Debt unlimited

The mainstream media is starting to face up to how deeply screwed we are by the bursting debt bubble.

Sez Jeff Randall in the Telegraph:

The debt trap time bomb

“According to [the Office for Budget Responsibility], UK personal debt will grow by nearly 50 per cent between now and the end of this parliament. Come 2015, it is forecast to reach £2.12 trillion pounds. How can this be right? The average British adult already owes £29,500, about 123 per cent of average earnings.”

“Is the OBR expecting a sudden burst in take-home pay to offset a massive expansion of household debt? No, quite the reverse.

“It explains: ‘We forecast that income growth will be constrained by a relatively weak wage response to higher-than-expected inflation. But we expect households to seek to protect their standard of living … this requires households to borrow throughout the forecast period [2011-2015]’.”

Governments have only one answer to too much debt. More debt. In fact, they depend on it because more debt is the only way to get more money, since money is loaned into existence and the banks have a de facto monopoly on money creation.

So the Office of Budget Wishful Thinking “requires” Brits to plunge themselves into 50% more debt over the next four years.

Let’s see. Which way are people going at the moment? Credit Action noted in March 2009, just as the recession was biting, that the average UK adult owed £4,870 on credit cards, motor and retail finance deals, overdrafts and unsecured personal loans. After two-and-a-half years of stagnant wages and low growth, that figure has fallen by 12% to £4,257.

So much for the Government’s hopes that Brits will immolate themselves on the altar of debt slavery merely to keep the tills ringing merrily.

Credit Action also reports:

“Figures released by the Finance & Leasing Association (FLA) show that consumer credit lending was down by 1% in July 2011, compared with last year. Retail store credit was down by 13% and credit cards and personal loans by 2% compared with July 2010.”

Millions of Brits are already struggling to service their debts. Neither they nor those who still can afford to borrow are not in any hurry to take on more. But the Government MUST HAVE MORE DEBT! What’s a poor Chancellor to do?

Well, borrowing more isn’t the only way to get people deeper into debt. Raising interest rates would have the same effect on the biggest chunk of outstanding debt, the £1.24 trillion owed on mortgages. But higher mortgage payments would finish off many of the families who are just keeping their heads above water. Perhaps George Osborne actually hopes that they will turn to extortionately-costly unsecured loans to ‘maintain their lifestyles’ (aka being able to feed and clothe themselves and their children).

The UK is not alone here. All the so-called Western economies are going along the same route of doubling down on debt. The euro zone makes up stories about a trillion euro rescue fund for itself, paid for by the Chinese (who didn’t even pretend to say ‘no’ politely).

They’re all hoping that the Growth Fairy will come back so they can pay off all this debt. Some of them are becoming dimly aware that she is never coming back – at least not without a return to energy at low, low prices that will remain a tantalising memory now that the peak of oil production is sliding by beneath us like a killer whale gliding under an ice flow.

This worries Dmitry Orlov. He’d hoped that governments would have the sense to throw in the towel and start organising an orderly retreat from dreams of endless debt-fuelled growth. But today he looks back at his Five Stages of Collapse and writes:

Stages of Collapse Revised: “Joined at the Wallet”

“I wished for an orderly cascade of collapsing institutions, with enough of a gap between them for public psychology and behavior to adjust to the new reality. But almost four lost years of both government and finance betting on a future that cannot exist, doubling down every time they lose again, have dashed those hopes. The effect, I think, will be to compress financial and political collapse into a single chaotic episode. Commercial collapse will not be far behind, because global commerce is dependent on global finance, and once international credit locks up the tankers and the container ships won’t sail. Shortly thereafter it will be lights out.”

If that sounds doomerish, just keep an eye on the euro area story as it unfolds over the coming days and weeks. Greece, Italy, Spain and Portugal all run the risk of financial or political collapse (or both) unless they receive huge additional bailouts. And no-one has any idea where the money will come from.

Back to the Seventies

Energy crises are nasty aren’t they?

If like me you were around in the 1970s, you’ll remember the slow-motion car wreck feel to things as unemployment rolled upwards, businesses closed down and family budgets stretched more thinly every month.

Then, as now, prices inflated as the economy stagnated. Politicians and union leaders railed against each other or met over beer and sandwiches, depending on which party was in power.

There were strikes. Not today’s one-day affairs but bloody disputes with pickets and braziers that went on for weeks or months. But in those days, there was a bigger, brighter future to fight for a bigger share of.

One of the big reasons why the Seventies and Eighties were shite (apart from the fashions and the Brotherhood of Man) was the massive energy crisis that gripped the UK from the first oil price shock in ’73 until the North Sea started to really come on stream in the Nineties.

Cheap(ish) black stuff

In 1970, the UK got half its energy from coal and virtually all the rest from oil. Then suddenly both became major problems. The UK coal industry was way past its peak by the Seventies because nearly all the high-thermal-value, easy-to-get-at stuff was already gone. Keeping it going called for ever-higher investments that produced ever-lower returns.

