Post-work: the radical idea of a world without jobs

23 01 2018

As you may know if you read this blog often enough, I am completely anti jobs and growth. So many jobs are ‘bullshit jobs’ these days, and so much automation is coming on board – like Amazon opening a store with almost no staff as one prime example – that the future of work is hardly well defined, especially as we head into a low energy future. Just this week, I was pointed to a book and an article on these issues that I thought I’d shara and comment on, and as always, your comments are more than welcome…..

Utopia for Realists : and how we can get there - Rutger BregmanThe book I was pointed to is one Geoff Lawton is currently reading, or so he tells me…..  it’s called “Utopia for Realists”. It certainly looks interesting to me, and I might just buy it, even if the Guardian gives it a caning

This is a book with one compelling proposition for which you can forgive the rest. It is utopian visions that have driven humanity forwards. It was the hope we could fly, conquer disease, motorise transport, build communities of the faithful, discover virgin land or live in permanent peace that has propelled men and women to take the risks and obsess about the new that, while not creating the utopia of which they dreamed, has at least got us some of the way. Celebrate the grip that utopia has on our imagination. It is the author of progress.

But if this is the book’s big insight, much of the rest fluctuates from the genuinely challenging to politically correct tosh. My biggest beef is the idea that increasingly grips liberal thinkers desperate for anything radical – the concept of a universal income for all. Financially, behaviourally and organisationally bonkers, this idea is gaining traction on the bien pensant left. The proposition is that because a rogue capitalism is going to automate away most of our jobs, human wellbeing can only be assured by everyone receiving a universal basic income.

I don’t know what this book critic thinks people with no jobs will spend to keep the economy going……  maybe he’ll find out when he loses his job, as journalism is one of the trades under serious threat this century.

Apart from the fact that human needs are infinite, so that today’s predictions of the end of work will prove as awry as those of previous centuries, a universal basic income is no more likely to succeed than communism.

That’s where he really lost me…….  using that word infinite. On a finite planet. Whose tosh are we reading now ?

Fortunately, there are some realist journos at the Guardian, like Andy Beckett, who are able to produce much more interesting and open views……

Work is the master of the modern world. For most people, it is impossible to imagine society without it. It dominates and pervades everyday life – especially in Britain and the US – [the rest of the world don’t count it seems…] more completely than at any time in recent history. An obsession with employability runs through education. Even severely disabled welfare claimants are required to be work-seekers. Corporate superstars show off their epic work schedules. “Hard-working families” are idealised by politicians. Friends pitch each other business ideas. Tech companies persuade their employees that round-the-clock work is play. Gig economy companies claim that round-the-clock work is freedom. Workers commute further, strike less, retire later. Digital technology lets work invade leisure.

As a source of subsistence, let alone prosperity, work is now insufficient for whole social classes. In the UK, almost two-thirds of those in poverty – around 8 million people – are in working households. In the US, the average wage has stagnated for half a century.

As a source of social mobility and self-worth, work increasingly fails even the most educated people – supposedly the system’s winners. In 2017, half of recent UK graduates were officially classified as “working in a non-graduate role”. In the US, “belief in work is crumbling among people in their 20s and 30s”, says Benjamin Hunnicutt, a leading historian of work. “They are not looking to their job for satisfaction or social advancement.” (You can sense this every time a graduate with a faraway look makes you a latte.)

The young French wwoofer working with me at the moment tells me that most of his peers are fast becoming totally cynical of the work ethic, and, interestingly, also seem to be very much aware of the possibilities and consequences of collapse…. I have to say, this has been the case with most of the French wwoofers who’ve been here over the past couple of years, unlike the American ones who have no idea..!  He even tells me there is a growing movement of young people in France leaving cities and going back to the land….

As a source of sustainable consumer booms and mass home-ownership – for much of the 20th century, the main successes of mainstream western economic policy – work is discredited daily by our ongoing debt and housing crises. For many people, not just the very wealthy, work has become less important financially than inheriting money or owning a home.

Whether you look at a screen all day, or sell other underpaid people goods they can’t afford, more and more work feels pointless or even socially damaging – what the American anthropologist David Graeber called “bullshit jobs” in a famous 2013 article. Among others, Graeber condemned “private equity CEOs, lobbyists, PR researchers … telemarketers, bailiffs”, and the “ancillary industries (dog-washers, all-night pizza delivery) that only exist because everyone is spending so much of their time working”.

Precisely…….  could not agree more. Of course, the collapse of the ERoEI of our energy sources – ALL of them – does not get a mention when he writes “The argument seemed subjective and crude, but economic data increasingly supports it. The growth of productivity, or the value of what is produced per hour worked, is slowing across the rich world – despite the constant measurement of employee performance and intensification of work routines that makes more and more jobs barely tolerable.” Of course, like most people, he may not be aware, let alone know of, the energy cliff…… human

I have to say, this bit was rather interesting…

In Britain in 1974, Edward Heath’s Conservative government, faced with a chronic energy shortage caused by an international oil crisis and a miners’ strike, imposed a national three-day working week. For the two months it lasted, people’s non-work lives expanded. Golf courses were busier, and fishing-tackle shops reported large sales increases. Audiences trebled for late-night BBC radio DJs such as John Peel. Some men did more housework: the Colchester Evening Gazette interviewed a young married printer who had taken over the hoovering. Even the Daily Mail loosened up, with one columnist suggesting that parents “experiment more in their sex lives while the children are doing a five-day week at school”.

The economic consequences were mixed. Most people’s earnings fell. Working days became longer. Yet a national survey of companies for the government by the management consultants Inbucon-AIC found that productivity improved by about 5%: a huge increase by Britain’s usual sluggish standards. “Thinking was stimulated” inside Whitehall and some companies, the consultants noted, “on the possibility of arranging a permanent four-day week.”

Of course…… nothing came of it as the North Sea oil was discovered and exploited, everyone back to work, we have a planet to pillage. But it certainly makes you think about what will happen when the oil crisis finally becomes permanent. This article, which I consider a gem and well worth the read, ends with..:

Creating a more benign post-work world will be more difficult now than it would have been in the 70s. In today’s lower-wage economy, suggesting people do less work for less pay is a hard sell. As with free-market capitalism in general, the worse work gets, the harder it is to imagine actually escaping it, so enormous are the steps required.

But for those who think work will just carry on as it is, there is a warning from history. On 1 May 1979, one of the greatest champions of the modern work culture, Margaret Thatcher, made her final campaign speech before being elected prime minister. She reflected on the nature of change in politics and society. “The heresies of one period,” she said, always become “the orthodoxies of the next”. The end of work as we know it will seem unthinkable – until it has happened.

All I can say is that the orthodoxies of the next era will be full of surprises, that’s for sure.

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AUSTRALIA’S ‘DUMB LUCK’ ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

4 01 2018

I recently tried to republish this on DTM, but it gave me so much heartache, I gave up. Now I’ve found a new source that hopefully allows more friendly copy/paste……. I hasten to add I disagree with much of what he has to say at the end of this lengthy article, and I could have edited it out, but there you go…… you make up your own mind.

Written on the 15 November 2017 by Matt Barrie, CEO Freelancer.com

AUSTRALIA'S 'DUMB LUCK' ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

I RECENTLY watched the federal treasurer, Scott Morrison, proudly proclaim that Australia was in “surprisingly good shape”.

Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970.

I was pretty shocked at the complacency, because after twenty six years of economic expansion, the country has very little to show for it.

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour.”

That neighbour is China.

Out of all OECD nations, Australia is the most dependent on China by a huge margin, according to the IMF. Over one third of all merchandise exports from this country go to China – where ‘merchandise exports’ includes all physical products, including the things we dig out of the ground.

Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that?

“As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

Unfortunately for Australia, that “lucky” free ride is just about to end.

Societe Generale’s China economist Wei Yao said recently, “Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400 per cent of the US banking losses incurred during the subprime crisis”.

A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.

Delusions which are all unfolding right now as this quadruple leveraged bubble unwinds. What makes this especially dangerous is that it is unwinding in what increasingly looks like a global recession- perhaps even depression, in an environment where the US Federal Reserve (1.25%), Bank of Canada (1.0%) and Bank of England (0.25%) interest rates are pretty much zero, and the European Central Bank (0.0%), Bank of Japan (-0.10%), and Central Banks of Sweden (-0.50%) and Switzerland (-0.75%) are at zero or negative interest rates.

As a quick refresher of how we got here, after the Global Financial Crisis, and consequent recession hit in 2007 thanks to delinquencies on subprime mortgages, the US Federal Reserve began cutting the short-term interest rate, known as the ‘Federal Funds Rate’ (or the rate at which depository institutions trade balances held at Federal Reserve Banks with each other overnight), from 5.25 per cent to 0 per cent, the lowest rate in history.

When that didn’t work to curb rising unemployment and stop growth stagnating, central banks across the globe started printing money which they used to buy up financial securities in an effort to drive up prices. This process was called “quantitative easing” (“QE”), to confuse the average person in the street into thinking it wasn’t anything more than conjuring trillions of dollars out of thin air and using that money to buy things in an effort to drive their prices up.

Systematic buying of treasuries and mortgage bonds by central banks caused the face value of on those bonds to increase, and since bond yields fall as their prices rise, this buying had the effect of also driving long-term interest rates down to near zero.

In theory making money cheap to borrow stimulates investment in the economy; it encourages households and companies to borrow, employ more people and spend more money.

“An alternative theory for QE is that it encourages buying hard assets by making people freak out that the value of the currency they are holding is being counterfeited into oblivion.”

In reality, the ability to borrow cheap money was mainly used by companies to buy back their own shares, and combined with QE being used to buy stock index funds (otherwise known as exchange traded funds or “ETFs”), this propelled stock markets to hit record high after record high even though this wasn’t justified the underlying corporate performance.

Europe and Asia were dragged into the crisis, as major European and Asian banks were found holding billions in toxic debt linked to US subprime mortgages (more than 1 million US homeowners faced foreclosure). One by one, nations began entering recession and repeated attempts to slash interest rates by central banks, along with bailouts of the banks and various stimulus packages could not stymie the unfolding crisis. After several failed attempts at instituting austerity measures across a number of European nations with mounting public debt, the European Central Bank began its own QE program that continues today and should remain in place well into 2018.

In China, QE was used to buy government bonds which were used to finance infrastructure projects such as overpriced apartment blocks, the construction of which has underpinned China’s “miracle” economy. Since nobody in China could actually afford these apartments, QE was lent to local government agencies to buy these empty flats.

“Of course this then led to a tsunami of Chinese hot money fleeing the country and blowing real estate bubbles from Vancouver to Auckland as it sought more affordable property in cities whose air, food and water didn’t kill you.”

QE was only intended as a temporary emergency measure, but now a decade into printing and the central banks of the United States, Europe, Japan and China have now collectively purchased over US$19 trillion of assets. Despite the the lowest interest rates in 5,000 years, the global economic growth in response to this money printing has continued to be anaemic. Instead, this stimulus has served to blow asset bubbles everywhere.

So if one naively were looking at markets, particularly the commodity and resource driven markets that traditionally drive the Australian economy, you might well have been tricked into thinking that the world was back in good times again as many have rallied over the last year or so.

