30 Jul 2012

Mortgage Lending

Below is a chart from the Bank of England showing the growth in mortgage lending. Unfortunately they only publish the figures and nothing much in the way of commentary.

I think the slop of this line is interesting in many ways. It shows that from 1996 to 2004 the rate of growth was accelerating - each year the % growth was about points higher.  At it's peak the amount of lending in 2004 was 16% higher than 2003. Remember that during this time the price of houses was increasing exponentially. So the acceleration may well reflect each borrower borrowing more, rather than more borrowers.

What caused the dip in 2005? We all know what happened after 2007.

Another interesting point is that at no time has the growth in lending been negative. And even now lending is growing about around 0.6%. This is presumably because our population is increasing and people are still wanting to get onto the property ladder.

However also recall a post I did a couple of weeks ago on the impact of demographics. Baby boomers are not buying bigger houses any more. If anything they are down sizing. As Harry Dent says in the interview, "housing is not going to come back, because baby boomers are done buying houses."

26 Jul 2012


There are two ways to deal with debt. Pay it off and go bankrupt. The image below comes from the Insolvency Service and shows personal insolvency from 2002-2012.

Source: Insolvency Services
vertical axis in 1000's

Note that personal insolvency was already rising by 2002-3; that it rises exponentially to a peak in 2006--before the credit crunch. After the peak there is an easing, but another peak in 2009-10.

There is a gradual downward trend.

Levels of personal debt were obviously becoming problematic before the credit crunch and housing market collapse. This was noted in the Daily Mail in Feb 2007, which quotes Liberal Democrat Treasury spokesman Vince Cable:
"We have warned the Chancellor for years about the seriousness of the personal debt problem and the need for a concerted plan of action involving better financial advice and education, debt data pooling and action on irresponsible lending."

The trend for companies is quite different. Bankruptcy was trending downwards until mid-2007, rose dramatically to a peak in 2009, eased, but the began a slow climb.

Source: Insolvency Services
vertical axis in 1000s

I think what we see here is businesses staying afloat on easy credit, then a large number of over indebted businesses going bust quite quickly. Then more recently we see the impact of low demand and a credit squeeze longer term. Businesses that are viable are struggling to get credit from banks who are unwilling to lend. The burden of debt repayments is most likely a significant factor.

25 Jul 2012


So the UK is officially in a double-dip recession. GDP growth was -0.7% for Q3 2012. It's interesting that what we're hearing so far is not a decisive plan to deal with the ongoing stagnation of the economy, but excuses for why the figure is so bad.

If the government were a UK football team then Osborne would have been fired by now.

We're still seeing no sensible discussion of the problem of private debt, no inkling that it might have something to do with the problem. Osborne is still blaming government debt for the failure of the whole economy to perform -  when are people going to wake up to the idea that this is logically incorrect, let alone economically.

Europe is chanting the same mantra, and taking the same steps. We're all being drawn inexorable into a financial disaster.

Nouriel Roubini's perfect storm for 2013 looks more and more likely.

23 Jul 2012

Four Horsemen: The Survival Manual. A Review

The big lie of the moment is that there is no alternative. Here is proof that there are multiple alternatives. As the title of this book suggests the authors see a potential apocalypse ahead, but are not without hope for survival. Their solution is totally unlike anything you have heard from the government.

The apocalyptic introduction makes better sense in the context of the film the book accompanies. The film introduces us to a number of expert witnesses all of whom seem to be in agreement that the status quo is not sustainable, and that we are on the cusp of a paradigm shift which could go either way. The broad scope of the book takes in almost every aspect of society, but with a focus on how economics plays a role in each. However the book is aimed at a general readership so each concept is explained for the beginner.

One thing it is important to keep in mind, and something that is emphasised in the film, is that the authors see themselves as capitalists rather than socialists. Their informants are also mostly capitalists. The argument put forward is one that tries to get away from the simplistic left/right dichotomies that tend to stymie political discourse. Reshaping the economy away from free market capitalism, which has been so disastrous for the whole world, is not a socialist project. Capitalism can work, just not this form of capitalism.

The introduction redefines the powerful image of the four horsemen of the apocalypse in modern terms. These are:
Black Horse: A rapacious financial system.
Red Horse: Organized violence & terrorism.
White Horse: Poverty.
Green Horse: Environmental breakdown.

The book focuses largely on first horse. Chapters 2-4 cover economics, banking and finance, and the special topic of rent seeking. Chapter 5 covers violence and poverty, and Chapter 6 looks at resources and the environment. Chapter 7 deals with how we might progress, and the last part of the book is a summary in 27 ‘principles’.

Chapter one discusses an essay by General Sir John Glubb called The Fate of Empires. Glubb’s study of European and Near Eastern empires shows that all of them share certain characteristics and stages of development. The main point being that most first world countries show every sign of being in the final stages of decline. This is more credible in light of the Four Horsemen film. Since the collapse of empires is usually followed by a period of barbarism we ought to be very concerned. The authors’ position seems to be that change is coming and we can either allow things to take their course, or we can act to influence the outcomes. If we can latch onto new paradigms then we might have a change of avoiding the coming catastrophe.

Chapter Two gives a brief over-view of the history of economic thought. One of the most important points made in this chapter is that politicians on the whole are following a particular school of thought called Neo-classical economics. It is a school of thought which has temporarily won the spotlight, but which is far from representing a consensus amongst economists. In fact has created more problems as it has solved.

Economists these days claim that they have made science out of their subject, but the authors point out that this claim is greatly exaggerated. All scientific explanations are reductive in the sense of explaining more complex phenomena in terms of simpler phenomena, but mainstream economists make “frankly absurd assumptions” and seek observations which confirm their theories. Mainstream economists completely failed to predict the current economic crisis because their models don’t allow for recessions, and in fact leave out the major causes of recessions. But these same people are still making ideologically driven economic policy.

