want to quote a little from that article. Starting with,

Economists have a strange way of writing up briefing documents. There is an advanced capacity to dehumanise economic advice and ignore the most important economic and social problems (unemployment and poverty) in favour of promoting non-issues (like public debt ratios). It reminds me sometimes of how the Nazis who were brutal in the extreme in the execution of their ideology sat around getting portraits of themselves taken with their loving families etc. The training of economists creates an advanced state of separation from human issues and an absence of empathy.

In a sense, we all understand this, this use of language to separate us from our collective humanity. A random Google search came up with this. A statement by British Prime Minister, David Cameron, to Parliament on the 24th regarding Europe, as in,

Mr Speaker, let me turn to yesterday’s European Council.

This European Council was about three things.

Sorting out the problems of the Eurozone.

Promoting growth in the EU.

And ensuring that as the Eurozone develops new arrangements for governance, the interests of those outside the Eurozone are protected.

This latter point touches directly on the debate in this House later today, and I will say a word on this later in my statement.

Resolving the problems in the Eurozone is the urgent and over-riding priority facing not only the Eurozone members, but the EU as a whole – and indeed the rest of the world economy.

Britain is playing a positive role proposing the three vital steps needed to deal with this crisis – the establishment of a financial firewall big enough to contain any contagion; the credible recapitalisation of European banks; and a decisive solution to the problems in Greece.

Read the last paragraph. Wonderful words that seem to make sense to the casual listener but picking up on Prof. Bill, an utter ‘separation from human issues and an absence of empathy‘. There is no humanity in those words from the British Prime Minister. We all know there are hundreds of other examples from mouthpieces all across our global society. Back to Bill Mitchell’s article,

Linkiesta say:

Greece has failed. To say this is not another report of investment banks or research centers, but directly Troika officials who have just completed their review on Hellenic public finance. Linkiesta is in possession of the entire report of the troika, composed of officials from the International Monetary Fund (IMF), European Central Bank (ECB) and European Commission.

I have a rule of thumb that I use when considering documents such as these. The rule is to assess how strong the concern for unemployment is. How often is unemployment mentioned? The answer is zero. The document never mentions the word or concept.

So obsessed are the Troika and their bean counters about public debt stabilisation that they have completely lost sight of one of the worst problems an economy can encounter – the failure to generate work for all.

Read those last words again, “completely lost sight of one of the worst problems an economy can encounter – the failure to generate work for all“. One last extract from the article,

There is absolutely no historical evidence which shows that when all nations are contracting or stagnant and private spending is flat (or contracting) that cutting public spending will create growth.

So why did these economists think that a nation would grow when all components of spending were strongly indicated to fall or were being actually cut? The answer lies in acknowledging that they operate in an ideologically blinkered world and are never taken to account for their policy mistakes. They are unaccountable and do not suffer income losses when the nations they dispense advice to and impose policies on behave contrary to the “expectation” which results in millions being unemployed.

In my view, my profession should be liable for the advice it gives and economists should be held personally liable for damages if their advice causes harm to other individuals. If the economists in the IMF and elsewhere were held personally responsible then the advice would quickly change because they would be “playing” with their own fortunes and not the fortunes of an amorphous group of Greeks that they have never met.

Very powerful words that strike at the heart of the matter, that of integrity. (If you want to read it in full, then the article is here.)

Let me move on a little. The 24th also saw a powerful essay on Yves Smith’s Blog Naked Capitalism, from Philip Pilkington, a journalist and writer living in Dublin, Ireland. Here’s a taste of what Mr. Pilkington wrote.

Every now and then a terrible thought enters my mind. It runs like this: what if the theatre of the Eurocrisis is really and truly a political power-game being cynically played by politicians from the core while the periphery burns?

Yes, of course, we can engage in polemic and say that such is the case. But in doing so we are trying to stoke emotion and generally allowing our rhetorical flourish to carry the argument. At least, that is what I thought. I had heard this rhetoric; I had engaged in it to some extent myself; but I had never really believed it. Only once or twice, in my nightmares, I had thought that, maybe, just maybe, it might have some truth.

Can you see the parallels between Prof. Mitchell and Philip Pilkington? The latter wrote, “a political power-game being cynically played by politicians from the core while the periphery burns“, the former wrote, “If the economists in the IMF and elsewhere were held personally responsible then the advice would quickly change because they would be “playing” with their own fortunes and not the fortunes of an amorphous group of Greeks that they have never met.”

It’s clearly obvious to all those that have commented to both the Bill Mitchell and Philip Pilkington items. That is, in my words, a complete lack of integrity, truth and a commitment to serve the people, from so many in places of influence and power.

We all sense this, hear it so clearly, a separation from human issues and an absence of empathy.

We have so much to learn, so much sense to learn, from dogs!