The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets.

This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg in a report entitled “The World’s Most Extreme Speculative Mania Unravels in China”.

Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.

While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.

Steel, of course, is made from iron ore, Australia’s biggest export, and frequently the country’s main driver of a trade surplus and GDP growth.

Australia is the largest exporter of iron ore in the world, with a 29 per cent global share in 2015-16 and 786Mt exported, and at $48 billion we’re responsible for over half of all global iron ore exports by value. Around 81 per cent of our iron ore exports go to China.

Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens.

In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Last January, China pledged “supply-side reforms” for its steel and coal sectors to reduce excessive production capacity. In 2016, capacity was cut by 6 per cent for steel and and 8 per cent for coal.

In the first half of 2017 alone, a further 120 million tonnes of low-grade steel capacity was ordered to close because of pollution. This represents 11 per cent of the country’s steel capacity and 15 pe rcent of annual output. While this will more heavily impact Chinese-mined ore than generally higher-grade Australian ore, Chinese demand for iron ore is nevertheless waning.

Over the last six years, the price of iron ore has fallen 60 per cent.

Australia’s second biggest export is coal, being the largest exporter in the world supplying about 38 per cent of the world’s demand. Production has been on a tear, with exports increasing from 261Mt in 2008 to 388Mt in 2016.

While exports increased by 49 per cent over that time period, the value of those exports has collapsed 38 per cent, from $54.7 billion to $34 billion.

Losing coal as an export will blow a $34 billion dollar per annum hole in the current account, and there’s been no foresight by successive governments to find or encourage modern industries to supplant it.

“What is more shocking is that despite the gargantuan amount of money that China has been pumping into the system since 2014, Australia’s entire mining industry – which is completely dependent on China – has struggled to make any money at all.”

Across the entire industry revenue has dropped significantly while costs have continued to rise.

According to the Australian Bureau of Statistics, in 2015-16 the entire Australian mining industry which includes coal, oil and gas, iron ore, the mining of metallic & non-metallic minerals and exploration and support services made a grand total of $179 billion in revenue with $171 billion of costs, generating an operating profit before tax of $7 billion which representing a wafer thin 3.9 per cent margin on an operating basis. In the year before it made a 8.4 per cent margin.

Collectively, the entire Australian mining industry (ex-services) would be loss making in 2016-17 if revenue continued to drop and costs stayed the same. Yes, the entire Australian mining industry.

Our “economic miracle” of 104 quarters of GDP growth without a recession today doesn’t come from digging rocks out of the ground, shipping the by-products of dead fossils and selling stuff we grow any more. Mining, which used to be 19 per cent of GDP, is now 6.8 per cent and falling. Mining has fallen to the sixth largest industry in the country. Even combined with agriculture the total is now only 10 per cent of GDP.

In the 1970s, Australia was ranked 10th in the world for motor vehicle manufacturing. No other industry has replaced it. Today, the entire output of manufacturing as a share of GDP in Australia is half of the levels where they called it “hollowed out” in the US and UK.

In Australia in 2017, manufacturing as a share of GDP is on par with a financial haven like Luxembourg. Australia doesn’t make anything anymore.

 

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.”

The Reserve Bank of Australia has cut interest rates by 325 basis points since the end of 2011, in order to stimulate the economy, but I can’t for the life of me see how that will affect the fundamental problem of gyrating commodity prices where we are a price taker, not a price maker, into an oversupplied market in China.

This leads me to my next question: where has this growth come from?

“Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.”

A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).

In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both State and Federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.

According to the Rider Levett Bucknall Crane Index, in Q4 2017 between Sydney, Melbourne and Brisbane, there are now 586 cranes in operation, with a total of 685 across all capital cities, 80% of which are focused on building apartments. There are 350 cranes in Sydney alone.

By comparison, there are currently 28 cranes in New York, 24 in San Francisco and 40 in Los Angeles. There are more cranes in Sydney than Los Angeles (40), Washington DC (29), New York (28), Chicago (26), San Francisco (24), Portland (22), Denver (21), Boston (14) and Honolulu (13) combined. Rider Levett Bucknall counts less than 175 cranes working on residential buildings across the 14 major North American markets that it tracked in 3Q17, which is half of the number of cranes in Sydney alone.

According to UBS, around one third of these cranes in Australian cities are in postcodes with ‘restricted lending’, because the inhabitants have bad credit ratings.

This can only be described as completely “insane”.

That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe “one of the biggest housing bubbles in history”. “Australia”, he added, “is the only country we know of where middle-class houses are auctioned like paintings”.

Our Federal government has worked really hard to get us to this point.

Many other parts of the world can thank the Global Financial Crisis for popping their real estate bubbles. From 2000 to 2008, driven in part by the First Home Buyer Grant, Australian house prices had already doubled. Rather than let the GFC take the heat out of the market, the Australian Government doubled the bonus. Treasury notes recorded at the time say that it wasn’t launched to make housing more affordable, but to prevent the collapse of the housing market.

Already at the time of the GFC, Australian households were at 190 percent debt to net disposable income, 50 per cent more indebted than American households, but then things really went crazy.

“The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation – Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

The astronomical rise in house prices certainly isn’t supported by employment data. Wage growth (see graph below) is at a record low of just 1.9 per cent year on year in 2Q17, the lowest figure since 1988. The average Australian weekly income has gone up $27 to $1,009 since 2008, that’s about $3 a year.

Foreign buying driving up housing prices has been a major factor in Australian housing affordability, or rather unaffordability.

Urban planners say that a median house price to household income ratio of 3.0 or under is “affordable”, 3.1 to 4.0 is “moderately unaffordable”, 4.1 to 5.0 is “seriously unaffordable” and 5.1 or over “severely unaffordable”.

At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of “severely unaffordable”. Melbourne is 9.6x.

This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.

If you borrowed the whole amount to buy a house in Sydney, with a Commonwealth Bank Standard Variable Rate Home Loan currently showing a 5.36% comparison rate (as of 7th October 2017), your repayments would be $6,486 a month, every month, for 30 years. The monthly post tax income for the average wage in Sydney ($80,277.60) is only $5,081.80 a month.

In fact, on this average Sydney salary of $80,277.60, the Commonwealth Bank’s “How much can I borrow?” calculator will only lend you $463,000, and this amount has been dropping in the last year I have been looking at it. So good luck to the average person buying anything anywhere near Sydney.

Federal MP Michael Sukkar, Assistant Minister to the Treasurer, says surprisingly that getting a “highly paid job” is the “first step” to owning a home. Perhaps Mr Sukkar is talking about his job, which pays a base salary of $199,040 a year. On this salary, the Commonwealth Bank would allow you to just borrow enough- $1,282,000 to be precise- to buy the average home, but only provided that you have no expenses on a regular basis, such as food. So the Assistant Minister to the Treasurer can’t really afford to buy the average house, unless he tells a porky on his loan application form.

The average Australian is much more likely to be employed as a tradesperson, school teacher, postman or policeman. According to the NSW Police Force’s recruitment website, the average starting salary for a Probationary Constable is $65,000 which rises to $73,651 over five years. On these salaries the Commonwealth Bank will lend you between $375,200 and $419,200 (again provided you don’t eat), which won’t let you buy a house really anywhere.

Unsurprisingly, the CEOs of the Big Four banks in Australia think that these prices are “justified by the fundamentals”. More likely because the Big Four, who issue over 80 per cent of residential mortgages in the country, are more exposed as a percentage of loans than any other banks in the world, over double that of the US and triple that of the UK, and remarkably quadruple that of Hong Kong, which is the least affordable place in the world for real estate. Today, over 60 per cent of the Australian banks’ loan books are residential mortgages. Houston, we have a problem.

It’s actually worse in regional areas where Bendigo Bank and the Bank of Queensland are holding huge portfolios of mortgages between 700 to 900 per cent of their market capitalisation, because there’s no other meaningful businesses to lend to.

“I’m not sure how the fundamentals can possibly be justified when the average person in Sydney can’t actually afford to buy the average house in Sydney, no matter how many decades they try to push the loan out.”

Indeed Digital Finance Analytics estimated in a October 2017 report that 910,000 households are now estimated to be in mortgage stress where net income does not covering ongoing costs. This has skyrocketed up 50 per cent in less than a year and now represents 29.2 per cent of all households in Australia. Things are about to get real.

It’s well known that high levels of household debt are negative for economic growth, in fact economists have found a strong link between high levels of household debt and economic crises.

This is not good debt, this is bad debt. It’s not debt being used by businesses to fund capital purchases and increase productivity. This is not debt that is being used to produce, it is debt being used to consume. If debt is being used to produce, there is a means to repay the loan.

If a business borrows money to buy some equipment that increases the productivity of their workers, then the increased productivity leads to increased profits, which can be used to service the debt, and the borrower is better off. The lender is also better off, because they also get interest on their loan. This is a smart use of debt. Consumer debt generates very little income for the consumer themselves. If consumers borrow to buy a new TV or go on a holiday, that doesn’t create any cash flow. To repay the debt, the consumer generally has to consume less in the future.

Further, it is well known that consumption is correlated to demographics, young people buy things to grow their families and old people consolidate, downsize and consume less over time. As the aging demographic wave unfolds across the next decade there will be significantly less consumers and significantly more savers. This is worsened as the new generations will carry the debt burden of student loans, further reducing consumption.

So why are governments so keen to inflate housing prices?

The government loves Australians buying up houses, particularly new apartments, because in the short term it stimulates growth – in fact it’s the only thing really stimulating GDP growth.

Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP, making this country in recent quarters the most indebted on this ratio in the world. According to Treasurer Scott Morrison 80 per cent of all household debt is residential mortgage debt. This is up from 47 per cent in 1990.

Australia’s household debt servicing ratio (DSR) ties with Norway as the second worst in the world. Despite record low interest rates, Australians are forking out more of their income to pay off interest than when we had record mortgage rates back in 1989-90 which are over double what they are now.

“Everyone’s too busy watching Netflix and cash strapped paying off their mortgage to have much in the way of any discretionary spending. No wonder retail is collapsing in Australia.”

Governments fan the flame of this rising unsustainable debt fuelled growth as both a source of tax revenue and as false proof to voters of their policies resulting in economic success. Rather than modernising the economy, they have us on a debt fuelled housing binge, a binge we can’t afford.

We are well past overtime, we are into injury time. We’re about to have our Minsky moment: “a sudden major collapse of asset values which is part of the credit cycle.”

Such moments occur because long periods of prosperity and rising valuations of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values.

Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Today 42 per cent of all mortgages in Australia are interest only, because since the average person can’t afford to actually pay for the average house- they only pay off the interest. They’re hoping that value of their house will continue to rise and the only way they can profit is if they find some other mug to buy it at a higher price. In the case of Westpac, 50 per cent of their entire residential mortgage book is interest only loans.

And a staggering 64 per cent of all investor loans are interest only.

 

“This is rapidly approaching ponzi financing. This is the final stage of an asset bubble before it pops.”

Today residential property as an asset class is four times larger than the sharemarket. It’s illiquid, and the $1.5 trillion of leverage is roughly equivalent in size to the entire market capitalisation of the ASX 200. Any time there is illiquidity and leverage, there is a recipe for disaster – when prices move south, equity is rapidly wiped out precipitating panic selling into a freefall market with no bids to hit.