Chapter three looks at how economic ideology manifests in the realm of banking and finance. The chapter begins with the important distinction between wealth and money which I found a bit difficult to follow. Most of the rest of the chapter is about money rather than wealth. The authors are highly critical of the present system of fiat based currency in which money is simply created out of nothing by banks. They discuss the option of a commodity based currency—e.g. the gold standard—but find that it too presents difficulties. What they opt for is alternative which involves a stable money supply, linked to population. What is clear, in this book, but also from many of heterodox economists, is that our present crisis, like the crisis of 1929 and the various recessions since the 1970’s, is that banks are free to create money in the form of debt. 97% of all money in the UK economy is debt. They advocate removing this power to create money from banks, and breaking them up so they are no longer too big to fail.

Chapter four was entirely new to me. It discusses rent seeking which refers to unearned wealth. The most obvious example of this is land ownership. When government improves amenities near land, the value of that land increases. The landowner is wealthier without having made any effort. And of the three factors of production—labour, capital, and land—only land is not taxed. Taxing effort and enterprise has a depressing effect on them. Meanwhile the effortlessly gathered wealth of landownership is not taxed at all. And land ownership is limited to a tiny portion of the population: in the UK 70% of the land is owned by 1% of the population.

To their credit the authors begin their chapter on organised violence with Steven Pinker’s recent observation that the world is less violent than it used to be. Their argument is that this progress is admirable, but has not yet gone far enough. Violence is often portrayed as cultural or religious, but the authors ask is to look at the roles economics, and particularly economic inequality play in creating and sustaining violence. “It follows that economic justice between nations is key to reducing the number of wars”. The book discusses terrorism and concludes that most terrorists are more interested in self-defence than in waging war. They cite Clark McCauley who says “Terrorism is the warfare of the weak, the recourse of those desperate for a cause that cannot win by conventional means.” Our so called “war on terror” has probably produced more recruits than it has killed. Most people just want a fair chance to earn a living and feed their family. But First World countries have perpetuated inequality for their own ends, for their own enrichment.

Chapter six looks at resources. To me this chapter has the most radical ideas. We live in a world where some people are dying of poverty and some are dying of obesity. Current economic models see growth as the only way to have prosperity. The authors argue that when resources are finite this doesn’t make sense, and indeed when one of the results is environmental degradation this is madness. Indeed the setup which encourages growth tends to increase inequality. Instead that we should aim for a steady state economy. “An economy where the bulk of business revenue is paid as wages to those who create the wealth, is an economy that doesn’t have to grow endlessly.” Also a world in which there is less inequality will be more likely to slow population growth. Large families are linked to high infant mortality, poverty, poor access to education and contraception. by reducing poverty (to zero?) then we would achieve a stable population level, or even presumably a falling population level.

The most radical suggestion in the book is that the world should see the planet’s resources, particularly mineral resources, as common property; that nations should not be able to profit from the accidents of nature that places oil, coal, or aluminium under their feet. This argument is logical enough, but it fails to convince. I think perhaps because I simply cannot imagine countries ever giving up these advantages under any circumstance. One suggestion I do have sympathy with is the plea to be less obsessed with possession and to seek contentment with what we have rather than always aspiring for more. Sadly I think this is very blue sky. A multi-billion pound industry, employing experts in psychology are dedicated to stimulating our desires, and creating the demand for the useless products of our consumer culture. Overall this chapter makes some very good points about inequality, and finite resources.

Chapter 7 gives a broad outline for a program of change which the authors believe would make for a fairer economic system. This requires changes in three areas. 1. Our monetary system should be stable overall with allowance for short term fluctuations. There are a number of ways to achieve something like this, including the gold standard, full reserve banking, and reducing bankers to being brokers for peer to peer lending. Each solution also has downsides. 2. Taxation needs to be more fair, and in particular needs to include the third factor of production, land, though perhaps with an exception for residential homes. Some services, such as public transport or roads have a natural monopoly and these should be delivered by a government funded by a share of public wealth. Tax wages and profit (from labour and capital) provides a disincentive to effort and enterprise. Wealth from land is unearned, and presently untaxed. The authors also suggest tackling other unearned wealth in the way that radio spectrum is rented out to providers. We must begin to use tax to offset the adverse effects of economic activity such as climate change. 3. The finance system must serve the economy, and “the interests of speculators are diametrically opposed to those of the ordinary saver.” Borrowing to speculate must stop as it distorts the economy by driving the expansion of money, and takes wealth from those who create it.

Markets are good at determining prices under ideal conditions, and should be allowed to work where appropriate. They don’t work when there is high inequality of income distribution and they are open to manipulation by speculators and rent seekers. Similarly the accumulation of capital is necessary to create investment. Creating value requires cooperation and we need to move away from seeing competition as the main driving force of economic progress.

Clearly this progress would require global cooperation. Personally I am extremely pessimistic about such cooperation as recent history shows that it is very difficult to achieve the kind of consensus required. As they say we’d need to transcend national boundaries and established party political models. As much as I appreciate the vision, I think here the idealism loses contact with the ground. To get to the point where even the First World agreed to all adopt cooperative economic policies last time it happened required the shock of a World War. And it lasted for just 25 years, and was brought down by national governments acting selfishly.

The last part of the book is a kind of summary in 27 principles. And having written that last paragraph and now reviewing the central argument of the book, I find myself reconsidering, which I think shows the value of the summary. I do find the picture painted of a civilisation potentially in its death throes and threatened by the Four Horsemen a compelling one. It’s clear that we do need a new vision. It’s clear that the vision enunciated in this book is cogent and coherent. I suppose what’s missing is the strategies and tactics to bring it about. A revolution requires organisation and planning. It’s very easy for us to spin our wheels talking about these things, and find we are going nowhere. The problem is all too clear. The ideal we’d like to get to is also clear. But just how we get there, how we bring about a revolution in social, economic and political thought and practice across the entire planet is still not clear. The 27 principles would also make a good focus for discussion of the ideas in the film and book.

One minor complaint about the book is that the index is minimal. For example ‘debt slavery’ is an important concept, but seems to just come under ‘debt’. Other terms I expected to find like ‘ponzi scheme’ were also missing.

