I have woken early ahead of a long day of meetings that will allow little time for anything else, let alone blogging. A little early morning (for him, late evening) tweeting with Prof David (Danny) Blanchflower, once of the Monetary Policy Committee, started the day.
Danny has rightly pointed to concern that the Baltic Dry Index of world cargo rates is at a record low and the MPC and Treasury seem not to have noticed. This has been highlighted by Danish container shipping giant Maersk reporting a massive drop in its profits with a forecast of worse to come.
It was a theme I addressed in a meeting in the City yesterday when I asked where the zombie debt that has financed the construction of over capacity in the shipping sector over the last few years is located: banks, somewhere, are exposed to it and at some point are going to have to recognise it.
The key point there is 'at some point'. In shipping, fracking and some other areas I suspect that as much window dressing as possible is being done on debt provisioning in banks, something that remains a possibility at present but which will become much harder in a couple of years as rules on loss recognition change in IFRS accounting.
Why do I suspect that there is a real desire to avoid loss recognition? For that my inspiration comes from an unlikely source. I don't often give much time to Allister Heath at The Telegraph, largely because his world view and mine are not close, but he says this morning:
[No] developed nation today could possibly tolerate another wholesale banking crisis and proper, blood and guts recession. We are too fragile, fiscally as well as psychologically. Our economies, cultures and polities are still paying a heavy price for the Great Recession; another collapse, especially were it to be accompanied by a fresh banking bailout by the taxpayer, would trigger a cataclysmic, uncontrollable backlash.
Before adding:
The public, whose faith in elites and the private sector was rattled after 2007-09, would simply not wear it. Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences.
Three thoughts. First the paranoia is apparent: the elite are under siege.
Second, if capitalism is based on profit and loss then Heath, a market fundamentalist if ever there was one, has just gone into denial on the economic system in which he has so much faith by suggesting its downside risk cannot be tolerated.
Third, Heath has no answers: all he can do is hope central banks can delay the fateful day when current crises have to be recognised, even though he simultaneously criticises the money printing he recognises this will inevitably entail.
We have to ask then, is that the plan? Will there be as much denial as possible for as long as possible to pretend that the good ship capitalism as it has developed is really doing just fine even though the reality is the exact opposite? I think that likely exactly because of the paranoia that Heath reveals.
The difficulty for him is that no amount of paranoia and no amount of window dressing is going to prevent three things becoming obvious. The first is that business has no clue what to do now. Not only is it not paying its tax, it's not contributing to society by investing in job creating either at present. The age of capitalist innovation appears to be over: we have moved to rentier capitalism.
Second, people can't afford to spend because demographic change at a time when politicians have overly promoted the concept of individual care has meant people now believe they have no choice but save. The supposed liberating impact of market based provision for care services we once thought communal is destroying market demand for almost anything else.
Third, in that case anger on the part of many might be the expression of reasonable frustration that they have been sold market based nonsense for so long.
But the market, rigged as it is, will I think seek to defer recognition of that reality for as long as it possibly can, and Danny is right that the Bank of England and Treasury will go along with that deception, pretending we live in a parallel universe where all is rosy, for as long as possible.
It will only work for so long. I make no prediction about what will happen then and I certainly would not want extremism of the sort that Heath predicts. But radical change is inevitable. Better to face that reality and plan for it that stick heads in the sand as a panicking Allister Heath is doing.
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Great article, this part perfectly sums up what I see as the core of our current situation:
“Not only is it not paying its tax, it’s not contributing to society by investing and job creating either at present. The age of capitalist innovation appears to be over: we have moved to rentier capitalism.”
That, and our enthusiastic surrender to competition from low-wage/low-rights/low-regulation economies like China, who are effectively waging a war against the western working classes.
I couldn’t help spotting this error though: “largely because his world view and men are not close” – I’m guessing this should be “largely because his world view and mine are not close”? Sorry to nitpick but thought you might want to fix that.
