Thursday, May 21, 2009

The World is Changed - We are Starting to see How...

One of the themes of this blog has long been that there is a fundamental shift in the world economy. I had expected the shift to become visible a couple of months ago, predicting a £GB and $US collapse, and have paid my penance for calling this event too soon. However, my central thesis, that 2009 is the year of the fall of the West appears to be coming true - only the process of change appears to be happening in slow time.

In a recent post, I sought to understand why I had called the collapse too soon, and suggested that perhaps the mechanism was anchor prices, an idea proposed by Dan Ariely. Essentially, this is the idea that the first price we see anchors our price expectations, and I extended the idea to the value of economies. In one example, if I recall correctly, Dan Ariely identifies how DVD players started off very expensive, and how, as the price reduced, we had a sense that they were bargain prices - even though all DVDs were less expensive. We were still fixated on the original price, not the price now.

I raise this example as, one way or another, despite our natural tendency to anchor, prices do indeed fall. In the case of the Western economies, we are starting to see the shift in the perception of the value of the economies, though the 'stickiness' of the anchor is still there.

This brings me on to the news, which indicates that S&P have put the UK's rating to a negative outlook, a move that is often a precursor to a sovereign downgrade. I have long been waiting for the markets to 'get it', and have long been puzzled that it has taken them so long. However, this is not necessarily a reason to conclude that the 'end' is now nigh. A metaphor might express the situation, which is to see the anchored valuation of the UK economy as a dam, and this is an additional crack in the structure of the dam. Just as with a dam slowly developing cracks, with the structural integrity weakening with each new crack, it is hard to say which crack will finally result in the deluge.

In my discussion of the climax of the crash, I speculated that the £GB would be the first to fall, and that the $US would follow after. In saying this, I recognised the inherent stickiness in our valuations of economies, and saw a necessity of the £GB falling in order to create enough of a crack in the dam to see the $US fall:
From my point of view, it will be the collapse of the UK economy that will be needed to shatter the belief in the US economy, and will be the final impetus to push the $US over the edge. Such a collapse might even see a brief run to safety into the $US, before the realisation hits that it is a run into danger
We have this quote from the Times, in which the latest US bank insolvency is discussed:
Investors were also concerned that the US may be next in the firing line after Standard & Poor’s sounded a warning about Britain’s AAA credit rating.
What is happening is that doubts about the sustainability of both monetary and fiscal policy in the UK and US are steadily leaving ever more, and ever deeper, cracks in the dam. However, the belief that the US must come through this economic crisis remains, and therefore I still believe that only a £GB rout will finally destroy the $US. However, as the dam analogy makes clear, this is at best only a guess, as there are many other cracks that are appearing, and they might cumulatively be enough to burst the dam.

When I first started to suggest a $US collapse, I was probably seen by many as being a lunatic out on the fringe. The view of the fragility of the $US is increasingly spreading into mainstream thinking. I flicked through the headlines and conveniently found this article in the Financial Post:

The U.S. dollar's day of reckoning may be inching closer as its status as a safe-haven currency fades with every uptick in stocks and commodities and its potential risks - debt and inflation - are brought under a harsher spotlight.

Ashraf Laidi, chief market strategist at CMC Markets, said Wednesday a "serious case of dollar damage" was underway.

"We long warned about the day of reckoning for the dollar emerging at the next economic recovery," Mr. Laidi said in a note.

Mr. Laidi said economic recovery would weigh on the greenback as real demand for commodities, coupled with improved risk appetite, caused investors to seek higher yields in emerging markets and commodity currencies. This would draw investment away from the U.S. dollar, which was dragged down by growing debt and the risk quantitative easing would eventually spark a surge in inflation.

The nature of the fragility of the $US is not, however, as simple as it might first appear. Another article perceptively highlights one of the underlying problems with the idea of a $US collapse, by pointing out that all of the major currencies are looking very 'ugly' at the moment:
The British pound has been a beneficiary, rising on May 21 to a high against the dollar this year of $1.58. But a downgrade of the UK's outlook by Standard & Poor's has just taken the wind out of the pound's sails. The rating agency's assessment is a timely reminder that it is not just the US which is running a double-digit government deficit, doubling its debt in the space of a few years and praying that money printing - £125bn in the UK's case - will generate economic recovery.