The risks of illiquidity and leverage in the residential property market flow through the entire financial system because they are directly linked; today in Australia the Big Four banks plus Macquarie are roughly 30 per cent of the ASX200 index weighting. Every month, 9.5 per cent of the entire Australian wage bill goes into superannuation, where 14 per cent directly goes into property and 23 per cent into Australian equities – of which 30 per cent of the main equity benchmark is the banks.

In 2015-16 there were 40,149 residential real estate applications from foreigners valued at over $72 billion in the latest data by FIRB. This is up 244 per cent by count and 320 per cent by value from just three years before.

Even more shocking, in the month of January 2017, the number of first home buyers in the whole of New South Wales was 1,029 – the lowest level since mortgage rates peaked in the 1990s. Half of those first home buyers rely upon their parents for equity.

This brings me onto Australia’s third largest export which is $22 billion in “education-related travel services”. Ask the average person in the street, and they would have no idea what that is and, at least in some part, it is an $18.8 billion dollar immigration industry dressed up as “education”. You now know what all these tinpot “english”, “IT” and “business colleges” that have popped up downtown are about. They’re not about providing quality education, they are about gaming the immigration system.

In 2014, 163,542 international students commenced English language programmes in Australia, almost doubling in the last 10 years. This is through the booming ELICOS (English Language Intensive Courses for Overseas Students) sector, the first step for further education and permanent residency.

This whole process doesn’t seem too hard when you take a look at what is on offer. While the federal government recently removed around 200 occupations from the Skilled Occupations List, including such gems as Amusement Centre Manager (149111), Betting Agency Manager (142113), Goat Farmer (121315), Dog or Horse Racing Official (452318), Pottery or Ceramic Artist (211412) and Parole Officer (411714) – you can still immigrate to Australia as a Naturopath (252213), Baker (351111), Cook (351411), Librarian (224611) or Dietician (251111).Believe it or not, up until recently we were also importing Migration Agents (224913).

You can’t make this up. I simply do not understand why we are importing people to work in relatively unskilled jobs such as kitchen hands in pubs or cooks in suburban curry houses.

At its peak in October 2016, before the summer holidays, there were 486,780 student visa holders in the country, or 1 in 50 people in the country held a student visa. The grant rate in 4Q16 for such student visa applications was 92.3 per cent. The number one country for student visa applications by far was, you guessed it, China.

While some of these students are studying technical degrees that are vitally needed to power the future of the economy, a cynic would say that the majority of this program is designed as a crutch to prop up housing prices and government revenue from taxation in a flagging economy. After all, it doesn’t look that hard to borrow 90 per cent of a property’s value from Australian lenders on a 457 visa. Quoting directly from one mortgage lender, “you’re likely to be approved if you have at least a year on your visa, most of your savings already in Australia and you have a stable job in sought after profession” – presumably as sought after as an Amusement Centre Manager. How much the banks will be left to carry when the market turns and these students flee the burden of negative equity is anyone’s guess.

In a submission to a senate economics committee by Lindsay David from LF Economics, “We found 21 Australian lending institutions where there is evidence of people’s loan application forms being fudged”.

The ultimate cost to the Australian taxpayer is yet to be known. However the situation got so bad that the RBA had to tell the Big Four banks to cease and desist from all foreign mortgage lending without identified Australian sources of income.

Ken Sayer, Chief Executive of non-bank Mortgage House said “It is much bigger than everyone is making it out to be. The numbers could be astronomical”.

“So we are building all these dwellings, but they are not for new Australian home owners. We are building these dwellings to be the new Swiss Bank account for foreign investors.”

Foreign investment can be great as long as it flows into the right sectors. Around $32 billion invested in real estate was from Chinese investors in 2015-16, making it the largest investment in an industry sector by a country by far. By comparison in the same year, China invested only $1.6 billion in our mining industry. Last year, 20 times more more money flowed into real estate from China than into our entire mineral exploration and development industry. Almost none of it flows into our technology sector.

“The total number of FIRB approvals from China was 30,611. By comparison. The United States had 481 approvals.”

Foreign investment across all countries into real estate as a whole was the largest sector for foreign investment approval at $112 billion, accounting for around 50% of all FIRB approvals by value and 97% by count across all sectors – agriculture, forestry, manufacturing, tourism – you name it in 2015-16.

In fact it doesn’t seem that hard to get FIRB approval in Australia, for really anything at all. Of the 41,450 applications by foreigners to buy something in 2015-16, five were rejected. In the year before, out of 37,953 applications zero were rejected. Out of the 116,234 applications from 2012 to 2016, a total of eight were rejected.

According to Credit Suisse, foreigners are acquiring 25 per cent of newly completed housing supply in NSW, worth a total of $39 billion.

In some circumstances, the numbers however could be much higher. Lend Lease, the Australian construction goliath with over $15 billion in revenue in 2016, stated in that year’s annual report that over 40% of Lend Lease’s apartment sales were to foreigners.

“I wouldn’t have a problem with this if it weren’t for the fact that this is all a byproduct of central bank madness, not true supply and demand, and people vital for running the economy can’t afford to live here any more.”

What is also remarkable about all of this is that technically, the Chinese are not allowed to send large sums of money overseas. Citizens of China can normally only convert US$50,000 a year in foreign currency and have long been barred from buying property overseas, but those rules have not been enforced. They’ve only started cracking down on this now.

Despite this, up until now, Australian property developers and the Australian Government have been more than happy to accommodate Chinese money laundering.

After the crackdown in capital controls, Lend Lease says there has been a big upswing with between 30 to 40% of foreign purchases now being cash settled. Other developers are reporting that some Chinese buyers are paying 100% cash. The laundering of Chinese cash into property isn’t unique to Australia, it’s just that Transparency International names Australia, in their March 2017 report as the worst money laundering property market in the world.

Australia is not alone, Chinese “hot money” is blowing gigantic property bubbles in many other safe havens around the world.

“But combined with our lack of future proof industries and exports, our economy is completely stuffed. And it’s only going to get worse unless we make a major transformation of the Australian economy.”

Instead of relying on a property bubble as pretense that our economy is strong, we need serious structural change to the composition of GDP that’s substantially more sophisticated in terms of the industries that contribute to it.

Australia’s GDP of $1.6 trillion is 69 per cent services. Our “economic miracle” of GDP growth comes from digging rocks out of the ground, shipping the by-products of dead fossils, and stuff we grow. Mining, which used to be 19 per cent, is now 7 per cent and falling. Combined, the three industries now contribute just 12 per cent of GDP thanks to the global collapse in commodities prices.

If you look at businesses as a whole, Company tax hasn’t moved from $68 billion in the last three years – our companies are not making more profits. This country is sick.

Indeed if you look at the budget, about the only thing going up in terms of revenue for the federal government are taxes on you having a good time – taxes on beer, wine, spirits, luxury cars, cigarettes and the like. It would probably shock the average person on the street to discover that the government collects more tax from cigarettes ($9.8 billion) than it collects from tax on superannuation ($6.8 billion), over double what it collects from Fringe Benefits Tax ($4.4 billion) and over thirteen times more tax than it does from our oil fields ($741 million).

But instead of thinking of intelligent ways to grow the economy, the focus is purely on finding more ways to tax you.

Here’s a crazy idea: the dominant government revenue line is income tax. Income tax is generated from wages. Education has always been the lubricant of upward mobility, so perhaps if we find ways to encourage our citizens to study in the right areas – for example science & engineering – then maybe they might get better jobs or create better jobs and ultimately earn higher wages and pay more tax.

Instead the government proposed the biggest cuts to university funding in 20 years with a new “efficiency dividend” cutting funding by $1.2 billion, increasing student fees by 7.5 percent and slashing the HECS repayment threshold from $55,874 to $42,000. These changes would make one year of postgraduate study in Electrical Engineering at the University of New South Wales cost about $34,000.

We should be encouraging more people into engineering, not discouraging them by making their degrees ridiculously expensive. In my books, the expected net present value of future income tax receipts alone from that person pursuing a career in technology would far outweigh the short sighted sugar hit from making such a degree more costly – let alone the expected net present value of wealth creation if that person decides to start a company. The technology industry is inherently entrepreneurial, because technology companies create new products and services.

Speaking of companies, how about as a country we start having a good think about what sorts of industries we want to have a meaningful contribution to GDP in the coming decades?

For a start, we need to elaborately transform the commodities we produce into higher end, higher margin products. Manufacturing contributes 5 per cent to GDP. In the last 10 years, we have lost 100,000 jobs in manufacturing. Part of the problem is that the manufacturing we do has largely become commoditised while our labour force remains one of the most expensive in the world. This cost is further exacerbated by our trade unions – in the case of the car industry, the government had to subsidise the cost of union work practices, which ultimately failed to keep the industry alive. So if our people are going to cost a lot, we better be manufacturing high end products or using advanced manufacturing techniques otherwise other countries will do it cheaper and naturally it’s all going to leave.

Last year, for example, 30.3 per cent of all manufacturing jobs in the textile, leather, clothing & footwear industries were lost in this country. Yes, a third. People still need clothes, but you don’t need expensive Australians to make them, you can make them anywhere.

“That’s why we need to seriously talk about technology, because technology is the great wealth and productivity multiplier. However the thinking at the top of government is all wrong.”

The largest four companies by market capitalisation globally as of the end of Q2 2017 globally were Apple, Alphabet, Microsoft and Amazon. Facebook is eight. Together, these five companies generate over half a trillion dollars in revenue per annum. That’s equivalent to about half of Australia’s entire GDP. And many of these companies are still growing revenue at rates of 30 per cent or more per annum.

These are exactly the sorts of companies that we need to be building.

With our population of 24 million and labour force of 12 million, there’s no other industry that can deliver long term productivity and wealth multipliers like technology.

“Today Australia’s economy is in the stone age. Literally. “By comparison, Australia’s top 10 companies are a bank, a bank, a bank, a mine, a bank, a biotechnology company (yay!), a conglomerate of mines and supermarkets, a monopoly telephone company, a supermarket and a bank.”

We live in a monumental time in history where technology is remapping and reshaping industry after industry – as Marc Andreessen said “Software is eating the world!” – many people would be well aware we are in a technology gold rush.

And they would be also well aware that Australia is completely missing out.

Most worrying to me, the number of students studying information technology in Australia has fallen by between 40 and 60 per cent in the last decade depending on whose numbers you look at. Likewise, enrollments in other hard sciences and STEM subjects such as maths, physics and chemistry are falling too. Enrolments in engineering have been rising, but way too slowly.

This is all while we have had a 40 per cent increase in new undergraduate students as a whole.

Women once made up 25 percent of students commencing a technology degree, they are now closer to 10 percent.

All this in the middle of a historic boom in technology. This situation is an absolute crisis. If there is one thing, and one thing only that you do to fix this industry, it’s get more people into it. To me, the most important thing Australia absolutely has to do is build a world class science & technology curriculum in our K-12 system so that more kids go on to do engineering.