Fixed
Not good at copy editing at any time
Worse at 6am
I tend to use the term Neofeudalism for ‘Rentier Capitalism’ – the popular support for Capitalism and, I think, Allister Heath’s belief system, is rooted in the deployment of wealth in productive enterprises that generate value and circulate cash with a small surplus that the middle can accumulate as capital of their own.
As definitions of Capitalism go, this is comprehensible and usable; and it’s pretty much the only game in town if we need providing moral justifications for a system that is doing rather well for you and I.
Heath’s problem is that he does not understand the nature of rent-seeking, and it’s inimical nature to production and consumption; and, as a servant of the elite, he sees no problem with the concentration of wealth and the economic disenfranchisement of the middle class that is inherent in the system of Neofeudalism.
Above all – and, quite obviously in his article – Heath cannot confront the truth that markets in general and banks in particular are artificial entities, created by regulation and maintained by governmental intervention.
Allister Heath cannot and will not understand that the current state of finance is the product of policy decisions – which he and the Daily Telegraph have wholeheartedly supported! – and he will take adopt an ‘over my dead body’ opposition to the policies and interventions that will be required to get us out of the position that we’re in.
So it’s valuable, as an exercise in understanding, to republish his ill-informed opinions, and he can at least be praised for being open about his confused dismay and cluelessness; but I doubt that he and his paper are on the road to Damascus and the only effective political response is to accelerate their slide into irrelevance.
You’ve asked an interesting question, indirectly: where’s the source of the next – or current! – banking crisis?
Is it leasing and over-lending to energy and commodities?
I maintain that we’re always looking in the wrong places, and we always get ‘blindsided’ by the unexpected source of instability – money markets, circular repurchases of debt insurance, shadow banking and garbage collateral, reinsurance spirals – and it’s entirely possible that you have looked in the right place.
It would be useful to know the full extent of banks’ exposures to leasing, and to identify risk concentrations elsewhere; and the Bank of England is endeavouring to do so.
So let me give you a hint: JP Morgan spun out its Commodities businesses in 2014 (among other things, this included de facto ownership of a major oil refinery); and, in that same year, Jamie Dimon pulled JPM entirely out of student debt. Smart money, or so I hope, and you might want to look for clues about JP Morgan’s exposure to leasing – aircraft, shipping, motor vehicles, infrastructure partnerships – and see if this contrasts to banks in London and in Continental Europe.
It is like watching a group of grown men in suits play a game of pass the parcel at the same time as playing musical chairs. Just as one catches the parcel he finds the chair pulled out from underneath him and down he goes!
They all know the rules of the games, they all think they can outwit their fellow players, they all enjoy taking risks and the thrill of the chase, they all know it’s going to end badly for someone, they all hope and pray it won’t be them, and they all lie like hell to try to be the winner!
That is the financial markets stripped bare to its core. A self-repeating cycle of asset bubbling nonsense which bears little or no relation to the real world going on around them, except for the dire consequences on the rest of humanity who have to keep suffering the consequences of such greed and short sightedness.
It really is time to put these people back into kindergarten and give them some long overdue re-education!
The crashing of house prices, or rather land prices, will, as always be the trigger, because land value is the security for most loans.
Always is a big word
This is an alarming statistic, and we weren’t even in a recessionary environment for the last 5 years!
“The figures show that, in 2015, the number of households evicted by county court-appointed bailiffs hit 42,728 (most households, of course, contain more than one person). That number is not only the highest it’s ever been, it’s climbed by more than 53% in just five years, an even greater insecurity for Britain’s hard-working families.”
http://www.theguardian.com/commentisfree/2016/feb/12/houses-assets-homes-housing-tenants-evicted
“Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences”.
And there it is, the terror felt by a market fundamentalist about the consequences of the failure of the ideology he has clung to for so long, and whose failures he still can’t see. The ‘plebs’ will revolt! They would demand real controls on his beloved ‘free market’, real redistribution of wealth, and, shock horror!, that the finance sector genii he so admires, will be subject to punishment from the rest of society i.e the society that Heath, and all the other market fundamentalists, have dumped the cost of their failure on.
Really, what can you say?