The euro, too, has been winning admirers. Yet its previous chaste appeal - in the form of German opposition to money printing - has been tarnished a little by the European Central Bank's decision to buy E60bn of covered bonds. The ECB considered buying more than twice that, according to Bloomberg. That is hardly surprising given the eurozone's slump is so shockingly deep. The German economy shrank 6.7pc in the first quarter from a year before. The comparable dip in the US was 2.6pc. Now which currency is the ugliest of them all? [emphasis added]

If we put ourselves in the mind of a scared investor, it is increasingly difficult to see where exactly we might want to place our wealth, such that it can be secured in these turbulent times. All of the major economies are in free fall, whether Europe, Japan, the UK or the US......What the investor is left with is the 'emerging market' economies, and these have traditionally been seen as the markets with the greatest risk.

On the one hand we have the high anchor valuation of the traditional leading economies, and on the other we have the risks associated with the emerging markets. It is no wonder that the signals from financial markets are so confused.

Added into this mix, we must also factor in the extraordinary actions of the Western governments, in particular the policy of Quantitative Easing (QE, or printing money). The UK and US are both embarked upon this policy, both countries are using the policy to support their bond markets, and both countries are steadily expanding the policy. The major overseas purchasers of the bonds are now becoming increasingly restless, and suspicious that the policy is going to lead to an inflationary default on debt, as is highlighted in a recent article:
For now, the dollar doesn't appear to have anything going for it. The US Federal Reserve has cut its benchmark interest rate virtually to zero. Worse, it is printing money and using the freshly minted cash to buy US Treasuries. The Chinese, the US's biggest foreign creditor, have made it quite clear that they take a dim view of this "policy mistake", as China's central bank put it. Undeterred by eastern frowns, some Fed governors have been gunning for even more money creation to buy bonds, according to the minutes of the last Federal Reserve meeting.
Just to add to the toxic mix of Western policy, the EU has also started down the road of QE, though as yet they are not buying EU government debt with their freshly printed money. However, for the UK and US, overseas creditors are increasingly worried about the credit worthiness of the countries. The negative report from S&P is an indicator of the worries for the UK, but the signs are also not positive for the US. Russia is now shifting reserves into Euros, The Democratic Party in Japan is threatening to only purchase US debt denominated in Yen (making funding of US debt a Japanese election issue), and China is shifting its mass of $US debt into short term instruments out of fear of US inflationary policy.

However, the policy of QE, rock bottom interest rates, and massive government borrowing and spending might be enough to prevent the real collapse in the economies in the very short term. As I have often pointed out, this is a short term fix with very high long term costs. As such, for domestic purposes these policies may serve the politicians in the short term, but only at the price of destabilising their ability to raise finance in the future, and even greater general economic damage later. This is at the heart of the worries of overseas creditors.

One of the arguments that has, in the past, been provided for the stability of the $US was the reserve status of the currency. Even this foundation for the $US is increasingly being questioned, and I have long been writing about the many activities of China in which they are gradually positioning the RMB as the replacement reserve currency. A search on Google news produced a flood of articles on the subject, of which the following is just one example:

May 15 (Bloomberg) -- The yuan may gain as much as 5 percent against the dollar this year as China promotes wider use of the currency, according to Bosera Asset Management Co., the nation’s second-largest fund company.

China has signed 650 billion yuan ($95 billion) of foreign- exchange swap agreements in the past six months with countries including South Korea, Argentina and Belarus and plans to promote the use of the currency in cross-border trade. The renminbi may become one of the world’s three major currencies within 30 years, joining the dollar and the euro, Li Quan, executive vice president of Bosera, said in a telephone interview yesterday.

“Demand for yuan-denominated assets will grow as China is trying to make the yuan a global currency,” said Shenzhen-based Li, whose firm oversees 178 billon yuan of assets. “At the same time, concern about dollar devaluation will prompt investors to inject more capital into emerging markets, especially China.”

Once again, my early posts on the subject might have been seen as the ravings of a lunatic, but nevertheless the idea of an RMB reserve currency is gaining increasing credibility. The only difference now between myself and many commentators is that they see the shift as being long term, whereas I see it as a rapidly accelerating process. I suspect that the difference lies in the fact that they are not recognising the vulnerability of the $US, and that if the $US does collapse, it will not be able to retain reserve status. In other words, they are focusing too much on the RMB's growing strength, rather than the inherent weakness in the $US.

What all of this amounts to is that the shift in the shape of the world economy is slowly becoming visible in financial markets.

However, this is not the whole story.