In terms of maths & science, the secondary school system has declined so far now that the top 10% of 15-year olds are on par with the 40-50% band of of students in Singapore, South Korea and Taiwan.

For technology, we lump a couple of horrendous subjects about technology in with woodwork and home economics. In 2017, I am not sure why teaching kids to make a wooden photo frame or bake a cake are considered by the department of education as being on par with software engineering. Yes there is a little bit of change coming, but it’s mostly lip service.

Meanwhile, in Estonia, 100% of publicly educated students will learn how to code starting at age 7 or 8 in first grade, and continue all the way to age 16 in their final year of school.

At my company, Freelancer.com, we’ll hire as many good software developers as we can get. We’re lucky to get one good applicant per day. On the contrary, when I put up a job for an Office Manager, I received 350 applicants in 2 days.

But unfortunately the curriculum in high school continues to slide, and it pays lip service to technology and while kids would love to design mobile apps, build self-driving cars or design the next Facebook, they come out of high school not knowing that you can actually do this as a career.

I’ve come to the conclusion that it’s actually all too hard to fix – and I came to this conclusion a while ago as I was writing some suggestions for the incoming Prime Minister on technology policy. I had a good think about why we are fundamentally held back in Australia from major structural change to our economy to drive innovation.

I kept coming back to the same points.

The problems we face in terraforming Australia to be innovative are systemic, and there is something seriously wrong with how we govern this country. There are problems throughout the system, from how we choose the Prime Minister, how we govern ourselves, how we make decisions, all the way through.

For a start, we are chronically over governed in this country. This country has 24 million people. It is not a lot. By comparison my website has about 26 million registered users. However this country of 24 million people is governed at the State and Federal level by 17 parliaments with 840 members of parliament. My company has a board of three and a management team of a dozen.

Half of those parliaments are supposed to be representatives directly elected by the people. Frankly, you could probably replace them all with an iPhone app. If you really wanted to know what the people thought about an issue, technology allows you to poll everyone, everywhere, instantly. You’d also get the results basically for free. I’ve always said that if Mark Zuckerberg put a vote button inside Facebook, he’d win a Nobel Peace Prize. Instead we waste a colossal $122 million on a non-binding plebiscite to ask a yes/no question on same sex marriage that shouldn’t need to be asked in the first place, because those that it affects would almost certainly want it, and those that it doesn’t affect should really butt out and let others live their lives as they want to.

Instead these 840 MPs spend all day jeering at each other and thinking up new legislation to churn out. Last year the Commonwealth parliament alone spewed out 6,482 pages of legislation, adding to over 100,000 pages already enacted. That’s not even looking at State Governments.

“What about trying to attract more senior people to Sydney? I’ll tell you what my experience was like trying to attract senior technology talent from Silicon Valley.”

I called the top recruiter for engineering in Silicon Valley not so long ago for Vice President role. We are talking a top role, very highly paid. The recruiter that placed the role would earn a hefty six figure commission. This recruiter had placed VPs at Twitter, Uber, Pinterest.

The call with their principal lasted less than a minute “Look, as much as I would like to help you, the answer is no. We just turned down [another billion dollar Australian technology company] for a similar role. We tried placing a split role, half time in Australia and half time in the US. Nobody wanted that. We’ve tried in the past looking, nobody from Silicon Valley wants to come to Australia for any role. We used to think maybe someone would move for a lifestyle thing, but they don’t want to do that anymore.

“It’s not just that they are being paid well, it’s that it’s a backwater and they consider it as two moves they have to move once to get over there but more importantly when they finish they have to move back and it’s hard from them to break back in being out of the action.

“I’m really sorry but we won’t even look at taking a placement for Australia”.

We have serious problems in this country. And I think they are about to become very serious. We are on the wrong trajectory.

I’ll leave you now with one final thought.

Harvard University created something called the Economic Complexity Index. This measure ranks countries based upon their economic diversity- how many different products a country can produce – and economic ubiquity – how many countries are able to make those products.

Where does Australia rank on the global scale?

Worse than Mauritius, Macedonia, Oman, Moldova, Vietnam, Egypt and Botswana.

Worse than Georgia, Kuwait, Colombia, Saudi Arabia, Lebanon and El Salvador.

Sitting embarrassingly and awkwardly between Kazakhstan and Jamaica, and worse than the Dominican Republic at 74 and Guatemala at 75.

“Australia ranks off the deep end of the scale at 77th place. 77th and falling. After Tajikistan, Australia had the fourth highest loss in Economic Complexity over the last decade, falling 18 places.”

Thirty years ago, a time when our Economic Complexity ranked substantially higher, these words rocked the nation:

“We took the view in the 1970s it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through In the 1970s we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems Then you are gone. You are a banana republic.”

Looks like Paul Keating was right.

The national conversation needs to change, now.

(This is an edited version of Matt Barrie’s “House of Cards” opinion feature and was co-authored with Craig Tindale)





A response to Changing the Conversation

8 12 2017

Ed. Note: Richard Smith’s article, Climate Crisis and Managed Deindustrialization: Debating Alternatives to Ecological Collapse, which Saral is responding to this post, can be found on Resilience.org here, or here on DTM where I republished it. My only gripe with Saral’s essay is the total lack of mention of debt abolition…..  canceling debt is the only way forward when we start talking about what to do about all the job losses.

By Saral Sarkar, originally published by Saral Sarkar blog

In his article,1 Richard calls upon his readers to “change the conversation”. He asks, “What are your thoughts?” He says, if we don’t “come up with a viable alternative, our goose is cooked.” I fully agree. So I join the conversation, in order to improve it.

Let me first say I appreciate Richard’s article very much. It is very useful, indeed necessary, to also present one’s cause in a short article – for those who are interested but, for whatever reason, cannot read a whole book. Richard has ably presented the eco-socialist case against both capitalism and “green” capitalism.

But the alternative Richard has come up with is deficient in one very important respect, namely in respect of viability. Allow me to present here my comradely criticisms. It will be short.

Is only Capitalism the Problem?

(1) Richard writes, “Capitalism, not population is the main driver of planetary ecological collapse … .”. It sounds like an echo of statements from old-Marxist-socialism. It is not serious. Is Richard telling us that, while we are fighting a long-drawn-out battle against capitalism in order to overcome it, we can allow population to continuously grow without risking any further destruction of the environment? Should we then think that a world population of ten billion by 2050 would not be any problem?

I would agree if Richard would say that capitalism is, because of its growth compulsion, one of the main drivers of ecological collapse. But anybody who has learnt even a little about ecology knows that in any particular eco-region, exponential growth of any one species leads to collapse of its ecological balance. If we now think of the planet Earth as one whole eco-region and consider all the scientific reports on rapid bio-diversity loss and rapid dwindling of the numbers of larger animals, then we cannot but correlate these facts with the exponential growth of our own species, homo sapiens sapiens, the latter being the cause of the former two.

No doubt, capitalism – together with the development of technologies, especially agricultural and medical technologies – has largely enabled the huge growth of human numbers in the last two hundred years. But human population growth has been occurring even in pre-capitalist and pre-medieval eras, albeit at a slower rate. Parallel to this, also environmental destruction has been occurring and growing in these eras.

It is not good to tell our readers only half the truth. The whole truth is succinctly stated in the equation:

I = P  x  A  x  T

where I stands for ecological impact (we can also call it ecological destruction), P for population, T for Technology and A for affluence. All these three factors are highly variable. Let me here also quote Paul Ehrlich, one of my teachers in political ecology. Addressing leftists, he once wrote, “Whatever [be] your cause, it is a lost cause unless we control population [growth]”. Note the phrase “whatever your cause”. Ehrlich meant to say, and I too think so, the cause may be environmental protection, saving the earth, protecting biodiversity, overcoming poverty and unemployment, women’s liberation, preventing racist and ethnic conflicts and cleansings, preventing huge unwelcome migration flows, preventing crime, fighting modern-day slavery, bringing peace in the world, creating a socialist world order etc. etc. etc., in all cases stopping population growth is a very important factor. Sure, that will in no case be enough. But that is an essential part of the solutions.

Note that in the equation cited above, there is no mention of capitalism. Instead, we find there the two factors technology and affluence. We can call (and we generally do call) the product of T x A (production of affluence by means of industrial technologies) industrialism, of which there has until now been two main varieties: the capitalist one and the planned socialist one (of the soviet type). Nothing will be gained for saving the ecological balance of the Earth if only capitalism is replaced with socialism, and ruling socialists then try to increase production at a higher rate, which they must do under the pressure of a growing population which, moreover, develops higher ambitions and aspirations, and demands all the good things that middle class Americans enjoy.

(2) Modern-day old-socialists do not deny the existence of an ecological problem. They have also developed several pseudo-solutions such as “clean” and “renewable” energies and materials, efficiency revolution, decoupling of GDP growth from resource use etc.

It’s good that Richard rejects the idea that green capitalism can save us. But why can’t it? “Because”, he writes, “companies can’t commit economic suicide to save the humans. There’s just no solution to our crisis within the framework of any conceivable capitalism.” This is good, but not enough. Because there are old-socialists (I know many in Germany) who believe that it is only individual capitalists/companies and the system capitalism that are preventing a rapid transition to 100 percent clean renewable energies and 100 percent recycling of all materials. Thanks to these possibilities, they believe, old-socialist type of industrialism, and even economic and population growth, can be reconciled with the requirements of sustainability. I don’t think that is possible, and I have also earlier elaborately explained why.2 Said briefly, “renewable energies” are neither clean nor renewable, and 100 percent recycling is impossible because the Entropy Law also applies to matter. What Richard thinks is not clear from this article of his. It is necessary to make his thoughts on this point clear.

Is Bottom-up Democracy of Any Use in the Transition Period?

(3) Richard writes, “Rational planning requires bottom-up democracy.” I do not understand the connection between the two, planning and democracy. At the most, one could say that for better planning for the villages, the planning commission should also listen to the villagers. But at the national level? Should, e.g., the inhabitants of each and every 500 souls village in the Ganges basin codetermine in a bottom up democratic planning process how the waters of the said river and its tributaries should be distributed among ca. 500 million inhabitants of the basin? If that were ever to be attempted, the result would be chaos, not planning. Moreover, how do you ensure that the villagers are capable of understanding the national interest and overcoming their particular interests? Such phrases are only illusions.

In his 6th thesis, Richard sketches a rosy, idealistic picture of a future eco-socialist society and its citizens. That may be attractive for him, me and other eco-socialists. But this future lies in distant future. First we would need a long transition period of contracting economies, and that would cause a lot of pain to millions of people spoilt by consumerism or promises of a consumerist future. We shall have to convince such people, and that would be an altogether difficult job. We should tell them the truth, namely that austerity is necessary for saving the earth. We can promise them only one thing, namely that all the pains and burdens as well as the benefits of austerity will be equitably distributed among all.

What to Do About Jobs?

(4) Richard writes: “Needless to say, retrenching and closing down such industries would mean job losses, millions of jobs from here to ChinaYet if we don’t shut down those unsustainable industries, we’re doomed.” And then he puts the question “What to do?” We can be sure that all people who wholly depend on a paid job for their livelihood, whom we must also win over, will confront us with this jobs question. Let me finish my contribution to this conversation with an answer to this question. 