Owen Jones’s article on the rise and readiness of the extreme Right (neo fascists), in The Guardian fits nicely into the theme of your blog, Richard. I actually believe that should the situation Heath outlines arise elites across Europe will have no hesitation in calling on the police and military to suppress the anger of the general populace. It will then come down to what extent the police and armed forces are willing to go along with that oppression. As we know, in the past they’ve been willing to do so. And we all know that Thatcher paid off the police in advance of the miners’ strike so that they’d be only too happy to go along with the oppression/suppression of communities that Tory policies required. But nowadays? Nevertheless, I’ve no doubt there are plenty in the senior ranks of the police and military who will be happy to respond to the panic of the elite and establishment and order the protection of the neoliberal order they are so much part of.
Sorry to be picky Ian but I would suggest that you have placed a comma after the word’s “Right (neo fascists)” in your opening sentence which is surplus to reality.
The speed in which the paper which still has the nerve and bare faced cheek to sell itself as the Guardian has been hurtling towards being a right wing neo con shrill over recent years ended a whileback when they finally arrived.
Not content with filling it’s content with the most extreme right wing drivel it has pissed off so many now former readers with its blatant censorship of the CIF facility that a lot of the former readers have set up their own alternative.
You might well enjoy offguardian
http://off-guardian.org/
Regards.
DH.
I’m not sure the miners’ strike is a good comparitor. After all there was no vote to strike and a significant minority of miners took the view that they should be working normally.
This time I’d hope it’s a bit different – so far the government haven’t done too well with the doctors and if there was large scale social disobedience of some sort I doubt that a “smaller” (and demotivated) “state” would cope too well.
But clearly targets would have to be carefully chosen…
People, and communities, voted with their feet – for a whole year – until they were starved back to work for a short time until they were officially “allowed” to stop work by our feudal masters when they had their pits, industry, communities and livelihoods forcefully shut down in favour of importing lower grade coal from halfway across Europe and in some cases the world.
No one voted for that either, except the neoconservative parasites and their quislings in the loyal opposition.
Ambrose Evans Pritchard reports that Goldman Sachs say the US and UK are safe from a global downturn … So on their past record, we can assume that they are gearing up, to cash in at our expense.
Don’t worry. The usual useful idiot suspects will be along shortly to tell us its all legal and above board.
Richard, you say “I certainly would not want extremism of the sort that Heath predicts.” Yet what he predicts is largely what is necessary:
1. Free Trade needs a massive re-thing with regard to capital flows and commodity speculation
2.Globalisation needs reigning in, especially the ease with which corporations can up sticks.
3.Price controls can be of use in a crisis especially when it comes to necessities.
4.Ultra-progressive Taxes- there is certainly a case for that!
5. A war on the City-fine as long as it doesn’t include what Quakers (17th Century) called ‘outward weapons.’
Sounds like heath has written a decent manifesto for Labour -hardly extreme but a society returning to its senses.
His fear is outward weapons
So is mine
Richard-I suspect when Heath says ‘war on the City’ he means regulation rather than pitchforks.
If we’ve got a Labour Party clearly articulating regulation of unproductive speculation and capital flows then the pitchforks won’t be needed-it’s up to Labour now to give us something to vote for.
Saw Heath on news debating with Ann Pettifor re likelihood of recession. He was wrong. Ann was right – as usual.
I would expect Ann to make mincemeat of him
Your good sense also has to combat that man who always sees a silver lining through his rose tinted glasses. I refer to Hamish McRae of the independent. He is seeing an imminent second Industrial Revolution and a veritable sprint of inventiveness. No recession is ever recognised in his outpourings, and golden days are always just round the corner.
He could be right
I don’t see it
That’s neo-liberalism in a nutshell your ‘golden days are just around the corner’ we’ll have ours now at your expense. Of course, so dangles the imaginary carrot, if you spin your treadmills a little faster your salvation awaits. Calvinism is built into neo-liberal macroeconomics so that salvation is only for the ‘elect.’
Not sure you can define it as paranoia. As all of us, he is looking at Padamos, Labour and the Democrats. It already began.