One of the other points that I have previously discussed in the blog is that the world economy is pointing in the wrong direction, which is towards illusory wealth of Western consumers. I have suggested that, in order for recovery to take place, account must be made for the shift in wealth around the world. In a recent article for the Trade and Forfaiting Review, I used the Tata Nano and the US car industry as an illustration of how the movement of wealth will shift economic structures:
The important point about the Tata Nano is that it is meeting a new demand from a rising middle class in emerging economies. In the interim, the credit-fuelled demand for SUVs, the mainstay of US car industry profits (until recently), is collapsing. On the one side there is a car that rests upon an unsustainable credit-fuelled consumption boom, a car that flattered the aspirations of the indebted, and on the other there is a car that meets the rising aspirations of the world’s new wealth generators.
Since writing the article, I saw another article in which the shift in the structure of the world economy is already becoming apparent:

General Electric yesterday became the latest big manufacturer forced to change course and make cheaper and simpler products to cope with the decline in purchasing power around the world.

The US engineering and financial conglomerate, which makes medical scanners, joins companies such as Sony and Unilever in seeking to develop less complex, better value products that will tempt customers in the face of the global recession. The shift away from cutting-edge technology and premium brands towards value for money is affecting a broad swath of businesses, from medical diagnostic equipment to soap powder.

GE is moving billions of dollars in research funds away from developing high-specification medical equipment towards lower-cost technology. Over the next six years GE Healthcare will devote half its $1 billion R&D budget towards low-cost products designed for use in emerging markets and remote areas, up from only 15 per cent today, John Rice, GE’s vice-president, said.

I have long argued that the financial crisis is a symptom, not the cause of the underlying economic crisis, and it becomes ever more apparent that this is the case. The boom in house prices and credit bubbles simply masked a more profound underlying change, whilst magnifying the consequences. Whatever happened, the wealth was shifting to countries like China, but the indebtedness of the Western economies has made the change more devastating, and also has hobbled the ability of the West to recover.

In the meantime, the governments of the Western world are seeking to sustain an economic 'shape' that was itself a product of an illusion. The change in the shape of the world economy has already taken place, and is just now become clear to see. As the illusion is dissipating, the world, the markets and individuals are starting to see the underlying reality. It is primarily the governments of the West that still seek to persuade us that we are in the illusory world that has already passed from existence, and seek to persuade us that it is still within reach. It is an illusion that flatters our dreams and aspirations, and is therefore an illusion that is aimed at a receptive audience. It is pushing at an open door.....we want to believe....

An interesting comparison again comes from Dan Ariely in a lecture that he gave recently (see video here). He shows a picture of two tables, where the length of the tables is an optical illusion in which one looks longer than the other - but they are in reality both the same length. Even having demonstrated that the tables are the same length, we can not help but still see one table as longer than the other. If you see the image below, it is possible to see the illusion in action. I can tell you that the tables are the same length, but still they appear to be different (image from here)

We have a resistance to seeing reality.

Even when we are told something is real, we can not help but hold on to our original perceptions. Whether the length of the tables, or our anchor valuation of the economy, we are sometimes resistant to abandoning our previous perceptions.

As we look on at the shift in the world economy, it is possible to see how enduring the illusions are. Even as ever more evidence mounts to suggest that we are witnessing a different shape, still we cling to the illusory world of old. We are still insistent upon the illusion that the West is still wealthy, that one way or another, it simply must be. Every day another measure tells us that the size of the economy is an illusion, but still our perceptions revert back to the illusory size.

The problem is that reality is still reality. Just as we must accept the reality that the tables are the same size, so must we accept the real size of our economies. It is this wilful disregard of reality that is, in part, driving us ever deeper into the ditch. I suspect that many in government have started to grasp the reality, but they are clinging on to and promoting the illusion, if only for their own selfish ends.

The underlying purpose of this blog has been quite simple. I have sought at every stage to paint a picture of the underlying reality of our economic situation. In doing so, at many stages, I am sure that I have been seen as raving, of being an 'end is nigh' doomster. The trouble that arises is that, as the economic crisis progresses through each stage, the scale of the disaster is becoming increasingly evident. What might have been viewed as ravings of a doomster eventually creep into the mainstream. Whilst getting some points wrong, the general thrust of the thesis of the blog appears to be correct.

The thesis is that the West is not, and will not be, as wealthy as it thought. A major change has taken place, and there is no prospect of reversing that change. Western governments, with their profligate interventions, are simply denying the world that sits before them. In denying reality, they are simply pushing the decline ever further, and to a point where any recovery of our former wealth becomes ever more impossible.

As with any other commentator on the economy, perhaps I am also subject to illusions, and might be perceiving an illusory world. The trouble is that, as time has progressed forwards, the world looks ever closer to the one in my perceptions. It is not a heartening thought.....

Note 1:

Some responses to comments on the last post.....

