The Grown Ups Are Not Coming Back

 

I’m going to take you back in time briefly, to about 1990. I’m eight, sitting in a classroom (3A), and it’s 9am. About twenty of us sit still, in total silence, waiting for our class teacher – Mrs Heater – to come in and start the day after morning assembly.

Five minutes tick away, then ten…and still no teacher arrives. Then on the fifteen minute mark, almost on the dot – I was marking the time with my new Mickey Mouse watch – havoc lets rip: the first I know something is up is when a projectile whistles right by my ear. Then, rapidly, chaos ensues classroom-wide: desks are overturned and transformed into barricades, general shouting and screaming erupts and small bands of eight year olds launch themselves, berserker-like, at other eight year olds, armed with pens and supported by indirect rubber band artillery fire.

We were quite a repressed lot – this was a prep school – and we’d never been left unattended in a classroom before: several years’ worth of pent up chaos-demand was consequently unleashed, instantaneously.

I sat in the middle of the maelstrom, diligently going through my latest textbook and ignoring the chaos around me – then, Mrs Heater arrives back: the prep-school version of the military police are summoned (senior school prefects) – and we are locked down, man. Gulag time.

I was at that point suddenly hit by a terrifying thought: one day, all the grown-ups will be gone (I was in the "learning about mortality" stage), and we – my generation, the kids around me - will be in charge and… it’s going to be like this every day, isn’t it? It’ll be chaos. And no one will come back to restore order.

This is one of my strongest memories from school: and…well, it turns out, three decades later - I was f*****g right, wasn’t it? All the grown-ups have gone. No one in charge has the vaguest idea what they’re doing. I reckon we’re about one minute off hitting the 9:15am post-assembly time – and the maelstrom is about to hit.

To bring you back to the present: listening to Boris Johnson’s speech yesterday, I was hit by the same feeling: this chap has no clue what he’s doing, at all, has he? But it’s not just him: no one else has either. No one on the radio, or phoning in to the radio, probably no one even listening to the f*****g radio - no one at all has the faintest idea.

I’m not just talking about the totally, obviously, completely bananas topical things, like the 10pm curfew. Or people sitting in cars on their own wearing masks.* 

I don’t just mean those things: I mean, objectively insane things, things the government are saying, in actual public, apparently in earnest. For example, take Boris announcing yesterday that the government is introducing 5 per cent mortgage deposits for first-time buyers to transform “generation rent” into “generation buy”.

(Incidentally, ten years ago – almost to the day – the headline from the then PM’s speech was “we plan to turn Generation Rent into Generation Buy” – how’d that go, then, Dave? But I digress.)

There’s the fact that he said that, and the fact that, in recent months, all mortgages for buyers with a 5% deposit have *completely* evaporated: there are now NONE. The number of 90% LTV mortgages has also decreased from 800 or so to a handful…which are shortly, probably, to be withdrawn completely too.

And the fact that banks today have said, in response to this plan, in short: “no”.

They actually gave a longer, more detailed answer, which was:

“NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO.”

The Ministry of Housing, Communities and Local Government said today, when asked, that they have no plans on how this will work, no detail on the scheme and no idea on a timeframe on when it would, theoretically, launch.

So: the key-note of his speech, the man in charge of our country, was to announce exactly the opposite of what is actually happening.

He could have stood up and said: “my government are introducing more jelly into the UK” at the same time as actively destroying all UK-jelly, and no one would’ve blinked.

Having said that: giving him the benefit of the doubt, is there any evidence, at all - even shaky evidence, I’ll take that - that if subsidised 95% mortgages were widely introduced (despite the fact that they're not) that they would increase homeownership in any way, rather than just drive prices up higher and handing yet further profits to the monopoly housebuilders, and - ultimately - reduce home ownership? 

I refer you to the banks’ longer answer above.

So, I think I might give up on even listening to the radio, or the news, or trying to contain my fury at the insanity dribbling from the mouths of the berserker-mentality children supposedly in charge of this utter sh*tshow. This isn’t really a political point, by the way, I’m just singling out the person who’s meant to be in charge: we’re all now inhabitants of Golding’s Coral Island. 

It’s time to ignore them, focus on the textbook in front of me, and do my best to dodge the indirect rubber-band artillery fire.

We are where we are. It’s 9:14am. Chaos is coming.  

Mrs Heater isn’t coming back.

If I were you, I’d get your desk barricade ready.