On the whole I found the book well written and engaging. It does go best with the film which helps to contextualise it. The explanations assume no previous knowledge and generally manage to convey the important points well, though I did find the distinction between money and wealth slightly confusing. As someone new to economics I found it increased my knowledge and understanding of the subject, and the implications of the economic policy decisions our politicians make. It’s clear, from this material and from the contributions of intellectuals in many fields, that something is going drastically wrong in the world and there is a danger than if we don’t correct our course we will come to grief. I think this book is a valuable contribution. I suspect that it will leave readers thinking “now what?” but also give them the motivation to start becoming politically active. And this seems to be exactly what we need.

Book: Four Horsemen: The Survival Manual. Motherlode Ltd,  2012.
ISBN: 978-0956398512. £9.99.

Film: Four Horsemen. Guerilla Films. 2012.
ASIN: B007AFCQWS. £10.99.

21 Jul 2012

Japan has Seen it all Before, and We're Getting it Wrong

Nomura Research Institute's Richard Koo says that what the world is experiencing right now, a "balance sheet recession," is different from traditional recessions.

"This is no ordinary recession." 


"People were no longer maximising profits they were minimising debt. And even with zero interest rates people were paying down debt. And no economics text book or business school anywhere in the world has suggested that such a think should take place."

Corporate debt repayment occurred for 10 years. Equivalent to nett 6% of GDP for that period.

More debts than assets = bankrupt.  But can be bankrupt with cash-flow or without. Without cash-flow it's game over. With cash-flow the best thing to do is pay down debt. Best for all stakeholders: shares retain some value, banks get repaid, workers keep jobs. The right thing to do is to use cashflow to pay down det, and you'll eventually get back in business.

However when everyone does it the aggregate effect is that the economy shrinks. Even when interest rates are zero and people still don't borrow. Because if you are bankrupt "you are not going to borrow money at any interest rates; and no one is going to lend you money either!"

"The Great Depression in the US was exactly this pattern. US lost half of it's GDP in just 4 years... because everyone was paying down debt."

In Japan this continued for 10 years.

"In this type of situation monetary policy is largely dead in the water."

"The only thing the government can do is the opposite - borrow and spend."

"That's basically what we realised what was happening in Japan."

Govern stimulus improved things briefly, but then they cut the deficit and it crashed again--because the private sector was still deleveraging. And they repeated this cycle, for a full 15 years.

"And because this is not in the economic textbooks, because it's not supposed to happen, no one gave us the right direction, until we discovered it ourselves, that this is a different disease... fiscal stimulus was maintained we finally climbed out 2005, the whole thing took 15 years."

20 Jul 2012

Banking and Nation States

Banks are complex entities operating in more complex environments. Indeed the the various banks are like a confederation of tribes. They employ thousands of people in many different capacities, all working together to create massive profits. These profits are funnelled in two main directions: 1. to shareholders; and 2. to executive salaries and bonuses. Like most organisations today banks seek to minimise the benefits to labour, the people who toil to generate profits. And since those who contribute capital (the shareholders) and the executives are adept at avoiding taxes, labour is left contributing a greater portion of their wealth to the common good. At present the gap is so wide that the top 1% of earners constitute a parallel society and culture that sucks value out of our society while adding little. We could live without them, but they can't live without us.

And banks cooperate together to alter the environment, i.e. the economy, to make it more conducive to their profit. As we have seen they often use deception to do this. They prey on the weak, and they make common cause with the powerful. Less powerful members of the tribe will gather around a strong leader and support him (it's always him in the banks). They get their own piece of glory by association.

Bankers have also made their way into the echelons of government. Banking and government employ each other as advisers. Government and the finance industry are in a symbiotic relationship. This is far more obvious in the USA where the Secretary of the Treasury and the President of the Federal Reserve Bank are both usually a former CEO of one of the big banks. Even under the Democrat President Obama. This symbiotic relationship guides economic policy, fiscal policy, and especially the making of regulations for the finance industry. And it always seems to benefit the 1% at the expense of the 99%.

I want to emphasise the collective aspects of this story. Shareholders club together to invest. Workers collaborate to make profits. Executives work together to alter the external environment. Banks collude together to fix interest rates. Banks and government are intertwined and create policy together. Tax havens cooperate with the rich to hide their money. At every node in this web we see symbiosis, collectivity, cooperation, and collusion underpinning the 'success' of the banks. Banks show how very effective collective action can be.

This should not be an unfamiliar story. Banks are doing what our nation states have always done in foreign policy terms. British, European and American governments have always cheated, lied to, and made war on their neighbours. Yes, we have long standing agreements between us now, but all of our present allies were once enemies; and many of our present enemies are former allies. And for the banks the definition of 'them' and 'us' is not based on race, religion, or geography. Since the people who run the banks are largely drawn from the richest 1% it's safe to say that the banks notion of 'us' is the 1% and their notion of 'them' is the 88%.

What the banks are doing now, is very similar to what the Dutch and British East India Companies did in the 19th century. The wealth of Britain, even to this day, owes a lot to the BEIC going out to colonise the world, kill and enslave the inhabitants, and strip the colonies of their wealth during the 19th century. We seem to have very short memories for this kind of thing.

What improved the conditions in the various colonies was the imposition of order by the locals, sometimes, as in the USA, by force. When the American colonists rose up against oppressive government they formed a community based on high ideals, almost every one of this is now debased. India's mostly peaceful revolution which culminated in independence in 1949 has been similarly subverted and they now have more billionaires than the UK, despite having about 800 million people living in poverty; while Mumbai has the most expensive land in the world.

In a way we could say that the enormous profits of the banks are a tax on our labour. More so since tax payers bailed out the big banks when their corrupt business practices lead the to ruin. It is a form of taxation without representation. Everyone, but particularly Americans, ought to be mad as hell about it.

Occupy Wall St and similar demonstrations were a good start, but they've faded from consciousness already. Move Your Money UK reckons that half a million people have moved their accounts from the big banks, but out of a population of 50 million adults that's only 1%. Pressure groups like 38Degrees help. We need to cooperate on the same kind of scale as the bankers have done, and though individually we have less power we are millions and millions.