Jonny, in response to your question about how the Bank of England might cause deflation in the RPI, perhaps the BoE February inflation report will clarify. I hope this is the right report, but they point to lower interest rates impacting upon the RPI. I was going to quote from the report, but my Internet connection has gone into a tailspin, such that it is very slow today (rather frustrating...). Apologies for not being able to offer up the quote (assuming I have the right publication and date).

Anon82, I think that you will find that my post on the US economy may shatter any illusions of any significant recovery. Many of the points might apply to the UK economy.

Gingellenator, I have discussed the inflationary default for a long time across many posts. I would like to provide you with a link, but this is an argument that has evolved through several posts. As such, time allowing, I might pull the thoughts together at a later date.

Sobers, you are quite right to question how QE might be reversed. You might note that there are no credible or serious plans for this, just vague assurances. It is hardly comforting.....

Anonymous, on the subject of the Bloomberg house price article. I am very impressed with your dilligence, and am unsuprised to find that yet another positive indicator is not at all positive.....For curious readers, you may want to compare and contrast the following two articles:

Adam, thanks for the Austrian view on inflation, which is an interesting contribution, in particular as it is so relevant to the post.

Clauswitz, thank you for your kind comments.

Kecske, thanks for the link to the article on hyper-inflation. I had picked this one up on Reddit. It is certainly interesting, but I have some reservations. I would like to discuss these, and may come back to it in the next post that is relevant.

Anonymous and Anonymous82, many thanks for the links on the S&P downgrade....very useful.


  1. Not only is the dam full of cracks, but it now seems there was a fault in the flow meter:

    [From RGE Monitor]"ONS gets sums wrong on retail sales [FT]

    One of Britain’s most closely watched economic indicators has heavily overstated the quantity of high street sales over the past two years, the Office for National Statistics admitted on Friday.

    Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.

    Many economists have been worried for some time that the published retail sales figures were too strong and have always received a furious response from the ONS.

    Karen Dunnell, the national statistician, wrote to newspapers last October, insisting that “ONS retail statistics are the best available and are not inaccurate”.

    She stuck to the same theme in another article, saying economists who had expressed surprise at the strength of ONS retail figures were upset because “City analysts also have a vested interest in not being proved wrong”.

    Yet while the ONS head was defending the accuracy of the retail figures, industry experts knew the outdated nature of price measurement in the retail sales index was much more than a triviality.

    The ONS previously said that between August 2007 and March 2009 retail sales volume grew 3.6 per cent. The changes announced on Friday mean it will now say the real rise in sales volumes was only 2.3 per cent.

    Such a large difference in the one indicator that has persistently given a more positive account of Britain’s economy will cause red faces at the ONS, especially as it had insisted on the superiority of its retail data to unofficial estimates.

    So confident has the ONS been that it warns users of the CBI or the British Retail Consortium sales data every month that these figures might not be “fit for purpose”.

    The BRC on Friday welcomed the changes, saying they meant the official data would now be more in line with its figures.

    The ONS’s old methodology failed to take sufficient account of goods that had risen strongly in price and so under-estimated the true rate of inflation in calculating the headline retail sales volume figures.

    The ONS said on Friday it was changing the way it compiled its retail sales data to make sure it “more accurately captures recent trends in retail sales, including where consumers switch purchases to goods that have fallen in price’’.

  2. I think you're right about people believing what they want to believe rather than the truth.

    It seems that almost every day I talk to somebody who assures me the: "recession will end soon and everything will be like it was."

    The recession isn't showing any signs of ending soon and even if it does, what logic suggests everything will be as it was? None that is obvious to me.

    Some might argue that we've long crusaded to allow the developing world to share our wealth, to make a fairer world for everybody. By giving away our manufacturing and over-regulating industry we've allowed that to quietly happen to some degree. I wonder if this is a case of: "Be Careful What You Wish For?"

    Even if China dominates the world economy in the end, their reign will be limited. They will cease to be 'developing' and become 'developed'. Then South America, or Africa, or some other place will be the new up-and-comer.

    As I've said before, what I'd like to see is an effort to bring Britain back to reality. Encourage industry and agriculture through investment, deregulation and low taxation. Cut public spending dramatically to a level where money need not be borrowed to pay for our services, ie. live within our means. Then concentrate on reminding everybody that community and family are actually rather more important than luxury goods and brand names.

    A return to traditional values and common sense would work wonders. But many people will be dragged there kicking and screaming, so wedded are they to the world of bling! and easy credit.

  3. re S&P downgrade

    Saw a piece on this on the BBC 10 o'clock news last night in which the reporter seemed to do her best to play it down.