Meanwhile, oil had been so cheap that we Brits used it for everything from heating schools to generating electricity, not to mention powering inefficient monstrosities like the Austin Princess. But then the US hit its peak of oil production and lost its ability to ‘swing’ the world price by turning its taps on or off. OPEC, which had been counting backwards from 100 ever since it read MK Hubbert’s peak oil model, immediately turned the price tap, which it now controlled, all the way to ‘diamond-studded camel harness’ and the rest is history.

Lavender Hill Zombies

Suddenly starved of the kind of cheap energy that made it possible to keep flogging crappy cars with 1940s-era engines and 18mpg fuel efficiency, the hitherto relatively graceful decline of Britain’s post-colonial industrial base turned thoroughly disgraceful, almost overnight.

Imagine a pleasant old cove from an Ealing Studios comedy opening a bedsit door and being swarmed by a garish horde of George Romero zombies and you get the flavour of Britain circa 1975.

The problem wasn’t that the world was running out of fossil fuel. Far from it. Our problem was that our energy inputs – and therefore everything else in the economy – were being suddenly and viciously repriced and there was nothing we could do about it. Of course, the Brits are a nation of decent fellows with a love of decency and fair play – so we went for each other’s throats for a couple of decades: Northern Ireland, football, the miners, you name it.

Monetary incontinence

Western Governments borrowed and printed money to keep their societies and economies functioning during the adjustment to high-priced energy and (in the UK’s case) the transition away from domestic coal to imported stuff and North Sea oil and gas.

I guess the original idea was that they’d ratchet down the monetary incontinence once they’d straightened out the energy thing. As if. By the end of the Eighties we were getting on top of expensive energy inputs (by off-shoring dirty, labour-intensive activities to the Far East) and the supply side was pretty much sewn up between OPEC, who were making up new oil reserves, and the USA, who were making up dollars to buy them.

That would have been a good time to stop flooding the planet with credit simply to fund ever more innovative ways of wasting fossil fuels. But Maggie and Ronnie were too deeply in love with the idea that all this new-found wealth was magically created by their monetarist ideology to see that it really still came from holes in the ground.

Because we’re worth it

This wasn’t even a case of setting fire to the house to keep warm. It was setting it alight just to ooh and ah at the pretty sparks whirling up into the night sky. Over the last 30 years, the world (mainly the US and Europe) burned through most of the remaining endowment of easy-to-get-at oil and gas. It doubled its population by turning to industrial agriculture and artificial fertilisers to convert oil and gas into food.

We invented the bestest-ever ways to amuse ourselves and, if we ever wondered where all the energy was coming from or whether anyone was still bothering about the state of the country’s infrastructure, we figured that these were problems that would easily be fixed. After all, there’s supposedly nothing that can’t be delivered by the amazing power of free markets or by the Chairman of the Federal Reserve whirling around dropping money from a helicopter.

In fact, all we’ve proved since the Seventies is that you can fill the world with a heck of a lot of stuff and people as long as there’s plenty of cheap energy. ‘Economics’ is now more or less solely concerned with removing any obstacles to revving the stuff-people engine faster and faster. Why keep mindlessly revving? Well, I assume it’s because we’re worth it or something.

History rhymes

So why is it beginning to look and feel like the Seventies again? Unemployment heading for three million; falling living standards; rising living costs; steep energy bills; a sense that young and old generations alike are heading into a cul-de-sac?

Are we heading into an energy crisis? Well, yes. The UK has a complex industrial economy that calls for shedloads of energy just to stand still. That energy is getting scarcer and more expensive – just like 40 years ago.

But this time the Government can’t simply launch a credit expansion on the scale of the one it kicked off in the Seventies to tide us over the energy contraction. People can’t afford to borrow and the banks can’t afford to lend.

Nor are there any huge lakes of oil and gas waiting to be discovered in easy-to-exploit places. What’s left lies in faraway, difficult and dangerous locations. Even when big discoveries are made, like the one off Brazil, the potential flow-rate (which is all that matters) puny compared to what’s needed to put a dent in the $100-plus prices that are suffocating the developed nations.

All the Government can do is print money as a lubricant to stop the economy seizing up. Note that it’s only a lubricant: it doesn’t stop the real economy from slowing down for want of cheap energy. And the way the money is created tends to enrich the very richest while doing nothing to raise the living standards of the bottom 90% (although the Government might argue that, by preventing complete economic seizure, QE and now Credit Easing, are preventing a sudden meltdown that would plunge everyone into destitution overnight).

Hands on the wheel

Maybe in the end, the demonstrations spreading around the world from Wall Street are all about who gets to hold the steering wheel as the world slaloms along its post-peak-net-energy course. The young can divine their futures in the plates of crumbs and bare bones being pushed towards them by greasy-chinned parents and grandparents who barely have the honesty to feign apology for squandering so much irreplaceable wealth in a mad half-century binge.