I suspect the time is not yet ripe. But the people who predicted the 2007 crisis are also predicting another major credit crunch in the next 18 months. Maybe that will be the trigger for the kinds of reforms that we need?

19 Jul 2012

The Trap II : The Lonely Robot

"... only two groups in society actually behave in a rational self-interested way. One is economists themselves; the other is psychopaths." Adam Curtis, The Trap (part II)

18 Jul 2012

Margins of Error in Economic Forecasting.

As someone trained in a real science one of the things that bugs me about the so-called science of economics is that econognomes never cite figures with a margin of error. All measurements have a level of accuracy and precision and a margin of error. If we measure distance then the margin of error is half the smallest unit on our ruler.

Recently two large organisations published growth forecasts for the UK economy. The IMF and Earnst & Young both released figures. Their forecasts for 2013 are 1.4% & 1.6% respectively. Of course the two organisations use different models (though probably both use Neo-classical models) and this means we expect slight differences. But this should not make us any more confident, because we don't know how confident the measure is.

Accuracy in this case will have to be determined in retrospect. If the figure cited is close to actual figure when it is announced then we'd say it is more or less accurate. It would be interesting to see how accurate these kinds of predictions have been over time. This article on the IMF website by Paula Masi suggests that the models are OK for stable conditions, but don't predict changes very well. Which is about the best we could expect for Neo-classical models. Note that in this article IMF forecasts deviated from the real world by ± 1% on average and had to be revised frequently to take account of changing economic policy. This figure of ± 1% seemed to apply quite broadly to other forecasters as well.

The precision of the figure is 1 decimal point in this case. This means that the figure is supposed to be precise to 0.1%. However in a situation where the likely inaccuracy will be ± 1% the extra decimal place is meaningless.

The margin of error is the error inherent in the measurement. For instance if the measures is 1.4% ± 1% then this is an extremely unreliable figure because it could be anything from -0.4% to 2.4%.  If the margin of error is ± 0.1% then the measure is expected to vary from 1.3% to 1.5%. And note that at this level of error the two predictions quoted above overlap, and so we don't treat the difference as very significant. They could both be 1.5% for instance. By comparing the accuracy of forecasts over time we can say that the average error in the prediction is ± 1% and take this for the real margin of error.

In statistical measures the error rate is a factor of the sample size, it's easy to work out. If 5% of the population say they'll vote Green we also know what the expected error is from the sample size. Similarly when comparing two sets of figures statisticians cite the likelihood of a correlation between them. When CERN announced that they had 'found' a new particle, what they actually said was they that had a confidence level of 99.9997% that the CMS detector had found a new boson at  125.3 ± 0.6 GeV/c2 within 4.9 σ or a bit over 99.9999% confidence that it wasn't a fluke. Note that it could still be a fluke!

Without this information a figure may as well be plucked out of the air and of course with economic forecasting we suspect that this is exactly what they do! I've complained to the media about the way they cite such figures, and even had journalists agree with me. Citing figures without uncertainty creates a false sense of certainty. But these economic measures are far from certain.At present the margin of error is the same order or magnitude as the measurement. Forecasters, then, could be almost 100% wrong in either direction!

I think it's also pretty clear from all of this that the claim of economics to be a science is far from credible. In fact economic models do make predictions, but they are almost always wrong in ways that should invalidate the theory.

17 Jul 2012

The Trap

This film (in three parts) by Adam Curtis from 2007 explores our ideas about the individual and freedom. In part one he explores the role that game theory has played in forming these ideas, particularly the game theory developed by John Nash which sees the human individual as completely alone and totally self-interested. Nash, the subject of a biography and film adaptation called A Beautiful Mind, suffered from paranoid schizophrenia. These theories became the underpinning of USA's Cold War 'balance of terror' nuclear strategy. 

Meanwhile R D Laing was popularising the notion that we cannot trust authorities to act in our interest. The "system" is trying to control our thoughts and suppress our freedom. His main attack was directed against psychiatry which had begun to use behavioural traits to assign diagnosis based on statistical methods. But in studying madness he came to believe that the family played a role as a theatre of power relations in which each member was selfishly trying to manipulate the others. He then generalised this to the idea that authority was being used to control and suppresses individuals, and he became a minor celebrity promoting these views. [Though given the zeitgeist he could well be seen as a product of his time].

At the same time a branch of economics, Neo-classical Economics, based on the thought of Friedrich August Hayek's 'Choice Theory' also viewed the individual as totally self interested, and began to be prominent. The idea of the 'public good' or a sense of 'public duty' began to be discredited. This process was dramatised in the comedy Yes Minister.

Western leaders began to be influenced by these ideas, particularly Margaret Thatcher in the UK [and Ronald Reagan in the USA]. The elements mentioned began to coincide particularly in the 1980s. 

Alain Enthoven had been a prominent proponent of game theory in economics. One of his objective was to replace values and emotions with self interest and rationality. For instance to measure the effectiveness of soldiers in Vietnam he introduced the concept of the body count, which is now seen as contributing to civilian deaths. In 1984 he was brought in by Thatcher to reform the NHS away from traditional values and caring, towards targets and measurable outcomes. He saw this as "challenging the power of organised medicine". In this view doctors do not care for their patients but only compete for personal power and prestige. He has taken the frankly aberrant views of John Nash, mixed with with the counter culture distrust of authority, and turned them into unquestioned truths about human nature. It's a vision of humanity in which altruism plays no part. Ironically the subsequent Labour government pursued similar policies based on similar assumptions.

Adam Curtis is one of the leading critical voices of our age. This film is very worthwhile watching. 

So in the minds of our politicians all of us are isolated, calculating, self obsessed, and completely lacking in empathy and altruism. There is no such thing as the public good or the public interest. Our happiness can best be achieved by encouraging selfish behaviour and allowing it free reign by eliminating the interference of government. This is partly because civil servants only serve their own self-interests.

This idea is flawed at it's roots. But it's roots go even deeper. I've explored this to some extent in my Renegade Economist blog Darwin Distorted or How the West was Won.