There is not much use talking to ourselves, the already converted. We need to start work, immediately and all over the world, especially in those countries where poverty and unemployment is very high. We know that, generally, these countries are also those where population growth is very high. People from the rich countries cannot simply tell their people, sorry, we have to close down many factories and we cannot further invest in industrializing your countries. But the former can tell the latter that they can help them in controlling population growth. The latter will understand easily that it is an immediately effective way to reduce poverty and unemployment. A massive educative campaign will of course be necessary in addition to concrete monetary and technical help.

In the rich countries, contrary to what Richard perhaps thinks, it will not be possible to provide new equivalent jobs to replace those jobs we need to abolish. For such countries, reducing working hours and job-sharing in the short term, and, in the long term, ostracizing automation and labor-saving technologies, and using labor-intensive methods of production instead, are together the only solution. That is already known. Another thing that would be needed is to negate free trade and international competition. However, it must also be said openly that high wages and salaries cannot be earned under such circumstances. 

We eco-socialist activists must begin the work with a massive world-wide political campaign in favor of such ideas and policies.

Notes and References

1. Smith, Richard (2017) “ Climate Crisis and Managed Deindustrialization: Debating Alternatives to Ecological Collapse.”
https://forhumanliberation.blogspot.de/2017/11/2753-climate-crisis-and-managed.html
and
https://www.commondreams.org/views/2017/11/21/climate-crisis-and-managed-deindustrialization-debating-alternatives-ecological

2. My views expressed in this article have been elaborately presented in my book:
Eco-Socialism or Eco-Capitalism? – A Critical Analysis of Humanity’s Fundamental Choices (1999). London: Zed Books,  and in various articles published in my blog-site
www.eco-socialist.blogspot.com





The model is broken…..

22 11 2017

This amazing article was originally published here…….

IS ‘SUSTAINABLE DEVELOPMENT’ A MYTH?

For a long time now, “sustainable development” has been the fashionable economic objective, the Holy Grail for anyone aiming to achieve economic growth without inducing catastrophic climate degradation. This has become the default position for two, very obvious reasons. First, no politician wants to tell his electorate that growth is over (even in countries where, very clearly, prosperity is now in decline). Second, policymakers prepared to invite ridicule by denying the reality of climate change are thin on the ground.

Accordingly, “sustainable development” has become a political article of faith. The approach seems to be to assume that sustainable development is achievable, and use selective data to prove it.

Where this comfortable assumption is concerned, this discussion is iconoclastic. Using the tools of Surplus Energy Economics, it concludes that the likelihood of achieving sustainable development is pretty low. Rather, it agrees with distinguished scientist James Lovelock in his observation that sustainable retreat might be the best we can expect.

This site is dedicated to the critical relationship between energy and economics, but this should never blind us to the huge threat posed by climate change. There seems no convincing reason to doubt either the reality of climate change science or the role that emissions (most obviously of CO²) are playing in this process. As well as counselling sustainable retreat, James Lovelock might be right, too, in characterising the earth as a system capable of self-regeneration so long as its regenerative capabilities are not tested too far.

False comfort

Economics is central to this debate. Here, comparing 2016 with 2001, are some of the figures involved;

Real GDP, 2016 values in PPP dollars:

2001: $73 trillion. 2016: $120tn (+65%)

Energy consumption, tonnes of oil equivalent:

2001: 9.5bn toe. 2016: 13.3bn toe (+40%)

Emissions of CO², tonnes:

2001: 24.3bn t. 2016: 33.4bn t (+37%)

If we accept these figures as accurate, each tonne of CO² emissions in 2001 was associated with $2,990 of GDP. By 2016, that number had risen to $3,595. Put another way, 17% less CO² was emitted for each $1 of GDP. By the same token, the quantity of energy required for each dollar of GDP declined by 15% over the same period.

This is the critical equation supporting the plausibility of “sustainable growth”. If we have really shown that we can deliver successive reductions in CO² emissions per dollar of GDP, we have options.

One option is to keep CO2 levels where they are now, yet still grow the economy. Another is to keep the economy where it is now and reduce CO2 emissions. A third is to seek a “goldilocks” permutation, both growing the economy and reducing emissions at the same time.

Obviously, the generosity of these choices depends on how rapidly we can continue our progress on the efficiency curve. Many policymakers, being pretty simple people, probably use the “fool’s guideline” of extrapolation – ‘if we’ve achieved 17% progress over the past fifteen years’, they conclude, ‘then we can expect a further 17% improvement over the next fifteen’.

Pretty lies

But what if the apparent ‘progress’ is illusory? The emissions numbers used as the denominator in the equation can be taken as accurate, as can the figures for energy consumption. Unfortunately, the same can’t be said of the economic numerator. As so often, we are telling ourselves comforting untruths about the way in which the world economy is behaving.

This issue is utterly critical for the cause of “sustainable development”, whose plausibility rests entirely on the numbers used to calculate recent trends.

And there are compelling reasons for suspecting the validity of GDP numbers.

For starters, apparent “growth” in economic output seems counter-intuitive. According to recorded numbers for per capita GDP, the average American was 6% better off in 2016 than in 2006, and the average Briton was 3% more prosperous. These aren’t big numbers, to be sure, but they are positive, suggesting improvement, not deterioration. Moreover, there was a pretty big slump in the early part of that decade. Adjustment for this has been used to suggest that people are growing more prosperous at rates faster than the trailing-10-year per capita GDP numbers indicate.

Yet the public don’t buy into the thesis of “you’ve never had it so good”. Indeed, it isn’t possible reconcile GDP numbers with popular perception. People feel poorer now than they did in 2006, not richer. That’s been a powerful contributing factor to Americans electing Donald Trump, and British voters opting for “Brexit”, crippling Theresa May’s administration and turning in large numbers to Jeremy Corbyn’s collectivist agenda. Much the same can be said of other developed economies, including France (where no established party made it to the second round of presidential voting) and Italy (where a referendum overwhelmingly rejected reforms proposed by the then-government).

Ground-level data suggests that the popular perception is right, and the per capita GDP figures are wrong. The cost of household essentials has outpaced both incomes and general inflation over the past decade. Levels of both household and government debt are far higher now than they were back in 2006. Perhaps worst of all – ‘though let’s not tell the voters’ – pension provision has been all but destroyed.

The pension catastrophe has been attested by a report from the World Economic Forum (WEF), and has been discussed here in a previous article. It is a topic to which we shall return in this discussion.

The mythology of “growth”

If we understand what really has been going on, we can conclude that, where prosperity is concerned, the popular perception is right, meaning that the headline GDP per capita numbers must be misleading. Here is the true story of “growth” since the turn of the century.

Between 2001 and 2016, recorded GDP grew by 65%, adding $47tn to output. Over the same period, however, and measured in constant 2016 PPP dollars, debt increased by $135tn (108%), meaning that each $1 of recorded growth came at a cost of $2.85 in net new borrowing.

This ratio has worsened successively, mainly because emerging market economies (EMEs), and most obviously China, have been borrowing at rates far larger than growth, a vice previously confined to the developed West.

This relationship between borrowing and growth makes it eminently reasonable to conclude that much of the apparent “growth” has, in reality, been nothing more substantial than the spending of borrowed money. Put another way, we have been boosting “today” by plundering “tomorrow”, hardly an encouraging practice for anyone convinced by “sustainable development” (or, for that matter, sustainable anything).

Nor is this all. Since the global financial crisis (GFC) of 2008, we have witnessed the emergence of enormous shortfalls in society’s provision for retirement. According to the WEF study of eight countries – America, Australia, Britain, Canada, China, India, Japan and the Netherlands – pension provision was deficient by $67tn in 2015, a number set to reach $428tn (at constant values) by 2050.

Though the study covers just eight countries, the latter number dwarfs current GDP for the entire world economy ($120tn PPP). The aggregate eight-country number is worsening by $28bn per day. In the United States alone, the annual deterioration is $3tn, equivalent to 16% of GDP and, incidentally, roughly five times what America spends on defence. Moreover, these ratios seem certain to worsen, for pension gaps are increasing at annual rates far in excess of actual or even conceivable economic growth.

For the world as a whole, the equivalent of the eight-country number is likely to be about $124tn. This is a huge increase since 2008, because the major cause of the pensions gap has been the returns-destroying policy of ultra-cheap money, itself introduced in 2008-09 as a response to the debt mountain which created the GFC. Finally, on the liabilities side, is interbank or ‘financial sector’ debt, not included in headline numbers for debt aggregates.

Together, then, liabilities can be estimated at $450tn – $260tn of economic debt, about $67tn of interbank indebtedness and an estimated $124tn of pension under-provision. The equivalent number for 2001 is $176tn, expressed at constant 2016 PPP values. This means that aggregate liabilities have increased by $274tn over fifteen years – a period in which GDP grew by just $47tn.

The relationship between liabilities and recorded GDP is set out in the first pair of charts, which, respectively, set GDP against debt and against broader liabilities. Incidentally, the pensions issue is, arguably, a lot more serious than debt. This is because the real value of existing debt can be “inflated away” – a form of “soft default” – by governments willing to unleash inflation. The same cannot be said of pension requirements, which are, in effect, index-linked.

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Where climate change is concerned, what matters isn’t so much the debt or broader liability aggregates, or even the rate of escalation, but what they tell us about the credibility of recorded GDP and growth.

Here, to illustrate the issues involved, are comparative annual growth rates between 2001 and 2016, a period long enough to be reliably representative:

GDP: +3.4% per year

Debt: +5.0%

Pension gap and interbank debt: +9.1%

To this we can add two further, very pertinent indicators:

Energy consumption: +2.2%

CO2 emissions: +2.1%

The real story

As we have seen, growth of $47tn in recorded GDP between 2001 and 2016 was accompanied – indeed, made possible – by a vast pillaging of the balance sheet, including $135tn in additional indebtedness, and an estimated $140tn in other liabilities.

The only realistic conclusion is that the economy has been inflated by massive credit injections, and by a comparably enormous unwinding of provisions for the future. It follows that, absent these expedients, organic growth would have been nowhere near the 3.4% recorded over the period.

SEEDS – the Surplus Energy Economics Data System – has an algorithm designed to ex-out the effect of debt-funded consumption (though it does not extend this to include pension gaps or interbank debt). According to this, adjusted growth between 2001 and 2016 was only 1.55%. As this is not all that much faster than the rate at which the population has been growing, the implication is that per capita growth has been truly pedestrian, once we see behind the smoke-and-mirrors effects of gargantuan credit creation.

This isn’t the whole story. The above is a global number, which embraces faster-than-average growth in China, India and other EMEs. Constrastingly, prosperity has actually deteriorated in Britain, America and most other developed economies. Citizens of these countries, then, are not imagining the fall in prosperity which has helped fuel their discontent with incumbent governing elites. The deterioration has been all too real.

The second set of charts illustrates these points. The first shows quite how dramatically annual borrowing has dwarfed annual growth, with both expressed in constant dollars. The second sets out what GDP would have looked like, according to SEEDS, if we hadn’t been prepared to trash collective balance sheets in pursuit of phoney “growth”. You will notice that the adjusted trajectory is consistent with what was happening before we ‘unleashed the dogs of cheap and easy credit’ around the time of the millenium.