————–

Footnote. Had just completed the above when I came across a piece by Patrick Cockburn in last Sunday’s Independent newspaper, that starts thus,

World View: A sense of injustice is growing. Elite politicians and notorious wrongdoers appear immune as ordinary Greeks reel from wage and job cuts

Up close, the most striking feature of the reforms being forced on Greece by its international creditors is their destructiveness and futility. The pay cuts, tax rises, cuts and job losses agreed to by parliament in Athens last week will serve only to send the economy into a steeper tailspin, even if it extracted a much-needed €8bn in bailout money from the EU leaders. “Nothing but a lost war could be worse than this situation,” one left-wing ex-minister tells me. “What is worse, no party or political group in Greece is offering real solutions to our crisis.

Say no more!

What is it you don’t understand?

Stating the obvious.

I am about a third into Paul Gilding’s book The Great Disruption. It’s proving to be a very-thought provoking read that I will review in more detail over the coming weeks.

However, I just wanted to quote from the start of Chapter 5, Addicted to Growth,

Indeed, as argued by economist Kenneth Boulding: “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

Very little that can be argued about that statement. It rather puts into context a couple of items read recently. Both from the blogsite New Economic Perspectives. The first on June 10th by Stephanie Kelton,

Earlier this week, President Obama talked about the weakening state of the economy, telling us that he’s not worried about a double-dip recession and that the nation should “not panic.” It’s hard to imagine a more alarming assessment at this juncture.

The recovery is faltering. Our economy is growing at annual rate of just 1.8 percent. Manufacturing just grew at its slowest pace in 20 months. More than 44 million Americans – one in seven – rely on food stamps. Employers hired only 54,000 new workers in May, the lowest number in eight months. Jobless claims increased to 427,000 in the week ended June 4. The unemployment rate rose to 9.1 percent. Nearly half of all unemployed Americans have been without work for more than 6 months. About 25% of all teenagers who are looking for work are unemployed. Eight-and-a-half million Americans are underemployed – i.e. working part-time because their hours have been cut or because they can’t find full-time work. There are, on average, 4.6 unemployed people for every 1 job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.

The second on July 8th by Marshall Auerback,

Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month. In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House. This isn’t just a “bump,” but a fully-fledged New York City style pot hole.

First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations. In addition the prior two month payroll increases were revised down by -44,000 overall. That’s weak – but not terrible.

Dig a bit deeper into the data and it looks absolutely awful: The household measure of employment fell by -445,000. Okay, it’s a noisy number. But, as Frank Veneroso has pointed out to me in an email correspondence, this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three.

But it gets worse: The work week was down one tenth. Overtime was down one tenth. The labor participation rate at 64.1% was the lowest since 1984. The broad U6 unemployment rate rose from 15.8% to 16.2%. In other words, as Frank suggested to me this morning, “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”

Now here’s the latest item published by Paul Gilding in his Blog, The Cockatoo Chronicles. (I have republished it in full, hopefully without upsetting Mr. Gilding – couldn’t see advice on reproduction – but copyright remains, of course, fully with Paul Gilding.)

Like a Grenade in a Glasshouse

June 29, 2011

It’s going to hit hard and it’s going to hurt – made worse because most aren’t expecting it. They think the world is slowly returning to our modern “normal” – steadily increasing growth, with occasional annoying but manageable interruptions. After all, the global recession wasn’t so bad was it? Sure there was pain and things got shaky but Governments responded, bailed out companies, stimulated economies, got things back on track. While it’s still a bit bumpy, Greek wobbles, US debt, extreme weather, high oil and food prices etc, it’ll work out. It always does….

If only it were so. In fact we are blindly walking towards the next in a series of inevitable system shaking and confidence sapping crises, deluded in the belief that the worst is behind us.

Each crisis will be a little worse than the last. Each one will shake our denial a little more. This is what happens when systems hit their limits. They don’t do so smoothly, but bump up against the wall, hitting hard, then bouncing off equally hard. It is the behaviour of a system trying to break through. But if the limits are solid, as is the case with our economic system hitting the limits of the planet – defined by unchangeable physical capacity and the laws of physics, chemistry and biology – then it can’t find its way through. So eventually, when the pain of hitting the wall gets too much, it stops.

Then it will hit. Like a grenade in a glasshouse, shattering denial and delusion and leaving it like a pile of broken glass on the floor of the old economic model. Then we’ll be ready for change.

I’ve been arguing the inevitability of this moment since 2005, mostly inside the business community. Before the 2008 financial crisis hit, the idea was almost universally rejected, with a belief in the indomitable power of globalised markets to overcome all challenges and keep growth on track. Most audiences believed that while markets always wobbled, they also always recovered. My suggestion, that this level of arrogance was the hallmark of empires before they fell, landed on deaf ears. They were the masters of the universe and markets and growth would always reign supreme.