16 Jul 2012

Full Reserve Banking

Michael Meacher MP (Lab) & Steve Baker MP (Con) & HBOS whistleblower, Paul Moore, talking about full reserve banking. FRB would mean that only the central bank could create money, whereas at present all banks are allowed to create money. See previous entry for how banks create money.

14 Jul 2012

Six Ages of Empire

Below is is General Sir John Glubb's own summary of the main points in his essay The Fate of Empires written in 1976. It is always good to see a writer who takes the time time to provide a summary at the end of a long essay - it seems to be a lost art in academia. Glubb studied a number of major Empires in Europe and the Near East: including Assyria, Achemanid Persia, Roman Republic and Empire, and the Ottomans. Unfortunately he doesn't consider any of the Indian, Chinese or Japanese Empires. Note that he considers the British Empire to have lasted from 1700-1950. He says approximate dates are fine for his purposes and that empires seldom begin and end on exact dates, but are preceded by a period of expansion and followed by a period of decline that makes them hard to locate exactly in time.

As numerous points of interest have arisen in the course of this essay, I close with a brief summary, to refresh the reader’s mind.

(a) We do not learn from history because our studies are brief and prejudiced.

(b) In a surprising manner, 250 years emerges as the average length of national greatness.

(c) This average has not varied for 3,000 years. Does it represent ten generations?

(d) The stages of the rise and fall of great nations seem to be:
The Age of Pioneers (outburst)
The Age of Conquests
The Age of Commerce
The Age of Affluence
The Age of Intellect
The Age of Decadence.
(e) Decadence is marked by:
An influx of foreigners
The Welfare State
A weakening of religion.
(f) Decadence is due to:
Too long a period of wealth and power
Love of money
The loss of a sense of duty.
(g) The life histories of great states are amazingly similar, and are due to internal factors.

(h) Their falls are diverse, because they are largely the result of external causes.

(i) History should be taught as the history of the human race, though of course with emphasis on the history of the student’s own country.

No doubt the points Glubb makes are contestable, and unfortunately I'm not in a position to judge his effort. But it is interesting that his list of characteristics which he sees as common to the final age of all empires are rampant across the first world. This is certainly a subject it would be interesting to follow up on. If searching on this subject be sure to include Glubb's name as otherwise you'll be swamped by references to the game The Age of Empires.

13 Jul 2012

Where does money come from?

Introduction to the book by New Economics Foundation.

"Money is essentially a relationship between credit and debt and always has been."

"The vast majority of money in circulation today is created by private and commercial banks."

Buy the book, download an overview, 
read some more notes on the subject 
on the NEF website

And it's clear that amongst the people who do not understand this are politicians. The MP for West Suffolk, Mathew Hancock, recently said in a parliamentary debate:
"Because the central bank is the monopoly provider of money and the lender of last resort, it must share a common strategy with the Government even though it is vital that its operational decisions on interest rates and financial stability are independent." Hansard 6 July via They Work for You.
But of course it is simply not true that the central bank is the monopoly provider of money. As this and other videos show, money is created by banks, out of nothing, all day every day. In fact the vast majority of money in circulation was created by banks creating credit.

12 Jul 2012

Role of Demographics

Harry S Dent talks about how demographics can predict trends in the economy--indeed how he has predicted economic trends and how he is predicting that we are still on the way down.

"What we are now entering is a prolonged downturn – a modern day Great Depression"

"housing is not going to come back, because baby boomers are done buying houses."

"We have to go through the detox process of deleveraging debt..." 

"My favourite economist is Steve Keen in Australia"

11 Jul 2012

What the Liberal Democrats Have Really Achieved in Government.

Click the image to see it full size

The Missing Billions

"On the afternoon of June 13, a High Court judge ruled that UK Uncut Legal Action could continue with legal proceedings against the tax office – HMRC – over the dodgy tax deal struck with Goldman Sachs in 2010 that saw up to £20m wiped off the banking giant's tax bill."
"The film is designed to illustrate the argument that UK Uncut have been making since 2010; that there is an alternative. The second half of the film moves away from the cuts to provide a short introduction to global tax avoidance, and then to look specifically at what is happening within HMRC regarding tax deals with big companies."

10 Jul 2012

Left & Right

Sometimes it can be hard to quantify what makes something or someone politically 'left' or 'right'. For those who want a ready reference then David McCandless and Stefanie Posavec  of Information is Beautiful have come to the rescue with their Left vs Right Diagram. The link is to Version 1.5 which was updated after some discussion with conservatives (McCandless is a lefty). There is a US version and a World version.

While your there check out the rest of this amazing site full of beautifully presented information.

8 Jul 2012

Household Debt Stats

I just discovered the excellent Credit Action website which has useful statistics on levels of personal indebtedness. For instance they say that:
Outstanding personal debt stood at £1.459 trillion at the end of April 2012. Which is about equal to 2011 GDP

The average amount owed per UK adult (including mortgages) was £29,706 in April. This was around 122% of average earnings.
 As with all of the information that surrounds the indebtedness of the UK this is sobering stuff. It gives us some sense of the scope of the Modern Debt Jubilee which is required.

7 Jul 2012

Four Horsemen Trailer II

"Historically all the signs of decline of empire are starting to develop... this current economic and financial crisis, that sort of thing always accompanies the demise of empire..."

I've now seen the film and I recommend watching it. There's a lot of information so I'm not really in a position to review it yet. The idea seems to be that we've reached a tipping point. Our way of live needs to change, and it can do this in an orderly or disorderly fashion. The film is an outline of what is going wrong, a plea for a orderly transition, and to some extent a blue print for how we might create a more sustainable and equitable world.

The Four Horsemen DVD is for-sale on Amazon.

I'm also reading the accompanying book: Four Horsemen: The Survival Manual. Review to follow.

6 Jul 2012

Numbers Game: Quantitative Easing.

Reading comments on various blogs and papers it's clear that many ordinary people don't really understand a lot of what's going on. The numbers are hard to get your head around for a start. The UK's GDP (roughly speaking what we earn in a year) is £1.5 trillion. That's


When the Bank of England talks about printing £50 billion it sounds like an huge amount. In absolute terms it is.