 

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*Or quarantining entire populations of completely healthy people for the first time in history, completely destroying our economy and millions of people's lives in the process for no apparent benefit, with no empirical real-world evidence lockdowns actually reduce the spread of the virus and plenty to the contrary, and in any case, no appreciable risk posed by COVID to anyone remotely healthy under the age of 80...ok, ok, I know none of you agree with me on this - and to be fair, it is a completely unprecedented epidemic (if you ignore previous epidemics), so that's not my beef here. Even if the ONS have already shown, beyond any reasonable doubt, that more people have and will die as a result of the lockdown than would've died from COVID, which oddly received zero coverage, and Prof Ferguson predicted 85,000 people would die from COVID in Sweden and 6,000 did and in 2005 he predicted 200 million people would die from bird flu and 282 people did and yet we still take his predictions seriously and don't mind that we have destroyed the country's future because of them...and if you think this has all been completely rational and appropriate and the economy has nothing to do with people's lives and we must protect the NHS by locking down for three weeks and flatten the sombrero sorry I meant six months and then suddenly actually no we didn't mean that we meant extend ineffectual restrictions for another six fucking months and maybe forever until your business is completely destroyed and until the vaccine arrives which might take years and actually might not arrive at all or even work and we should definitely not lift these insane restrictions until a vaccine arrives, then whatever. That's just my opinion. You have yours, I have mine. And I am right. 

 

Complex Systems Collapse

So.

We’re not going back to normal, are we? The OBR now reckon we’ll never return to pre-lockdown levels of growth. Their central prediction is that unemployment will be at 12% by the end of the year. This is a complete disaster, and yet I still don’t think people have quite grasped the enormity of the economic impact of the lockdown yet.

I think my economic glass half empty outlook might come from the fact that I’ve never really believed in amelioration in general: amelioration being the idea that, over time, things just generally improve. I‘ve always thought that things are cyclical, whereas there is a general belief in our contemporary society – that we’ve never really shaken off since the enlightenment – that everything will just progress, inevitably, and economic growth will return for ever because it just, erm….. well it just does. So there.

I’ve always thought that there comes a point where, after a peak, stuff just gets worse and worse. This has been re-enforced by having family in Zimbabwe and closely following the news there, and also by growing up being a Welsh rugby supporter.

The thought that I might be becoming a bit of an inaccurate version of Cassandra has of late led me to escape the constant doom and gloom on the news, by returning to my first love (oh alright, second after Marion Ravenwood from Indiana Jones) and start reading archaeology books again. Just to be clear: the fact that I studied archaeology is nothing at all to do with Karen Allen's seminal portrayal of Marion Rav…oh ok yeah, totally is (although I actually gave up on archaeology when I realised that my career would end up in ruins. But I digress).

Turns out this wasn’t the escape I had anticipated: the first book I picked up was on the late Bronze Age collapse (1177 B.C.: The Year Civilization Collapsed by Eric Cline – which I highly recommend).

The late Bronze Age was an incredible period: an amazingly complex world of Minoans, Myceneans, Hittites and Ancient Egyptians that involved international trade agreements, centralised economic systems and a generally extraordinary level of sophistication in writing, art and trade.

Santorini, to take one example, in the late Bronze Age was a city where people lived in three storey houses, with flushing toilets with marble toilet seats, and had hot and cold water piped to their bathrooms. The inhabitants, largely literate, ate food grown thousands of miles away to the north, off pottery plates made thousands of miles to the south, and drank wine grown thousands of miles to the east. They had restaurants, futures markets and theatres. They even had a fire brigade. They were part of an incredibly elaborate network of long-distance exchange and trade, that was the forerunner of today’s globalised world. I went there on holiday a few years ago, and the toilet in the hotel was a hole in the ground, and the hot water was broken, but I think this was down to my parents just liking a bargain.

And here’s the thing: it all collapsed – all of these great civilisations, simultaneously – within the space of about fifty years, around 1,200 B.C. Not only that, but it took centuries for the Mediterranean to reach that level of complexity and sophistication again. The collapse was sudden and violent: cities were abandoned, trade routes were lost and writing died out, all in the space of a few decades, having stood for centuries.

There have been various attempts to explain this: climate change, being the most common explanation – but then there’d always been droughts, earthquakes and climate stress in the region, so why this time?

One of the most compelling explanations is to be found in Complexity Theory.

This essentially places the blame on hyper-interdependence: the systems at the time had become so complex and interdependent, that they became extremely vulnerable to external shocks – you just needed to disturb one part of the system for the whole thing to collapse.

The late Bronze Age was a time of concentrated density functions: in other words, all trade and activity was ultimately run from centralised palaces, and if this palace was, for example, partly destroyed in a fire, or had its food supply disrupted by a local drought: then the entire local economic system around it started to collapse as a result. This collapse led to its trade partners suffering similar shocks, and collapsing in turn.