Now the response is different. The financial crisis saw many break off from the pack and start to ask the difficult questions. I now find as I tour the world speaking about The Great Disruption to community gatherings, corporate executives and policy makers that minds are increasingly open. While not the dominant view, the previous confidence in the inevitably of growth has become shaky and the group asking the challenging questions is rapidly expanding.

As I argue in the book, the fundamental cause of what’s coming is resource constraint and environmental breakdown, which when combined with an overstretched financial system and high levels of debt puts unbearable tension into the global economy. While no one can know what event will pull the pin out of the grenade, the underlying pressures make that moment inevitable. Yes, the dominant commentary still blames each individual problem on unique circumstances, but the underlying systemic causes are clear for those who wish to look.

The continued level of denial still surprises me, especially given the pressures driving this are not esoteric and can be measured in clear economic indicators. A good example was recently published by one of the more interesting voices to join the growing chorus that we have a system-wide problem. The legendary contrarian and fund manager Jeremy Grantham is co-founder of the Boston based firm GMO, with over $100 billion of assets under management. So this guy is a solid capitalist and market advocate, pursuing wealth for the wealthy. But he sees the data and is raising the alarm, calling this moment “one of the giant inflection points in economic history” – referring to the end of a 100-year steady decline in commodity prices. His views were echoed by Stephen King, group chief economist at HSBC, who wrote in the FT: “After the biggest meltdown since the Great Depression, economic theory tells us that world commodity prices should not be this high. But they are and the West quickly needs to wake up to this new economic reality. Commodity prices are now permanently higher.”

Grantham provides the detail, pointing out that the 100 year trend of falling prices in the 33 most important commodities, except for oil, were wiped out with a price surge from 2002 to 2010 – a surge even greater than experienced in WW2. We have now reached what Grantham calls the Great Paradigm shift; not a price spike but a new reality. Within this new reality, Grantham says: “if we maintain our desperate focus on growth, we will run out of everything and crash.”

This is why hitting the wall is inevitable – because limits are not philosophies, they are limits. We can understand what to expect – and why the grenade will shatter the glasshouse of economic growth – by going back to how systems behave when they hit their limits. Our economic system first hit the wall in 2008 – that was when The Great Disruption began with food and oil prices hitting record highs and a credit crisis driven by reckless monetary policy pursuing growth at all costs. The resulting recession meant we backed away from those limits (bouncing off the wall), and then borrowed massive amounts of money from our children (think Greece) to try to get the economy moving again.

Now that the global economy is slowly entering a so-called “recovery”, the prices of commodities (representing our use of earth’s resources for food and materials) are on the way up, accelerated, in the case of food, by climate change. Of course if significant growth kicks in, the prices of oil, food and other commodities will surge, this timestarting from near record highs. Then we will bounce back into recession and prices will back off again. Hit the wall, bounce off. Hit the wall, bounce off. Ouch.

By itself this would pose enough of a challenge to growth. But now we also have the debt we used to get the economy moving again. This debt can only be paid off with significant economic growth – but such significant growth is impossible as outlined above. So the debt itself becomes an enormous additional tension in the system, as argued by Richard Heinberg in his important forthcoming book The End of Growth. With the global economy and ecosystem now both burdened by unmanageable debt, effective global default is only a matter of time.

So we’re living in a glass house with the grenade sitting there for all to see. Who knows what will pull the pin. It could be Greece, a Chinese food crisis, peak oil or any number of other triggers. But it’s coming.

The question to ask yourself is simple. Are you ready?

Back to Kenneth Boulding: “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

Precisely!

The Winston Churchill effect?

Forgive me for making this a much shorter contribution but the efforts of the previous two posts took rather a long time!

This is about the debt situation in the United States of America and, as always, Learning from Dogs trying to get to the underlying truth.

It’s from the BBC and it’s a radio programme that is included in this Post.

But why the headline referring to Churchill? Well in the programme Justin Webb, of the BBC, reminds the world of a characteristic of the American Nation noted by Sir Winston Churchill, “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” (But caution about the precise wording of that quote – see here!)

Here’s the article that accompanied the BBC broadcast, the radio programme is after this article,

Is the US in denial over its $14tn debt?

Is America in denial about the extent of its financial problems, and therefore incapable of dealing with the gravest crisis the country has ever faced?

This is a story of debt, delusion and – potentially – disaster. For America and, if you happen to think that American influence is broadly a good thing, for the world.

The debt and the delusion are both all-American: $14 trillion (£8.75tn) of debt has been amassed and there is no cogent plan to reduce it.

The figure is impossible to comprehend: easier to focus on the fact that it grows at $40,000 (£25,000) a second. Getting out of Afghanistan will help but actually only at the margins. The problem is much bigger than any one area of expenditure.