    Unfortunately I cannot find it online. However, I do remember her saying something along the lines of "Of course, when it comes to the downgrading, by that time we'll have had an election and confidence may have been restored".

    The report also gave plenty of air time to one of the Treasury ministers saying that S&P were the only ratings agency to take this step.

    Similar sentiments expressed here .

  4. re above

    Pretty sure the report was by Stephanie Flanders:

    Here is her latest piece of Pravda-esque commentary:

    "we shouldn't get carried away with the news that Standard & Poor's has revised down its outlook for the UK. We are not about to lose our triple-A rating yet. And none of the other big ratings agencies have changed their view."

  5. Peter Schiff on the beginnings of the real economic crisis

  6. Another great post, Mark!
    Check out this article about "green shoots" in the stock and bond markets:

  7. Cynicus,
    You've said a lot about China recently, but I can't recall much about India. How do you see India featuring in the global picture?

  8. @ Steve Tierney

    ...Steve, that's so One Nation even this lefty might consider voting for you. Just consider, mind you ;o)

    I would add though that I'm not sure how capitalism works without people demanding the next luxury good or brand name. It's that materialism that has driven neo-liberalism and kept the profits rolling in.

    I think we need a new politics that moves away from 19th Century ideologies and takes account of the fact that our world is finite, regardless of climate change and recognises the competition we (Western Europe) face is unlike anything we have faced for centuries.

    Views like yours from Tories and similar realism from the left will hopefully be the order of the day.

  9. "As such, for domestic purposes these policies may serve the politicians in the short term, but only at the price of destabilising their ability to raise finance in the future, and even greater general economic damage later. This is at the heart of the worries of overseas creditors."

    Are you sure about such perspicacity on the part of overseas creditors?

    Everywhere I look, I see people who base their judgements on 'evidence', and for everyone in the media and government there seems to be clear evidence that the government's policies are working; there are 'green shoots'; the worst is over so it's time to get back in the water.

    People do not judge the situation based on *ideas*, so they do not seem capable of understanding that "what works" today can wreak huge damage tomorrow. Why should the overseas investors be any different? These are the same investors, after all, who thought that the UK and US economies were rock solid until a couple of years ago.

    In the past you have discussed how limits on the availability of oil might stop future growth in the world economy, which I find to be a very persuasive argument. If you were an 'investor' (and yes, I do find myself instinctively hostile to the very notion of making a living that way), should you take that *idea* - for which there is no real evidence yet - into account, or should you simply rely on the available 'evidence' and therefore place your bets according to the immediate future?

    It is this sort of question which suggests to me that the free market system will always be chaotic and ultimately self-destructive. Instinctively it feels to me that there should be 'someone' who considers the bigger picture and uses long range information to influence the operation of the markets but I realise that this is an absolute no-no to free market adherents!

  10. @Matt

    Thank you for your comments.

    One thing that people on the left and people on the right mostly agree on is the wish for Britain to succeed and prosper.

    What we disagree on is how you go about that. As you know, the left like to increase taxation and regulation in order to 'enforce' what they hope will be the perfect state from the top down. That's what I'm against.

    Sometimes the right do their share of that too. And I'm against it then as well.

    Localism, power down to the lowest level, people able to make the decisions about things that affect them, rather than being dictated too from on high. Politicians need (urgently) to be reminded they are the servants of the public, NOT the other way around

    Family values, common decency, neighbourhoods, are supported on all sides of the political spectrum.

    I don't mind a few brand names and some luxury goods. I don't want everybody to go back to Spam and Scratchy clothes. (Although I quite like Spam.) People should certainly be free to spend their own money on whatever they choose. It is THEIR money, after all.

    My point was that our country has forgotten some of the traditional values it once held dear and replaced them with false idols, like celebrity and easy credit.

    Some might argue some of that was Thatcher's fault. And I wouldn't entirely disagree. But the world is much more complicated than blaming figureheads from the past for everything. We were all on board the train and it was on the wrong track before Thatcher came along. She did some very valuable things too.

    What we need now is some careful, considered thinking about what we really want out of life and the best way to stimulate and afford it as a country.

    I could not agree more that this thinking needs to come from BOTH sides of the political coin. I hope we can do it. You could even argue that we are doing it right here, right now, in some small way.

  11. 'Civilisation makes liars of us all'
    Me, 2006.

    The real crisis? We stopped being wise...My predication?... As I said back in Jan/Feb, I think there's life in the old dog yet, and so, if the Dam does break this year or next, my guess is something out of left field which precipitates the collapse. The mutation of swine flu would be one such very real possibility.