They’re very unhappy and they don’t intend to leave the ship in the hands of people they see as short-sighted, greedy and incompetent. The bankers and their captive politicians ballsed-up the biggest bonus ever given to any species on earth and the next generation isn’t going to allow them preside over the coming fall out.

Today, like a century ago, Governments can’t or won’t see that capitalism has reached a historic turning point. At the start of the 20th century, Western Europe’s governing classes reacted to organised demands from labour and liberal groups by more or less reluctantly setting up social institutions to spread the coming wealth around more fairly. A couple of decades later, the Great Depression dragged America’s ruling class kicking and squealing into the same recognition.

In Russia the rulers’ policy of ‘let them eat borscht’ led to revolution, civil war, economic isolation and decades of misery for millions.

It’s decision time

Time is running out for those who seek to paper over the cracks with yet more debt. The choice for the politicians is to make concessions or try to control increasing conflict.

Driving through the opportunity in a crisis

Crises are problems for governments but opportunities for dogmatists.

While the British government flounders deeper into the worst financial and energy crisis in its history, various political elements are gleefully grinding their axes amid the confusion.

Their ideological tunnel vision leads to egregious examples of fiddling while Rome burns, such as the one highlighted by George Monbiot today:

George Monbiot – Roads to Ruin

Vast sums are being squandered on road schemes which will simply shunt the congestion problem on to the next bottleneck – by councils cutting a wide variety of essential services. And a massive reallocation of cash is taking place from public transport to private transport.

. . .

It seems that the door to new roads has swung open again. The Conservatives have long had an interest in getting people off public transport and into cars. Public transport is often unionised. It pools resources and encourages social mixing and collective action. Car driving, by contrast, isolates us from other people and encourages us to see society – pedestrians, bicycles, other cars, speed limits, traffic calming – as an obstacle. The car drives us to the right. It is a powerful but overlooked agent of political change.

We are now in the post-peak era of oil production. Bank of England Governor Mervyn King yesterday admitted that a decade or more of economic stagnation could lie ahead. Put the two together and it’s clear that the steady fall in UK road traffic over the last three years will continue.

In three or four years’ time, with the economy flat-lining and fuel prices at record highs relative to disposable incomes, will people cheer these schemes or curse the narrow-minded politicos who bulldozed them through in support of a transport dogma that’s already had it’s day?

Cameron’s climbdown

If you’re the leader of a party that’s totally hog-tied by big banks, construction firms, property interests and retailers, how do you speak truthfully to the electorate?

Well, if you’re Mr Cameron you have to be devious.

You know that your retail paymasters will blow their fuses if your big speech of the year includes such sensible advice to people as:

“The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.”

Because that sounds like you’re not just describing what’s happening but actually endorsing it. And that would be bad for vested interests the ‘recovery’.

So you don’t say those words. But you do make sure they’re in the advance copies of your speech that get sent to the media in time to catch papers on the morning before you step up to the lectern.

When smoke and flames erupt from every orifice of  the British Retail Consortium, you feign shocked surprise at how easily your words might be misinterpreted by the public and change the final wording to:

“The only way out of a debt crisis is to deal with your debts. That is why households are paying down the credit card and store card bills.”

Job done. The coverage generated by changing the wording guarantees far more attention  for the first version: the one you wanted everyone to hear.

The big question, of course, is why do we now live in a country whose prime minister has to resort to Byzantine subterfuges to get sensible advice past his Government’s corporate minders?

Osborne the Sub-Prime-a-donna

The stand-out para in today’s Guardian article about how credit easing might work is:

“Bonds could be bought directly in the £180bn corporate bond market. Buying bonds issued by small and medium-sized enterprises (SMEs) directly is less feasible as they don’t really exist. Instead banks could package small company loans and overdrafts into so-called securitisations which could then be bought.”

Now a big reason for the dearth of credit for small firms is that the creditworthy ones want as little debt as possible while lenders rightly won’t touch the uncreditworthy ones with a barge pole.

So George Osborne has come up with a cunning plan to take the crappy loans of rocky SMEs, whizz them up with decent debt from sounder firms, and use the resulting brew as collateral against new loans to the very SMEs that sensible lenders won’t touch.

It’s the Subprime Debacle all over again, only with small businesses instead of houses. Moreover, it will put good businesses at risk for the sake of bad ones. Does anyone believe that the banks will ask the good SMEs before they bundle their (sound) loans and overdrafts into one of these securitisations?  Of course they won’t: it’s too good an opportunity for banks to make risk-free money trading the securitisations while accepting the Government’s plaudits for opening a ‘credit lifeline’ to struggling small firms.

So if – or rather when – credit easing goes ingloriously tits-up, subprime-style (because that’s what always happens when you give money to people who can never pay it back), the sound businesses risk getting screwed along with the weak ones because credit will dry up for all.

Stiffing the prudent to save the feckless. It’s the story of the second great depression but who’d have thought it was Conservative policy?