But as a percentage it's only about 3.3%.

People ask things like "how come we've got £50bn to give to the banks but we can't afford £20bn for the NHS". The answer is quite tricky and involves the difference between money and wealth which I have to confess I don't fully understand.

The £50bn is money created out of thin air. The UK has a certain amount of wealth and we use tokens to represent it which we call money. For a couple of centuries now our system is set up so that we can make an arbitrary decision on how many tokens represent our wealth (when I say 'we' I mean the government). In printing more money the Bank of England has basically made each token worth about 3% less. In the old days we called this a devaluation. So we haven't created more wealth, we've just divided our wealth up into smaller piles.

If we were still using gold, then imagine we had 1,000,000 gold coins in circulation. The devaluation is like rounding up all the coins, melting them down, and then minting 1,033,333 coins. Each of the new coins is worth 3% less, but the total amount of gold is the same. Before coins were standardised people would often file a bit off each coin and eventually they'd have enough gold to make an extra coin. Thus devaluing the currency.

Buying a service like the NHS, which costs about £100 billion in round figures (about 6% of our GDP), requires us to spend some of our wealth to pay salaries and maintain buildings and such like. We do this by the government giving money to people. But in this case the nett amount of wealth the government has goes down by that amount of money. The government has to spend some of it's income, which comes mainly from taxation.

A small amount of printing money is not a big problem. If we buy and sell things in pounds then nothing much changes. But now that each token is worth 3% less we must give 3% more of them when we buy something from outside the UK, say oil from Saudi Arabia for example. Because we are so reliant on oil the price of it is very important. If we have to pay more for it, then the price at the pump goes up. This causes inflation as the cost of oil affects the price of just about everything. If prices go up then people are worse off and want more pay, which means business makes less profit and wants to put prices up. And since almost every economy involves external inputs, inflation is always a worry.

This kind of inflation caused by printing money can create a feedback loop that causes hyper-inflation such as we see in Zimbabwe where the currency becomes so debased that it can hardly buy anything. It's not that Zimbabwe has no wealth, but that each unit of currency represents such a small slice of the pie that it is worthless. This kind of inflation is disastrous.

To try to prevent inflation caused by devaluing the currency, the Bank of England is able to manipulate interest rates on lending. But I think that's another story (and one I need to know more about before attempting to explain it).

Economists vs Weather Forecasters

Why did god make economists?

To make weather forecasters look good.
Imagine that I am a weather forecaster. I use a mathematical model to predict the weather. But weather is very complex and so I make some assumptions.

Firstly I notice that the total amount of rain is the same as the amount of water put into the atmosphere by evaporation and transpiration. The nett water flow is zero. So I assume that water does not play an active role my model. Similarly wind movements do not change the total amount of air, so I assume that overall it is not important.

In terms of climate I make an arbitrary decision that climate is just big weather. I ignore the way that changes of scale affect how systems behave. And I also assume that weather will tend towards equilibrium that the amount of water in the air, and air movements due to pressure changes will settle down and stay the same unless acted on by an external force (such as an asteroid striking the earth).

The model I produce is a reasonably complex series of algebraic equations that can be handled by a moderately powerful computer.

Would you trust my weather forecasts? Or would you think I was delusional? Would you not point that that when water accumulates it can have dramatic effects such as floods? Would you not point out that localised air movements from tornadoes to hurricanes are actually quite important features of weather? Would you not think that global climate is different from local weather since it covers longer time frames and is on an entirely different scale? And would you not point out that the idea of weather stabilizing at an equilibrium is patently ridiculous, that everyone knows that the weather is inherently unstable and very difficult to predict? Would you not point out that weather and climate modelling can only be done on the worlds most powerful supercomputers and is still far from 100% reliable? Would you not call me a fool?

And economists? Well they have mathematical models too. In these models they see that debt is also credit and cancels out, so it isn't included in their models. They assume that banks are merely passive mediums of money exchange. They assume that the macro-economy is simply a scaled up micro-economy, and that like a simple supply and demand relationship the economy is always seeking equilibrium. In these models consumers are assumed to have perfect knowledge for making decisions, including perfect knowledge of the consequences of their actions, and that masses of people behave no differently from this perfect individual.

It's all patently idiotic. One doesn't have to be an economist to understand that this approach simply cannot work. And it becomes more clear why this approach has not worked. The models will never work. The number of completely insupportable assumptions make it a certainty that they will only ever be right by accident.

Here's Steve Keen explaining it to a group of economists. And note that Unlearning Economics would probably find my analysis overly simplistic: How Not to Criticise Economics.

Now these people, directly or through back seat driving, have repeatedly driven the economy into a ditch. And yet they still clutch the wheel and claim to be doing, and refuse to let anyone else have a go. They seem sincere in their belief that they're continued mayhem is the best that anyone could do under the circumstances. And yet a few marginalised economist who are more willing to ask questions, have made accurate predictions of the present crisis. These people were prescient enough to see the crisis coming, and to write and publish books on the subject. The present crisis was foreseen, it was avoidable, and there is another way. But politicians still have their heads in the sand.
We have to tell our politicians that time is up for economists of the Neo-Classical bent. We need a better model. Better models are available. I have my preferences, but I think the first step is an acknowledgement of failure by the current lot, then a public debate about alternatives, where we can let people, like Steve Keen, like Ann Pettifor, like Joseph Stilitz, like Michael Hudson be heard. Then use democracy to make a choice and give it a generation to make a difference, and then have a review.

5 Jul 2012

Just Banking Conference

Ann Pettifor... "we're going to have a cataclysm"

See also the Green New Deal.

Mary Mellor (Emeritus Prof of Sociology)... "what we need is de-growth... how much is enough?"

Prof Steve Keen. "Neo-classical economists don't include banks or debt or money and that is why they didn't see the crisis caused by banks, debt & money coming."

Prof Richard Werner

How can we make banks social useful?