    We'll see... There are certainly enough cracks now for it to happen sooner though, I do acknowledge that.

    Glad to see the old Dam analogy is back ;)

  12. @Cynicus

    Interesting piece.

    The psychological phenomenon you describe is often refered to as the 'Primacy effect' and, as you rightly point out, is a common bias in reasoning.

    However, I feel I should urge caution about employing psycho-biological explanations to explain economic phenomena; the powerful elites of all epochs have always employed their own myth-making to explain (or rather 'justify') the status-quo, and the 'greed is good', 'survival of the fittest', pseudo-scientific Darwinian-distortions of our own time are no exception.


    re "It is this sort of question which suggests to me that the free market system will always be chaotic and ultimately self-destructive."

    Which 'free market system'?

    If you're refering to the one impossed on the developing world, then yes it is "chaotic and self-destructive" - but the powers that be know this, hence why it is used.

    If your reference is to some mythical "free market system" that exist in the Western world, then it is precisely that - a myth: existing in economic text books and Republican speeches, and nowhere else.

    I recently wrote a piece explaining this (well, referencing Chomsky's explanations) which you can read here . Unfortunately, it hasn't received a reply from Cynicus so I am unsure what he would make of the arguement.

    @Steve Tierney

    re "One thing that people on the left and people on the right mostly agree on is the wish for Britain to succeed and prosper."

    At the risk of sounding like a candidate for Miss World, I want the whole world to succeed and prosper - of course this should include my own country Britain - but I do not wish to see it succeed and prosper at the expense of anywhere else. If I did I may as well start beating a war drum.

    re " the left like to increase taxation and regulation in order to 'enforce' what they hope will be the perfect state from the top down. That's what I'm against.

    Sometimes the right do their share of that too. And I'm against it then as well."

    I'm not convinced of the relevance of the old left-right dichotomy these days. Like many people I know, I am both anti-State power (or 'against big government' if you prefer) and anti-Corporate power ('against private tyranny'); so would you describe me as being on the left or right?

    re "Localism, power down to the lowest level, people able to make the decisions about things that affect them, rather than being dictated too from on high."

    I agree that localism: power dissolved to the lowest level possible, decisions to be made by the people most directly affected by them, is what is needed in the long term. The question is how does one get there?

    The mistake I think many on the Ron Paul-'Libertarian'-right make is to believe that removing the State appartus would level the playing field when, in reality, I think it would make things far far worse.

    On the other hand, the more radical "far-left" (anarchist, synicalists, etc,) if they remain idealistic could end up supporting a Ron Paul-like agenda which would leave most people with far less power and opportunity than they have even now.

    So, for example, you say you are against "increase taxation and regulation", does that mean to say you are against universal health care, minimum wage provision, income support, health and safety at work, anti-discrimination policies?

    If "yes", I can't see how this position is defensible in any humanitarian terms.

    The very rights that our ancestors fought for centuries to establish are the ones that will be threatened if we allow that kind of 'baby out with the bathwater' reasoning to continue to go unchecked. Life is just more complex than any simple left-right analysis would allow.

    NB, I said "If yes", I have no idea if that would be your position or not and am not trying to imply that I do. Just trying to avoid any potential misunderstandings!


  13. @Tiberius:-

    I'm reluctant to answer your post for two reasons.

    The first is that this is CE's blog and I don't want to hijack it. My earlier comments were loosely in keeping with his post and that's fine, but if we go too far into personal politics that would no longer be the case.

    The second is that you are asking huge questions, the answer to each is an essay. For instance you ask: "Do you support the Minimum Wage?" and then suggest that if I don't I must not be humanitarian. Well no, I don't support Minimum Wage. I don't accept it means what you think it means, but it would take a very long debate for us to get to the bottom of that.

    The same is true for your other questions. By all means email me privately if you'd like the debate.

  14. @Tiberius

    I enjoyed the piece on your blog, and I think I did harp on about there never having been a pure free market economy, on CE a few months ago.

    But what is 'the answer'? We either demand evidence that a system works, or we impose one based on ideology. Or some imagined pragmatic blend of the two, which I think is what Gordon Brown and New Labour thought they were doing.

    But what if what if this is all a red herring? What if all the philosophy and arguments are just fine tuning of an historical fluke: the discovery of oil?