The economist Jeffrey Sachs, director of Columbia University’s Earth Institute, is no rabid fiscal conservative but on the debt he is a hawk: “I’m worried. The debt is large. It should be brought under control. The longer we wait, the longer we suffer this kind of paralysis; the more America boxes itself into a corner and the more America’s constructive leadership in the world diminishes.”

The author and economist Diane Coyle agrees. And she makes the rather alarming point that the acknowledged deficit is not the whole story.

The current $14tn debt is bad enough, she argues, but the future commitments to the baby boomers, commitments for health care and for pensions, suggest that the debt burden is part of the fabric of society:

“You have promises implicit in the structure of welfare states and aging populations that mean there is an unacknowledged debt that will have to be paid for by future taxpayers, and that could double the published figures.”

Richard Haass of the Council on Foreign Relations acknowledges that this structural commitment to future debt is not unique to the United States. All advanced democracies have more or less the same problem, he says, “but in the case of the States the figures are absolutely enormous”.

Mr Haass, a former senior US diplomat, is leading an academic push for America’s debt to be taken seriously by Americans and noticed as well by the rest of the world.

He uses the analogy of Suez and the pressure that was put on the UK by the US to withdraw from that adventure. The pressure was not, of course, military. It was economic.

Britain needed US economic help. In the future, if China chooses to flex its muscles abroad, it may not be Chinese admirals who pose the real threat, Mr Haass tells us. “Chinese bankers could do the job.”

Because of course Chinese bankers, if they withdrew their support for the US economy and their willingness to finance America’s spending, could have an almost overnight impact on every American life, forcing interest rates to sky high levels and torpedoing the world’s largest economy.

Not everyone accepts the debt-as-disaster thesis.

David Frum is a Republican intellectual and a former speech writer to President George W Bush.

He told me the problem, and the solution, were actually rather simple: “If I tell you you have a disease that will absolutely prostrate you and it could be prevented by taking a couple of aspirin and going for a walk, well I guess the situation isn’t apocalyptic is it?

“The things that America has to do to put its fiscal house in order are not anywhere near as extreme as what Europe has to do. The debt is not a financial problem, it is a political problem.”

Mr Frum believes that a future agreement to cut spending – he thinks America spends much too big a proportion of its GDP on health – and raise taxes, could very quickly bring the debt problem down to the level of quotidian normality.

‘Organised hypocrisy’

I am not so sure. What is the root cause of America’s failure to get to grips with its debt? It can be argued that the problem is not really economic or even political; it is a cultural inability to face up to hard choices, even to acknowledge that the choices are there.

I should make it clear that my reporting of the United States, in the years I was based there for the BBC, was governed by a sense that too much foreign media coverage of America is negative and jaundiced.

The nation is staggeringly successful and gloriously attractive. But it is also deeply dysfunctional in some respects.

Take Alaska. The author and serious student of America, Anne Applebaum makes the point that, as she puts it, “Alaska is a myth!”

People who live in Alaska – and people who aspire to live in Alaska – imagine it is the last frontier, she says, “the place where rugged individuals go out and dig for oil and shoot caribou, and make money the way people did 100 years ago”.

But in reality, Alaska is the most heavily subsidised state in the union. There is more social spending in Alaska than anywhere else.

To make it a place where decent lives can be lived, there is a huge transfer of money to Alaska from the US federal government which means of course from taxpayers in New York and Los Angeles and other places where less rugged folk live. Alaska is an organised hypocrisy.

Too many Americans behave like the Alaskans: they think of themselves as rugged individualists in no need of state help, but they take the money anyway in health care and pensions and all the other areas of American life where the federal government spends its cash.

The Tea Party movement talks of cuts in spending but when it comes to it, Americans always seem to be talking about cuts in spending that affect someone else, not them – and taxes that are levied on others too.

And nobody talks about raising taxes. Jeffrey Sachs has a theory about why this is.

America’s two main political parties are so desperate to raise money for the nation’s constant elections – remember the House of Representatives is elected every two years – that they can do nothing that upsets wealthy people and wealthy companies.

So they cannot touch taxes.

In all honesty, I am torn about the conclusions to be drawn. I find it difficult to believe that a nation historically so nimble and clever and open could succumb to disaster in this way.

But America, as well as being a place of hard work and ingenuity, is also no stranger to eating competitions in which gluttony is celebrated, and wilful ignorance, for instance regarding (as many Americans do) evolution as controversial.

The debt crisis is a fascinating crisis because it is about so much more than money. It is a test of a culture.

It is about waking up, as the Americans say, and smelling the coffee. And – I am thinking Texas here – saddling up too, and riding out with purpose.

NB: Copyright BBC © 2011 The BBC is not responsible for the content of external sites. Read more.

Here’s the 30 minute broadcast under the Analysis series from Radio 4 on the BBC.(Just click on this link) analysis_20110628-1024a

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