Two Wrongs Don't Make a Right

Bob Diamond, having been caught out, confessed all and hoped that by going first he would mitigate the punishment that would inevitably follow. He obviously did not understand the dynamics of the mob which greeted his outing as a wrong doer. He underestimated the pent up frustration that everyone in the UK feels when they are much worse off while fat cats report record profits. Nothing about this situation is fair.

I want to take a step back and consider a moral point. Our Judeo-Christian based morality broadly works by identifying the guilty party and punishing them by inflicting some harm or loss on them. For every crime there is a perpetrator and we expect demonstrable suffering to be visited on them. It is a long time since execution was a public spectacle in the UK, but nevertheless there seems to a genuine desire to visit harm on Bob Diamond as retribution for his crimes. It almost seems as though people see scourging and crucifying Diamond as a way to redeem bankers. Sound familiar?

There is a fact that has presented itself time and again to me. The implications are profound and troubling. It is this:
If in confessing their sins they are inviting harm or loss upon themselves, then no rational being would confess. 
A rational being avoids harm, sometimes going to great lengths to do so. When we set up a system of justice that visits harm upon people, then they will do everything possible to cover up mistakes and moral failings.

None of us is perfect, and none so saintly that we don’t break our own moral from time to time. Sometimes we quite consciously and deliberately do something moderately immoral (or perhaps illegal). I think this applies to more or less everyone. Saint Paul complains that he does the thing he would not do, and does not do what he would. (Romans 7:15).

But Judeo-Christian morality leaves us with an imperative to identify wrong doers and harm them in some way, or cause them loss. And we believe that this harm done to them cancels out the harm they did. In other words our moral and legal system is based on the idea that two wrongs make a right.

As I say this conclusion is both profound and troubling. Presented with the proposition that two wrongs make a right, most people would be capable of seeing the logical flaw. In order to punish in the way that we do we must sanction certain kinds of harm in the hope that fear of harm will be a deterrent. But fear of harm can be overcome by other motivations as our prison population shows. Furthermore this sanctioned harm requires us to suspend the virtues of empathy and altruism. Suspension of empathy is all that allows us to harm another being, because if empathy is engaged then we feel the other’s suffering. In order to extract retribution we have to become a bit less human.

There is also the vexed question of who is sanctioned to harm people, and how to they cope with the dehumanising effects of this power without becoming monsters. Armies down the ages have committed atrocities. Police forces have often misused their powers. Judges have been completely out of touch. And so on.

If we hold empathy and altruism to be good, then I would argue that they are always good; and conversely that if failures of empathy and altruism are evil then they are always evil. The whole notion of necessary evil is extremely fraught. Necessary evil all too easily becomes a smoke screen for any evil.

A nation baying for the blood of Bob Diamond does not encourage bankers to come forward and admit mistakes. Any rational wrong-doer is actively covering their tracks a little more thoroughly even as I write this. The idea that punishment can undo wrong doing or redeem wrong doers is just magical thinking. Two wrongs do not make a right. We can’t call for harm to be visited on another person and claim the moral high ground. This leaves us with a dilemma over what to do with these bankers.

Harming Diamond does not fix the situation. Setting up the conditions for this not to happen again needs to be our priority. Using this as an opportunity to call for systemic change makes more sense than focusing on one individual.

Government to Deregulate Physics

Responding to the announcement that physics working at CERN have discovered a new sub-atomic particle, yesterday David Cameron has announced the government's intention to deregulate Physics. "The Conservatives feel there are too many Laws, and that Physics is being held back by this regulatory burden. The Conservatives feel that the 2nd Law of Thermodynamics promotes wasteful spending of energy by systems and we will repeal it in the next Budget."

Asked about the other Laws of Thermodynamics, Cameron replied, "This government does not believe that any system should be allowed to get something for nothing, so we're in favour of the 1st law. We do have a committee looking into the 3rd law."

On Newton's Laws of Motion Mr Cameron said "We don't think this is an appropriate regulatory frame work and would prefer that the market be allowed to determine how objects move."

"The Large Hadron Collider was a very expensive project imposed on the UK by the European Union, and we feel that if the regulatory framework had been less complex that the search for the so-called God particle would be been less costly overall. Clearly under the last Labour government the Higgs Boson was not discovered and they should be ashamed of themselves."

4 Jul 2012

Zombie Banks

Banks should prove to us that they are alive by going without QE or subsidies for even a day.

Bank's income is coming from govt subsidies. They have an infinite line of credit...

3 Jul 2012

Private Debt Stays Behind Closed Doors

This is a graph from the Government's 2011 Budget Report. It shows their estimates of the scale of private sector debt - about six times the level of public debt. The top lighter band is the financial sector. Black is household which is about 80% mortgages, and dark-green is non-financial business.

Budget Report 2011 Private Debt

Curiously neither the 2011 or the 2012 Government Budget have any measures for dealing with this problem. In the 2012 Budget there is barely any mention of private debt. I fact public debt is talked up as the problem. And recent days have seen government minsters blaming this on Labour. In particular the Government's  Budget is silent on the possibility of this massively over-indebted sector borrowing even more money for investment. I cannot recall any government minister mentioning private debt, and I cannot recall any journalist asking sustained questions about it. Some questions came up during Steve Keen's recent book promotion tour, but have died down again.

Many commentators are now saying that the Govt are using the chaos of the ongoing depression to shrink the state for ideological reasons. For example, in an interview with the Guardian, Dr Gabriel Scally formerly of the Department of Health says:
"At the end of the war this country was hugely indebted but within a couple of years had free healthcare and free education for everyone – what an achievement! This government is putting a huge price on education, especially young people seeking to go to university, and is in the process of dismantling the NHS." 

I think this is very likely to be the case. So not only is the government ignoring the primary cause of the depression, its austerity program is doing long term damage and preventing recovery, but they are dismantling or seriously weakening the social institutions that we need to help us get through this.

If you sat down to right a farce about a myopic and incompetent government, you could not do better than the real thing we have now. The UK will be a long time recovering, and we have not seen the worst of it yet.