    If we discovered mines bursting with fully-formed cars, DVD players and plasma TVs, people would still argue over the best way to distribute them. Some might argue that the system that enabled each family to have ten cars and TVs was the most successful while others might argue that some families having none, and others having one hundred, would provide better incentives to search for more such mines, or to invent machinery for pulling cars out of the ground faster. And others might argue that enabling everyone to have just one car and TV would make the existing mines last for hundreds of years.

    Isn't the reality that our discovery of a supply of concentrated free energy was a one-off, and all the economics and philosophy doesn't really amount to much, except for how long we have before the stuff runs out?

  15. Why No Hyperinflation in the US and the UK
    With the massive increases in the money supply in the US and the UK, the question must surely be: why has there been no Weimar-style inflation?

    This fascinating aricle should provoke debate:

    Ellen Brown, The Weimar Hyperinflation? Could it Happen Again?

    The link was in one of Kecske's posts.

  16. @Steve Tierney

    re "I'm reluctant to answer your post for two reasons.

    The first is that this is CE's blog and I don't want to hijack it. My earlier comments were loosely in keeping with his post and that's fine, but if we go too far into personal politics that would no longer be the case.

    The second is that you are asking huge questions, the answer to each is an essay."

    Both points taken. I have posted my responses on my own blog here:

    (Note: for stylistic/eccentric reasons all my blog post are written in the third person)

    Though I realise you very are busy at the moment, I will welcome your comments there whenever you get the time.

    re "Well no, I don't support Minimum Wage. I don't accept it means what you think it means, but it would take a very long debate for us to get to the bottom of that."

    I don't know what you think I mean it means (!!), but would definetly welcome a very long debate to get to the bottom of it!


  17. @ Lemming

    re "I enjoyed the piece on your blog and I think I did harp on about there never having been a pure free market economy, on CE a few months ago"

    You probably did but I am relatively new to this blog. I have been slowly working my way through Cynicus' back catalogue of posts and usually find myself in agreement with most of your comments.

    re "But what is 'the answer'? We either demand evidence that a system works, or we impose one based on ideology. Or some imagined pragmatic blend of the two, which I think is what Gordon Brown and New Labour thought they were doing."

    I think the best evidence for any system comes from trying it out in practice.

    The problem however is that when so-inclined people (anarchists, syndicalists) have tried in the past to obtain what you may call the 'economic breathing space' necessary to to try other systems the prevailing orthodoxies have gone out of their way to crush them; they have no intention of seeing the 'the threat of a good example'- it's partly the reason the Western powers supported Franco's destruction of the Spanish Republic?

    So, I don't think there is any 'answer', nor do I think you can 'impose' anything; I believe all one can do is help to lay the foundations for something better.

    I agree that Gordon Brown is a pragmatist: he understands well the limits of State power in a globalised world, and the power of international finance to make-or-break goverments and their people. His 'problem' is that he has far less ability to shape public opinion than the 'vested interest' do, and, now both have turned against him, he has become unable to deliver the political stability that the system relies on.

    Whether that next step towards stability will be one of fascism or democracy is the worry.

    re "But what if what if this is all a red herring? What if all the philosophy and arguments are just fine tuning of an historical fluke: the discovery of oil?"

    Not sure I understand this point.

    'Oil' as a phenomena is/was the interplay between a naturally occuring resource and the human ability to utilize that resource: it wasn't of much use to the rest of the animal kingdom, nor to our cave-dwelling ancestors. So was the 'fluke' discovering the oil, or the discovering how it could be used?

    re "Isn't the reality that our discovery of a supply of concentrated free energy was a one-off, and all the economics and philosophy doesn't really amount to much, except for how long we have before the stuff runs out?"

    Well no, the best supply of 'free energy' is the sun - and all indications are that as technologies continue to improve, this and other renewable resources (tidal, wind, geothermal) will be able to provide for all man's energy needs.

    The 'problem' again though is that these resources are non-centralizable, and, hence, more democratically-conducive than our hydrocarbon-based economy will allow for: you can stick some tanks around your oil-well, you can build the most enormous embassy in Iraq, but noone is going to cordon-off the sun (except perhaps Mr Burns!)

    So the powers-that-be in this system have every intention of down-playing the significance of 'alternative energies', opposing their advancement, and (when they are unable to defeat them) looking to co-opt them.

    'The stuff' running out is, from both an environmental and humanitarian perspective, a good thing I think: the price of oil on people and planet has been enormous.


  18. Tiberius

    (An apology: when I said I "harped on about" there never having been a pure form of capitalism I intended it as self-deprecation as I realised that your posts made my comments seem pretty trivial. Having re-read my comment in your post it didn't come across that way. Sorry if it sounded a bit aggressive.)