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Flagging growth – the energy connection

As we have seen, then, the very strong likelihood is that real growth in global economic output over fifteen years has been less than 1.6% annually, slower than growth either in energy consumption (2.2%) or in CO² emissions(2.1%). In compound terms, growth in underlying GDP seems to have been about 26% between 2001 and 2016, appreciably less than increases in either energy consumption (+40%) or emissions (+37%).

At this point, some readers might think this conclusion counter-intuitive – after all, if technological change has boosted efficiency, shouldn’t we be using less energy per dollar of activity, not more?

There is, in fact, a perfectly logical explanation for this process. Essentially, the economy is fuelled, not by energy in the aggregate, but by surplusenergy. Whenever energy is accessed, some energy is always consumed in the access process. This is expressed here as ECoE (the energy cost of energy), a percentage of the gross quantity of energy accessed. The critical point is that ECoE is on a rising trajectory. Indeed, the rate of increase in the energy cost of energy has been rising exponentially.

As mature resources are depleted, recourse is made to successively costlier (higher ECoE) alternative sources. This depletion effect is moderated by technological progress, which lowers the cost of accessing any given form of energy. But technology cannot breach the thermodynamic parameters of the resource. It cannot, as it were, ‘trump the laws of physics’. Technology has made shale oil cheaper to extract than shale oil would have been in times past. But what it has not done is transform shales into the economic equivalent of giant, technically-straightforward conventional fields like Al Ghawar in Saudi Arabia. Any such transformation is something that the laws of physics simply do not permit.

According to estimates generated on a multi-fuel basis by SEEDS, world ECoE averaged 4.0% in 2001, but had risen to 7.5% by 2016. What that really means is that, out of any given $100 of economic output, we now have to invest $7.50, instead of $4, in accessing energy. The resources that we can use for all other purposes are correspondingly reduced.

In the third pair of charts, the left-hand figure illustrates this process. The area in blue is the net energy that fuels all activities other than the supply of energy itself. This net energy supply continues to increase. But the red bars, which are the energy cost of energy, are rising too, and at a more rapid rate. Consequently, gross energy requirements – the aggregate of the blue and the red – are rising faster than the required net energy amount. This is why, when gross energy is compared with economic output, the energy intensity of the economy deteriorates, even though the efficiency with which netenergy is used has improved.

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Here’s another way to look at ECoE and the gross/net energy balance. Back in 2001, we needed to access 104.2 units of energy in order to have 100 units for our use. In 2016, we had to access 108.1 units for that same 100 units of deployable energy. This process, which elsewhere has been called “energy sprawl”, means that any given amount of economic activity is requiring the accessing of ever more gross energy in order to deliver the requisite amount of net (surplus) energy. By 2026, the ratio is likely to have risen to 112.7/100.

The companion chart shows the trajectory of CO² emissions. Since these emissions are linked directly to energy use, they can be divided into net (the pale boxes), ECoE (in dark grey) and gross (the sum of the two). Thanks to a lower-carbon energy slate, net emissions seem to be flattening out. Unfortunately, gross emissions continue to increase, because of the CO2 associated with the ECoE component of gross energy requirements.

Shot down in flames? The “evidence” for “sustainable development”

As we have seen, a claimed rate of economic growth (between 2001 and 2016) that is higher (65%) than the rate at which CO2 emissions have expanded (37%) has been used to “prove” increasing efficiency. It is entirely upon these claims that the viability of “sustainable development” is based.

But, as we have also seen, reported growth has been spurious, the product of unsustainable credit manipulation, and the unwinding of provision for the future. Real growth, adjusted to exclude this manipulation, is estimated by SEEDS at 26% over that period. Crucially, that is less than the 37% rate at which CO² emissions have grown.

On this basis, a claimed 17% “improvement” in the amount of CO2 per dollar of output reverses into a deterioration. Far from improving, the relationship between CO2 and economic output worsened by 9% between 2001 and 2016. In parallel with this, the amount of energy required for each dollar of output increased by 11% over the same period.

The final pair of charts illustrate this divergence. On the left, economic activity per tonne of CO2 is shown. The second chart re-expresses this relationship using GDP adjusted for the artificial “growth” injected by monetary manipulation. If this interpretation is correct – and despite a very gradual upturn in the red line since 2010 – the comforting case for “sustainable development” falls to pieces.

In short, if growth continues, rising ECoEs dictate that both energy needs, and associated emissions of CO2, will grow at rates exceeding that of economic output.

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We are back where many have argued that we have been all along. The pursuit of growth seems to be incompatible with averting potentially irreversible climate change.

There is a nasty sting-in-the-tail here, too. The ECoE of oil supplies is rising particularly markedly, and there seems a very real danger that this will force an increased reliance on coal, a significantly dirtier fuel. A recent study by the China University of Petroleum predicted exactly such a trend in China, already the world’s biggest producer of CO2. As domestic oil supply peaks and then declines because of higher ECoEs, the study postulates a rapid increase in coal consumption to feed the country’s voracious need for energy. This process is most unlikely to be confined to China.

Where does this leave us?

The central contention here is that the case for “sustainable development” is fatally flawed, because the divergence between gross and net energy needs is more than offsetting progress in greening our energy mix and combatting emissions of harmful gases. “Sustainable development” is a laudable aim, but may simply not be achievable within the laws of physics as they govern energy supply.

If this interpretation is correct, it means that growth in the global economy can be pursued only at grave climate risk. A (slightly) more comforting interpretation might that the super-heated rate of borrowing, and the seemingly disastrous rate at which pension capability is being destroyed, might well crash the system before our obsession with ‘growth at all costs’ can inflict irreparable damage to the environment.





More on money and the economy………

11 11 2017

Articles that, as far as I am concerned, confirm my desire to print local money are coming into my newsfeed thick and fast. This latest one, from the consciousness of sheep, claims the UK economy is as good as finished…….

I don’t agree with everything in it, but bear with me…..

This article also ties in with the looming oil problems. Of course, with the North Sea oil fields depleting in double digits figures, and the UK being as good as out of coal and gas, it’s no wonder an English website would be expressing concern. Make no mistake though, with Australia importing well over 90% of all its liquid fuel requirements, we are in no better shape, really….

“Inflation” says the author “results in the appearance of rising prices; but is actually the devaluation of money.” In my opinion, this is one of the biggest mistakes of economics. Money has no value. It’s for trading and spending. When we sold our house a couple of years ago, we were suddenly the owners of $400,000 instead of a house. Were we rich? I don’t think so…….  not until we spent it on a farm, a couple of utes, a bunch of tools, building materials, livestock, soil improvers, earthworks, concrete…… and now most of the money is gone, I feel richer than ever, because I have the things I need to face our uncertain future. No I’ll take that back, the future is certain, it will be bad…!

There are, however, other reasons for rising prices [than money printing].  And unlike monetary inflation, these are self-correcting.  For example, global oil prices have begun to break out of the $40-$60 “goldilocks” band in which consumers and energy companies can just about keep their heads above water.  Most economists believe this to be dangerously inflationary.  Indeed, almost all previous recessions are the result of monetary tightening (usually by raising interest rates) in response to an upward spike in oil prices.  Since oil is used to manufacture and/or transport every item that we buy, if the price of oil increases, then the price of everything else must increase too.

But the price of oil is not increasing in response to money printing.  Rather, it is the result of declining inventories which point to a global shortage of oil early in 2018 – traders are currently bidding up the price on futures contracts to guarantee access to sufficient oil to meet anticipated demand.  Since oil is considered “inelastic” (we have little choice but to pay for it) the assumption is that rising wholesale prices will be passed on to consumers, causing general inflation.  Frank Shostak from the Mises Institute challenges this assumption:

“Whether the asking price set by producers is going to be realized in the market place, however, hinges on whether or not consumers will accept those prices. Consumers dictate whether the price set by producers is ‘right’.  On this Mises wrote, ‘The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.’

“If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realized.”

And the result is a recession/depression……. Shostak further argues that in this case:

“If the price of oil goes up and if people continue to use the same amount of oil as before, then this means that people are now forced to allocate more money for oil. If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come off.”

Clearly there is a difference between something as ubiquitous as oil and those other goods and services that must fall in price unless more money is printed into existence.  The difference is this; each of us has a series of “non-discretionary” purchases that we have little or no choice but to make every month.  These include:

  • Rent/mortgage payments
  • Utility bills
  • Debt interest
  • Council tax
  • Food
  • Transport
  • Telephone/broadband

In addition, we make various “discretionary” purchases of goods and services that we want rather than need.  These include pretty much everything else that we buy, including:

  • TV subscriptions
  • Cinema
  • Eating out
  • Going to the pub
  • Music downloads/subscriptions
  • Electrical equipment
  • Clothes
  • Home furnishings

Oddly enough…..  I have nothing to do with that last list! Am I already out of discretionary spending power…?

If the cost of living rises without appropriate increases in people’s access to money, then we as individuals do what governments are trying to do to the economy as a whole – we cut back on everything that we consider discretionary.  In this way, the rising price of oil – and electricity -does not result in generalised inflation; it merely redistributes our spending across the economy. Just ask the retail sector how well it’s doing at the moment….. When I recently replaced my freezer for a bigger one, I went to Gumtree, not Hardly Normal, and the perfectly functioning small freezer will be sold to pay for it.

This is of course where ‘free money’ from the community, to only be spent in the community really comes in handy. It allows people to buy their essentials, when locally made, without spending the government money, thus allowing the real stuff to be spent on energy and taxes and other stuff created in the Matrix.

Make no mistake, one day soon, the ONLY economy left will be our local economies.

The articles continues…….

Another mistake made by economists and politicians is the belief that rising prices will generate political pressure for additional public spending and for wage increases across the economy.  Indeed, one of the greatest economic mysteries of our age is why apparently full employment has failed to translate into rising wages.  The obvious answer, of course, is that working people have traded employment for low wages.

There is good reason for this.  Since 2010, government attempts to run a budget surplus have sucked money out of the economy.  Public spending and social security payments (the two ways new government money enter the economy) have been savagely cut.  If government refuses to spend new money into the economy, only the banks can.  But since 2008 the banks have stubbornly refused to spend money into the “real economy,” preferring instead to pump up asset bubbles that add no new value to the wider economy.  Only those working people fortunate enough to get a foot on the housing ladder get to benefit from this; but even they can see the illusion – a house may have risen in price since it was bought… but it is still the same house; no commensurate additional value has been added.  The same is true for bubbles in bonds, shares, cryptocurrencies, luxury property, collectibles and fine art.

“Full employment”? The writer seems unaware of the manipulation of statistics regarding employment… don’t know if the UK suffers from the same problem, but here in Australia, anyone working just one hour a week is no longer considered unemployed! A remarkable nmber of people ‘on the dole’ actually work, they are merely underemployed, but not counted.