Economic Revisionism

Recently the Guardian published an article by J. Bradford Delong (June 29, 2012) Explaining current US Treasury rates is beyond even the economic prophets which tries to rehabilitate mainstream economists. Sadly no comments were possible on the paper's website, but two non-orthodox economists have replied:
Bill Mitchell: Revisionism is rife and ignorance is being elevated to higher levels.

Steve Keen: What utter self-serving drivel, Brad Delong!

Both of these commentators point out in some detail, with extensive quotes and many links, that the people Delong suggests we trust with the economy have always been and still are clueless about what is going on. They are part of the problem not the solution.

Meanwhile the scandal over interest rate fixing is highlighting how corrupt banks and the finance sector have become under deregulation and a culture of greed.

2 Jul 2012

Max Keiser on how the Markets are Rigged (2007)

This film is about how hedge funds were ripping off the system by manipulating markets in precisely the same kinds of ways as the 'pools' of 1929. Free markets are in fact rigged by brokers, banks, & CEOs.  And governments collude with them by removing legal impediments. This same behaviour caused the last Great Depression.

"This trading is the matrix for a future crisis" (remember this was said in 2007!)

In the USA "markets are not free, they are not fair".



Al Jazeera once again more insightful than Western media.

Changing the World. A Case Study.

The world changed in 1971. I suspect that few of us noticed, though we've all felt the effects.

In 1971 President Nixon unilaterally dismantled the Bretton Woods Agreement. This multi-lateral agreement on monetary policy was put in place to help the world recover financially from WWII. It spawned the IMF and the World Bank. In the same year the UK introduced the Competition and Credit Control Act. The main effect of these changes was deregulation, which allowed private sector debt to begin to accumulate.

From 1945 to 1971 was a period of economic stability, with no notable crises. The IMF tell us that since 1970 "there have been 147 bank crises, 218 currency crises and 66 country-financing crises". In 1971 the motto of Polonious was decisively thrown out. The world began to borrow to finance consumption and to gamble on asset prices. Debt fuelled consumption and speculation, especially the latter, pushed up prices causing inflation. Inflation required pay rises, and further price rises. Until it all collapsed in a recession. Then began to pile up again. Each cycle was a little worse because some of the debt carried over. In the Third World it rapidly lead to ruin and poverty for many. In South-East Asia ruin and poverty came in the late 1990's. Now the First World faces ruin.

The response to this was to further deregulate the economy, but particularly finance. This allowed for more debt, and more risky lending. Banks, who make money from debt, were happy to oblige. Sucessive governments around the world followed similar policies.

The finance sector generated huge amounts of income but concentrated it in the hands of a tiny minority. It generated even hugher amounts of debt. Today the UK is the most indebted country in the world. Recent estimates place our private sector debt at 507% of GDP, household debt (including mortgages) at 100%, and Government at just 81% of GDP.

The most recent crisis exposed corruption in the finance sector, and the massive scale of our indebtedness. Five years later we're still going down hill, with Europe teetering on the brink (of what?). Many first world banks are technically insolvent but somehow reporting record profits. Now we learn that some have been manipulating interest rates. They are propped by government borrowing amounting to a trillion pounds. Executive pay is increasing exponentially. Unemployment is high. So much for the "free market". Many intellectuals are pointing to distrubing parallels with Europe in 1931.

The same trend has excerbated environmental problems. Governments seem paralysed by fear of the business sector. The political will to address any of these problems does not exist at present.

How did this happen?

The most disquieting voices joining the chorus of criticism come from perfectly respectable elements of society: from the college campus, the pulpit, the media, the intellectual and literary journals, the arts and sciences, and from politicians. In most of these groups the movement against the system is participated in only by minorities. Yet, these often are the most articulate, the most vocal, the most prolific in their writing and speaking.

Lewis Powell Memo
The second major event of 1971 was the Lewis Powell Memorandum to the US Chamber of Commerce entitled "Attack on American Free Enterprise System". Powell characterised the situation as a war in which business interested were threatened by social change emphasising the values of cooperation and mutual aid (our values). The memo makes a series of detailed proposals for an aggressive response by conservative businessmen.

Businessmen should endow universities with chairs to teach conservative business practices, and financially support conservative institutes. Powell proposed that a number of very well resourced think-tanks be set up. These would help to create and promote a consistent, potent message. Deregulation was central to their agenda. They needed to train spokesmen in communicating the conservative message, and create booking agencies to help organise speakers. They also invested in media companies to ensure access. They did all this, and needless to say they funded conservative political parties. Nixon appointed Powell to the Supreme Court two months after the memo was published.

At the same time US conservatives began to politicise fundamentalist Christians who had been disengaged to that point, creating a whole new constituency of millions of ultra-conservative voters.

The results have been spectacular. Conservatives all over the world have benefitted from this coordinated strategy to hijack democracy in the USA, and fight a war against their own people. A steady stream of graduates with PhDs in what amounts to conservative ideology, finds jobs in universities and think-tanks to explore and publish their ideas and influence new generations of students and intellectuals particularly economists. There are close linked between Neo-Conservative though and Neo-Classical Economics. Through manipulation and control of the media a constant presence of the conservative message is maintained. Powell's memo is one of the most important documents of the 20th century, it is the founding charter of the Neo-Conservative religion.

As a result conservative ideas have been at the forefront of politics. Deregulation has wrecked the world's economy, and helped to wreck the environment. Conservatives set the agendas on which elections are fought (they are doing so again in the UK right now). Business policy became political policy; business values became social values.

Progressives tend to use the language of conservatives when critiquing conservative ideas, because they don't understand that even a negative mention helps to reinforce the idea. This is simply illustrated by saying "Don't think of an elephant". We cannot help but think of an elephant. The conservatives also manage to portray opposing views as against the common good, out of touch, or naive. Ironically self-interested conservatives gang together, and community spirited progressives are often deeply divided. Resistence has been ineffective.

Clearly the very great likelihood is that this will all continue with rather horrific consequences. This how American businessmen suceeded in changing the world, and

The question I'm asking myself is "OK, I've understood this, now what?"


Submitted to the journal of the Buddhist Order I am a member of. July 2012