    My point is that economists can argue between themselves over which system delivers the best prosperity and/or fairness, when in reality our current prosperity is based purely on the one-off discovery of oil. Yes, it took some ingenuity to work out how to use it, but once that happened it made housing, clothing and feeding the world a piece of cake. It could have lasted hundreds or thousands of years, giving us plenty of time and resources to develop alternatives for when it did run out - or rather more practically, perhaps, to wind down gradually to a lower energy-consuming society. But instead, even CE admits that there may be something to this 'peak oil' idea (I think). I don't believe that the markets were ever capable of developing alternatives to oil until it was too late to avoid massive suffering.

  19. @ Lord Keynes

    re The Weimar Hyperinflation

    Although I have never heard (but cannot dispute) the assertion made by Ellen Brown that hyperinflation in Germany was caused by mass short-selling of the German Mark, her analysis of how the German economy was transformed is incorrect.

    As she says, having completely unreasonable demands placed upon it at Versailles and starved of outside financial assistance laid the seeds for radical politics in Germany.

    However as soon as the Nazi party had got into power the Bank of England offered almost unlimited loans at favourable rates. It was largely due to this that the German economy made a seemingly miraculous recovery.

    Britain was not being charitable, rather it's aim was to create a fascist Germany that could be turned against an increasingly powerful Russia; by allowing these great powers (and potential challengers to the global order) to bleed each other to death, Anglo-American global dominance could be assured for a long time to come.

    (See: A Century of War by William F Engdhal)

    Today we do not have any countries who would be willing to bankroll the US for their own ends. Indeed only this week the US' biggest creditor issued a warning to the US on its policy of QE and paying back its debts with watered-down money.

  20. Since you first posted The World Is Changed..., S&P has made soothing noises towards U.S. sovereign debt and its attendant AAA rating. As one of the rating agencies upon whom one could reasonably ascribe some measure of culpability in the credit mess, I suspect that the mere threat of 'oversight' would be a sufficient enough lever to temper S&P's new-found quest for "The Truth", in much the same way as TARP-recipient banks 'elected' to swallow their secured Chrysler debt.

  21. @CE

    Think you'll find this of interest:


    I did post you a reply put it hasn't appeared on here so I guess it got lost in the internet-ether!

    Summary of it was:

    1. No need to apologies, I took your comment as intended.

    2. I think you overstate oil's (relative) importance in the history of Western development - as compared to say, colonialism, slavery, protestantism.

    You imply it was/is crucial, I think an argument could be made that the dependency it created was an obstacle to securing long-term economic growth.

    (my argument loses a lot in abridgement though!)


  22. I don't want to put words in Lemmings mouth but I expect, like me, he wasn't just talking about Western civilisation but the entire worlds prosperity over the last 300 years (even if it has been unevenly spread)

    The reasons why the West has been the strongest recipient of the benefits of this glut of cheap energy are obviously varied but the age of cheap energy, if not actually over, is on the horizon.

    Modern human civilisation is uttrely dependent on the stuff in every sense and without it the world will look very different.

    I really would recommend the archdruid blog posted here recently. I'm learning as much about peak oil and technology as I have learnt from CE about economics.

    This isn't even a global warming blog just fairly basic economics based on the reality that cheap energy IS finite and that as soon as it takes more energy to get the oil/coal/gas out of the ground than you get from the it it's history regardless of it's price.

    When that happens and who can say when an economic depression will look like a picnic.

  23. "We hope you are all aware that as the dollar falls inflation rises. That is because we don’t produce much anymore and as the dollar declines the cost of imported goods rises, including oil. By the end of the year oil could be $80 a barrel and gasoline over $3.00 a gallon. It started to feed on itself two months ago."


  24. US T-bill yield spike indicates we're now entering the end-game:

    The Fed now either prints the dollar out of existence or gives up.

  25. Hi Matt,

    Only just noticed your message was directed was towards me

    re "Modern human civilisation is uttrely dependent on the stuff in every sense and without it the world will look very different."

    Without wishing to get too Gandhi-esque, it depends on how you define "civilization". I'd be happy to concede that the Western Anglo-American version of society may not survive, but I'm not at all convinced that this would be a tragedy.

    The "difference" of which you speak will hopefully be one that benefits the 80% of the world who get a bum deal from the current ordering of things.

    "I really would recommend the archdruid blog posted here recently. I'm learning as much about peak oil and technology as I have learnt from CE about economics."

    Thanks for the recommendation, I will certainly check it out when I have more time.

    I'm sure it will have been linked here before, but Chris Martenson's presentation on Peak Oil is also excellent.



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