And the way governments have stopped spending in vain attempts to reach budget surpluses is truly baffling. As is of course the tsunami of privatizations going on all over the world. This wealth transfer is the biggest con the planet has ever seen…

Economically, people are responding to this in the only way they can.  The working poor – increasingly dependent upon in-work benefits and foodbanks – have not only cut their discretionary spending; they have been eating into their supposedly non-discretionary spending too.  As Jamie Doward in the Guardian reports:

“More than a third of people who earn less than the “real living wage” have reported regularly skipping meals to save money…  A poll carried out for the Living Wage Foundation also found that more than a third of people earning less than this had topped up their monthly income with a credit card or loan in the last year, while more than one in five reported using a payday loan to cover essentials. More than half – 55% – had declined a social invitation due to lack of money, and just over half had borrowed money from a friend or relative.”

As I’ve said in past posts on this issue, if you don’t have access to money, you simply have to borrow it. Credit card debt in Australia accounts for a full quarter of all private debt, and when you have to pay extortionary interest rates on those, it limits your spending power even more.

Things look grim in the UK it seems….

Cat Rutter Pooley in the Financial Times reports that:

“In-store sales of non-food items fell 2.9 per cent over the three months to October and 2.1 per cent in the past year — the worst performance since the BRC started compiling the data in January 2012. Clothing sales were particularly hard hit, according to the report, with unseasonably warm weather holding down purchases. Online sales growth was also lacklustre, at less than half the pace of the three- and 12-month averages.”

This latter point is particularly important because until now economists and politicians have peddled the myth that high street sales were falling because consumers were buying online.  The reality is that they are falling because – with the exception of food – we are not buying anymore.  The news of the fall in high street shopping comes just a day after the British Beer and Pub Association reported a massive fall in the sale of beer.  On the same day, energy company SSE threatened to shut down its energy supply business as a result of falling profits.  Back in December last year, we reported a similar shift in purchasing behaviour as people cut back on personal hygiene products.

You know things are bad when beer sales are falling…! If ever there was an argument to be made for self sufficiency, this does the job. I make 90% of the alcohol I drink (and it isn’t much, believe me… my wife gave me a bottle of Scotch when I left Queensland for good two years ago, and the bottle was only recently emptied..); and I am finally growing more and more of my own food, even selling excess produce I cannot eat fast enough myself…  Nicole Foss’ deflationary spiral sounds like it’s started, and while no one is saying so yet, I think it’s on in Australia too.

The one consolation is that when Britain’s poor have finally cut their spending to the bone, and a swathe of businesses have been forced into bankruptcy, it is the rich who are going to face the biggest losses.  The Positive Money campaign highlights the Bank of England/Treasury dilemma:

“The Bank of England faces its current predicament thanks to an ongoing failure to think beyond a limited, orthodox form of the central bank’s role. By keeping rates low, it risks inflating asset bubbles even further. But with incomes so weak, now is the wrong time to raise them.”

This lesson will only be learned retrospectively.  Once it becomes apparent that millions of British workers are not going to be repaying their debts, banks will crash.  Once it becomes apparent that British workers cannot provide the government with the tax income to pay back its borrowing, the bond market will crash.  Ironically, JPMorgan has already christened the coming collapse; as Joe Ciolli at Business Insider reported last month:

“JPMorgan has already coined a nickname for the next financial meltdown.  And while the firm isn’t sure exactly when the so-called Great Liquidity Crisis will strike, it figures that tensions will start to ratchet up in 2018…”

And I thought 2020 would be crunch time…….. how often can I be called an optimist..??

When the time comes, Britain will be particularly badly hit because our economy has been all but hollowed out.  The supposed “wealth” that makes up a large part of our GDP comes from the movement of precisely the asset classes that the coming Great Liquidity Crisis will render worthless.  The difference compared to 2008 is that this time around the banks are too big to save and individual central banks and governments are too small to save them.

Limits to growth, limits everywhere….. and nobody’s acknowledging it.

 





I’m not the only one who’s worked it out….

7 11 2017

Following up on the post where I ‘claimed’ to have worked it out, along comes this article from a website I recently discovered that all my readers should also follow. Dr Tim Morgan who runs the WordPress blog Surplus Energy Economics, published the following, called Anticipating the next crash. While he doesn’t exactly mention printing one’s own community money, every single argument he makes proves my point as far as I am concerned…… the loss of trust in money in particular really caught my attention…..

Enjoy….

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THIS TIME IT COULD BE MONEY – NOT BANKS

tim morganBecause the global financial crisis (GFC) was caused by a collapse of trust in banks, it can be all too easy to assume that the next crash, if there is one, must take the same form.

In fact, it’s more likely to be different. Whilst the idiocy-of choice before 2008 had been irresponsible lending, by far the most dangerous recklessness today is monetary adventurism.

So it’s faith in money, rather than in banks, that could trigger the next crisis.

Introduction – mistaken confidence

Whenever we live through a traumatic event, such as the GFC of 2008, the authorities ‘close the stable door after the horse has bolted’. They put in place measures that might have countered the previous crisis, if only they had they known its nature in advance.

The reason why such measures so often fail to prevent another crash is simple – the next crisis is never the same as the last one.

That’s where we are now. We might be slightly better-placed to combat a GFC-style event today than we were back in 2008, though even that is doubtful. But we are dangerously ill-prepared for what is actually likely to happen.

Put at its simplest, the GFC resulted from the reckless accumulation of debt over the previous 8-10 years. Debt creation has continued – indeed, accelerated – since 2008, but the new form of recklessness has been monetary adventurism.

So it’s likely to be money, not debt, which brings the house down this time. Where 2008 was triggered by a collapse of faith in banks, a loss of faith in currencies could be the trigger for the next crisis.

And, judging by their actions, the authorities seem not to have spotted this risk at all.

Unfinished business?

Where the likelihood of a sequel to 2008 is concerned, opinion divides into two camps.

Some of us are convinced that the GFC is unfinished business – and that another crisis has been made more likely by the responses adopted back then. That we’re in a minority shouldn’t worry us because, after all, change happens when the majority (‘consensus’) view turns out to be wrong.

Others, probably the majority, believe that normality has now been restored.

But this view, frankly, is illogical. To believe that what we have now is “normality”, you would have to accept each of these propositions as true.

1. Current monetary conditions, with interest rates that are negative (lower than inflation), are “normal”

2. It is “normal” for people to be punished for saving, but rewarded for borrowing

3. It is also “normal” for debt to be growing even more rapidly now than it did before 2008

4. Buying $1 of “growth” with $3 or more of borrowing is “normal”

5. QE – the creation of vast sums of new money out of thin air – is also “normal”

6. Vastly inflated asset values, and extremely depressed incomes, are “normal”

7. Policies which hand money to the already-wealthy, at the expense of everyone else, are another aspect of “normal”

8. It is quite “normal” for us to have destroyed the ability to save for pensions, or for any other purpose.

To be sure, Lewis Carroll’s White Queen famously managed to believe “six impossible things before breakfast”, but even she would have struggled to swallow this lot with her croissants and coffee.

When we consider, also, the continued stumbling global economy – which, nearly a decade after the crisis, remains nowhere near “escape velocity” – the case for expecting a second crash becomes pretty compelling.

But this does not mean that we should expect a re-run of 2008 in the same form.

Rather, everything suggests that the sequel to 2008 will be a different kind of crisis. The markets won’t be frightened by something familiar, but will be panicked by something new.

This means that we should expect a form of crisis that hasn’t been anticipated, and hasn’t been prepared for.

2008 – a loss of trust in banks

We need to be clear that the GFC had two real causes, both traceable in the last analysis to reckless deregulation.

First, debt had escalated to unsustainable levels.

Second, risk had proliferated, and been allowed to disperse in ways that were not well understood.

Of these, it was the risk factor which really triggered the crash, because nobody knew which banks and other financial institutions were safe, and which weren’t. This put the financial system into the lock-down known as “the credit crunch”, which was the immediate precursor to the crash.

Ultimately, this was all about a loss of trust. Even a perfectly sound bank can collapse, if trust is lost. Because banks are in the business of borrowing short and lending long, there is no way that they can call in loans if depositors are panicked into pulling their money out.

This also means – and please be in no doubt about this – that there is no amount of reserves which can prevent a bank collapse.

So – and despite claims to the contrary – a 2008-style banking crisis certainly could take place again, even though reserve ratios have been strengthened. This time, though, banks are likely to be in the second wave of a crash, not in the front line.

Coming next – a loss of trust in money?

The broader lesson to be learned from the financial crisis is that absolute dependency on faith is by no means unique to banks.

Trust is a defining characteristic of the entire financial system – and is particularly true of currencies.

Modern money, not backed by gold or other tangible assets, is particularly vulnerable to any loss of trust. The value of fiat money depends entirely on the “full faith and credit” of its sponsoring government. If that faith and creditworthiness are ever called into serious question, the ensuing panic can literally destroy the value of the currency. It’s happened very often in the past, and can certainly happen again.

Loss of faith in a currency can happen in many ways. It can happen if the state, or its economy, become perceived as non-viable. In fact, though, this isn’t the most common reason for currency collapse. Rather, any state can imperil the trustworthiness of its currency if it behaves irresponsibly.

Again, we can’t afford to be vague about this. Currency collapse, resulting from a haemorrhaging of faith, is always a consequence of reckless monetary policy. Wherever there is policy irresponsibility, a currency can be expected to collapse.

In instances such as Weimar Germany and modern-day Zimbabwe, the creation of too much money was “route one” to the destruction of the trust. But this isn’t the only way in which faith in a currency can be destroyed. Another trust-destroying practice is the monetizing of debt, which means creating money to “pay” government deficits.

So the general point is that the viability of a currency can be jeopardized by any form of monetary irresponsibility. The scale of risk is in direct proportion to the extent of that irresponsibility.

The disturbing and inescapable reality today is that the authorities, over an extended period, have engaged in unprecedented monetary adventurism. As well as slashing interest rates to levels that are literally without precedent, they have engaged in money creation on a scale that would have frightened earlier generations of central bankers out of their wits.

Let’s be crystal clear about something else, too. Anyone who asserts that this adventurism isn’t attended by an escalation in risk is living in a fantasy world of “this time it’s different”.

Here is a common factor linking 2008 and 2017. In the years before the GFC, reckless deregulation created dangerous debt excesses. Since then, recklessness has extended from regulation into monetary policy itself. Now, as then, irresponsible behaviour has been the common factor.

A big difference between then and now, though, lies in the scope for recovery. In 2008, the banks could be rescued, because trust in money remained. This meant that governments could rescue banks by pumping in money. There exist few, if any, conceivable responses that could counter a haemorrhage of faith in money.

Obviously, you can’t rescue a discredited currency by creating more of it. [ED. hence the need to create local currency]

If a single currency loses trust, another country or bloc might just bail it out. But even this is pretty unlikely, because of both sheer scale, and contagion risk.

So there is no possible escape route from a systemic loss of trust in fiat money. In that situation, the only response would be to introduce wholly new currencies which start out with a clean bill of health.

An exercise in folly

To understand the current risk, we need to know how we got here. Essentially, we are where we are because of how the authorities responded to the GFC.

In 2008, the immediate threat facing the financial system wasn’t the sheer impossibility of ever repaying the debt mountain created in previous years. Most debt doesn’t have to be repaid immediately, and can often be replaced or rolled-over.

Rather, the “clear and present danger” back then was an inability to keep up interest payments on that debt. Because the spending of borrowed money had given an artificial boost to apparent economic activity, there was widespread complacency about how much debt we could actually afford to service. When the crash unmasked the weakness of borrowers, it became glaringly apparent that the debt mountain simply couldn’t be serviced at a ‘normal’ rate of interest (with ‘normal’, for our purposes, meaning rates in the range 4-6%).

The obvious response was to circumvent this debt service problem by slashing rates. Cutting policy rates was a relatively straightforward, administrative exercise for central bankers. But prevailing rates aren’t determined by policy alone, because markets have a very big say in rate-setting. This, ultimately, was why QE (quantitative easing) was implemented. QE enabled central banks to drive down bond yields, by using gigantic buying power to push up the prices of bonds.

Beyond the mistaken assurance that QE wasn’t the same as “printing money” – so wouldn’t drive inflation up – little or no thought seems to have been devoted to the medium- or longer-term consequences of monetary adventurism.

In essence, ZIRP (zero interest rate policy) was a medicine employed to rescue a patient in immediate danger. Even when responding to a crisis, however, the wise physician is cognisant of two drug risks – side-effects, and addiction.

The financial physicians considered neither of these risks in their panic response to 2008. The result is that today we have addiction to cheap money, and we are suffering some economic side-effects that are very nasty indeed.

The inflation delusion

Even the assurance about inflation was misleading, because increasing the quantity of money without simultaneously increasing the supply of goods and services must create inflation. This is a mathematical certainty.

Rather, the only question is where the inflation is going to turn up.

As has been well explained elsewhere, handing new money to everyone would drive up general inflation. Giving all of it to little girls, on the other hand, would drive up the price of Barbie dolls. Since QE handed money to capital markets, its effect was to drive up the price of assets.

That much was predictable. Unfortunately, though, when policymakers think about inflation, they usually think only in terms of high street prices. When, for example, the Bank of England was given a degree of independence in 1997, its remit was framed wholly in CPI terms, as though the concept of asset inflation hadn’t occurred to anyone.

This is a dangerous blind-spot. The reality is that asset inflation is every bit as ‘real’ as high street inflation – and can be every bit as harmful.

Massive damage

In itself, though, inflation (asset or otherwise) is neither the only nor the worst consequence of extreme monetary recklessness. Taken overall, shifting the basis of the entire economy onto ultra-cheap money must be one of the most damaging policies ever adopted.

Indeed, it is harmful enough to make Soviet collectivism look almost rational.

The essence of cheap money is policy to transform the relationship between assets and incomes through the brute force of monetary manipulation.

Like communism before it, this manipulation seeks to over-rule market forces which, in a sane world, would be allowed to determine this relationship.

By manipulating interest rates, and thereby unavoidably distorting all returns on capital, this policy has all but destroyed rational investment.

Take pensions as an example. Historically, a saver needing $10,000 in twenty-five years’ time could achieve this by investing about $2,400 today. Now, though, he would need to invest around $6,500 to attain the same result.

In effect, manipulating rates of return has crippled the ability to save, raising the cost of pension provision by a factor of about 2.7x.

Therefore, if (say) saving an affordable 10% of income represented adequate provision in the past, the equivalent savings rate required now is 27%. This is completely unaffordable for the vast majority.  In effect, then – and for all but the very richest – policymakers have destroyed the ability to save for retirement.

Small wonder that, for eight countries alone, a recent study calculated pension shortfalls at $67 trillion, a number projected to rise to $428 trillion (at 2015 values) by 2050.

What this amounts to is cannibalizing the economy. This is a good way to think about what happens when we subsidise current consumption by destroying the ability to provide for the future.

Savings, of course, are a flip-side of investment, so the destruction of the ability to save simultaneously cripples the capability to invest efficiently as well. The transmission mechanism is the ultra-low rate of return that can now be earned on capital.

A further adverse effect of monetary adventurism has been to stop the necessary process of “creative destruction” in its tracks. In a healthy economy, it is vital that weak competitors go under, freeing up capital and market share for new, more dynamic entrants. Very often, the victims of this process are brought down by an inability to service their debts. So, by keeping these “zombies” afloat, cheap money makes it difficult for new companies to compete.

Obviously, we also have a problem with inflated asset values in classes such as stocks, bonds and property. These elevated values build in crash potential, and steer investors towards ever greater risk in pursuit of yield. Inflated property prices are damaging in many ways. They tend towards complacency about credit. They impair labour mobility, and discriminate against the young.

More broadly, the combination of inflated asset values and depressed incomes provides adverse incentives, favouring speculation over innovation. And this is where some of the world’s more incompetent governments have stepped in to make things even worse.

In any economic situation, there’s nothing that can’t be made worse if government really works at it. The problems created by “zombie” companies are worsened where government fails to enforce competition by breaking up market domination. Though the EU is quite proactive over promoting competition, the governments of America and Britain repeatedly demonstrate their frail grasp of market economics when they fail to do the same.

Worse still, the US and the UK [and AUSTRALIA…] actually increase the shift of incentives towards speculation and away from innovation. Having failed to tax the gains handed gratuitously to investors by QE, these countries follow policies designed to favour speculation. Capital gains are often taxed at rates less than income, and these gains are sheltered by allowances vastly larger than are available on income.

The United Kingdom has even backstopped property markets using cheap credit, apparently under the delusional belief that inflated house prices are somehow “good” for the economy.

How will it happen?

As we’ve seen, monetary recklessness – forced on central bankers by the GFC, but now extended for far too long – has weakened economic performance as well as intensifying risk. In some instances, fiscal policy has made a bad problem worse.

In short, the years since the crash have been characterised by some of the most idiotic policies ever contemplated.

All that remains to consider is how the crash happens. The prediction made here is that, this time around, it will be currencies, rather than banks, which will be first suffer the crisis-inducing loss of trust (though this crisis seems certain to engulf the banks as well, and pretty quickly).

The big question is whether the collapse of faith in currencies will begin in a localized way, or will happen systemically.

The former seems likelier. Although Japan has now monetized its debt to a dangerous scale (with the Bank of Japan now owning very nearly half of all Japanese government bonds), by far the most at-risk major currency is the British pound.

In an earlier article, we examined the case for a sterling crash, so this need not be revisited here. In short, it’s hard to find any reason at all for owning sterling, given the state of the economy. On top of this, there are at least two potential pitfalls.  One of these is “Brexit”, and the other is the very real possibility than an exasperated public might elect a far-left government.

Given a major common factor – the fatuity of the “Anglo-American economic model” – it is tempting to think that the dollar might be the next currency at risk. There are, pretty obviously, significant weaknesses in the American economy. But the dollar enjoys one crucial advantage over sterling, and that is the “petro-prop”. Because oil (and other commodities) are priced in dollars, anyone wanting to purchase them has to buy dollars first. This provides support for the dollar, despite America’s economic weaknesses (which include cheap money, and a failure to break up market-dominating players across a series of important sectors).

[ED. More and more countries, not least China, are now buying oil without US$]

Conclusion

Once the loss of trust in currencies gets under way, many different weaknesses are likely to be exposed.

The single most likely sequence starts with a sterling crash. By elevating the local value of debt denominated in foreign currencies, this could raise the spectre of default, which could in turn have devastating effects on faith in the balance sheets of other countries. Moreover, a collapse in Britain would, in itself, inflict grave damage on the world economy.

Of course, how the next crisis happens is unknowable, and is largely a secondary question. Right now, there are two points which need to be taken on board.

First, the sheer abnormality of current conditions makes a new financial crisis highly likely.

Second, rather than assume that banks will again be in the eye of the storm, we should be looking instead at the most vulnerable currencies.

Losing faith in banks, as happened in 2007-08, was bad enough.

But a loss of faith in money would be very, very much worse.





I’ve worked it out…….

5 11 2017

Well…. at least I think I’ve worked it out. What I am about to disclose will of course not solve our energy problems, even if they are only perceived, because we are already well past peak all energy per capita. We’ve actually been there for decades; Nixon might not have realized it at the time, but that’s what he was trying to ‘fix’ when he abandoned the Gold Standard….

alternativecurrency

As you can imagine, my personal epiphany is a moving target, continually improved over the past twenty years; as I keep telling my wife, I’m not the smartest man on the planet, so how come it so often feels like I am? This blogpost was inspired by the film Demain which I saw last month, and a more recent event, a friend of mine applying for a grant, which was rejected because it now appears you need to have 10% of the value of the grant in assets before they even consider it. I suggested to her we should print our own money……. so here we go.

I hope that almost everyone reading this humble blog knows where money comes from. Out of thin air if you are new to this unbelievable scheming by bankers. If you don’t believe me, just google “money as debt”

Having done some research, it appears that the alternative money mentioned in Demain must be bought with Pounds Sterling. Which is not worth the paper it’s printed on. Money, as I keep repeating ad nauseam is not a marker of wealth, but merely something to be used for trading. You buy my eggs, I use the money for buying fuel for my ute. It’s still used that way of course, but to get some, the world’s debt must rise exponentially, and we are now reaching the stage where people are spending so much of their money to pay the interest on their credit cards and mortgages and whatever other loans they have taken out to keep up with the Joneses that less and less is being spent on consumption. Yes dear readers, we are now consumers, not citizens.

To get this money, you either have to borrow it, or work for wages, often at a job you don’t like and which is not sustainable, or beg for it. Like me getting the age pension, or you jumping through hoops to get unemployment benefits so you can barely survive… or like my friend, apply for a grant to keep the broken community going with its miserly local economy. Worse, conmen are getting in on the act and tempt the gullible to part with ‘real money’ to buy things like bitcoins or earth dollars…..

So what’s the solution I hear you ask…? I think it’s free money….

alternative currency2

Of late, I have been reading more and more about guaranteed minimum income, or guaranteed basic income. There are possibly more forms of it…  I’m all for this, however, not if it sticks to FIAT money, money created as debt. Debt is crushing the economy, so there is no point printing more and more debt so that banksters can just get richer and richer. It’s really that simple.

What I propose is that communities literally print money, on a photocopier. You can have as much as you like, maybe pay for the printing costs – which makes it literally worth the paper it’s printed on…! Because it’s not recognised as being ‘worth anything’ (at least in conventional economic thinking, whatever that is…), you have to spend it. Hoarding it is a waste of time, and you can’t earn interest on it either (which actually makes it very similar to real money these days…!) and it even solves crime, because it’s not worth stealing….

You will of course still need ‘real money’ (until the big crash happens) to pay the car registration, power bills, and bank debts, but, it will free up your ‘real money’ so you can repay your credit cards faster……. it might even allow you to work fewer hours, or not at all. Make no mistake, unemployment will soon be a growing industry. And if Louis Arnoux is right, by 2022 there won’t be enough surplus energy in oil so you won’t be driving cars and paying rego.

Post crash, I don’t expect ‘real money’ to be worth any more than my Mickey Mouse version. But at least we would have control over it.

If anyone reading this lives in the Huon Valley, contact me…… I’d like to call the currency the Huon, and we’ll need to print a million of them at least to keep our little local economy going. This is not a LETS Scheme, this is serious business, only without getting the banks involved. I wonder where you can buy suitable currency paper….?