It ended up with complex state systems failure on a vast scale. This was why it was unprecedented at the time: climate stresses were not new to the Mediterranean, but previously society generally consisted of a patchwork of farms and individual merchants, which was far more resilient to, say, a local earthquake, which only took out part of the system.

Incidentally, this seems to happen every 1,600 years: an identical collapse happened almost exactly 1,600 years later, with the fall of the Western Roman Empire. And the fall of Rome was, erm, 1,600 years ago…

 

Density Functions

Hyper-interdependence internationally has, historically, tended to inevitably end up with state-systems collapse on an inter-continental scale.

Our global financial system is now incredibly densely interconnected, in fact to a scale never seen before and is, therefore, extraordinarily vulnerable as a result: QED the fact that a chap noshing on a bat in China (allegedly) can lead to Oak Furniture Land going bust in Swindon six months later, to take just one random fully-assembled-hardwood-furniture-based example.

 

Zimbabwe Here We Come

Our system in fact could not be more vulnerable. This is why I find the blithe assumption that we can just close everything down for a few months, and re-start it all and it’ll be back to normal in a jiffy pal so bewildering: it really just fucking well won’t. Who knows what we’ve unleashed upon ourselves.

I’m not saying that hyperinflation is necessarily imminent: we could even get deflation in the short term, which central banks fear even more, as they can't print their way out of it. This is as hyper-inflation is not just down to the amount of money in the system, but the velocity of the money itself: the trillions that have been minted and the billions that are now being printed as a result of the lockdown are the kindling on the forest floor, it still needs a spark to set the forest fire off.

That spark could well be in the form of a crisis in confidence: once people lose confidence in, say, the UK government’s ability to pay its debts as a result of the sheer amount of money Rishi Sunak is adding to the pile (the debt to GDP ratio sailed past 100% recently, and it was barely even mentioned…) then we will pass a critical confidence threshold, what physicists call a ‘phase transition’ – and hyper-synchronicity will ensue, ultimately causing hyperinflation. By this I mean that people will lose confidence that their UK fiat-money will buy what they want it to buy, and will spend it as quickly as they can before it loses even more value, and the velocity of money will increase, and then….well, money will become worthless quicker than you’d think. When the panic hits, I’m going to panic-spend it on an actual Fiat, just to be ironic.

This spark - a sudden crisis in confidence causing mass unpredictability - could strike at any moment. Jurassic Park enthusiasts will remember unpredictability in complex systems being described as the “Butterfly Effect” by Jeff Goldblum: the idea that a butterfly flapping its wings in New Mexico can cause a Hurricane in China. And we’ve just let loose about a trillion metaphorical butterflies.

We don’t know when the confidence threshold will be passed (maybe it’s passed already, it’ll take a while to realise) or even which bit of the system being disturbed will lead to the hurricane, but that’s Jeff’s point: you can’t identify the individual butterfly.

You can only prepare for the hurricane.

Have you tried turning it off and turning it on again?

I have some concerns.

Watching the news unfold everyday is an odd experience at the moment – it’s almost as if everyone has been locked inside for months with limited human contact, and has consequently gone insane. I also wonder if this is a temporary loss of collective sense, or part of something more structural.

I studied archaeology as an undergrad, and read extensively about how civilisations often behave just prior to collapse – this seems to largely involve rapidly devaluing their money supply, accelerating the degradation of the environment and then finally, just before the end plays out, they go on a spree of tearing down statues and coming up with new ritualistic chants, in a vain effort to appease the clearly very displeased Gods. Luckily, none of these things appear relevant today.

But as I say, I have some concerns.

The stark economic consequences of the lockdown are starting to surface. The news that the economy has now dropped by 25% in total this year at least made the news, even if it was only very briefly the lead item – and was shortly dropped behind further Orange Man Bad coverage (yes, we get it now: Orange Man Bad. Can we focus on something else for a bit?). But I don’t feel that it got the coverage it deserved. I still feel the BBC headline should have been:

BREAKING: HOLY F**K THE F**KING ECONOMY CONTRACTED BY A FIFTH IN A MONTH HOLY F**K!

…but whatever, I understand the BBC has other priorities at the moment.

My main concern is about the banks. Since the last financial crisis, gross debt has now more than doubled, in almost every financial sphere you could conceive of. The causes of the last financial crisis have not only not been addressed: they have actually grown in multitude.

For example, take derivatives, at the heart of the last financial crisis. The total amount of outstanding derivatives has increased fourfold since 2008, according to the BIS (https://www.bis.org/statistics/derstats.htm). This doesn’t meant that the risk has increased fourfold - risk in derivatives increases exponentially as a function of scale, as related to gross nominal value – so the total value of outstanding derivatives has increased fourfold, but the risk from derivatives has increased exponentially.

CDOs, which were behind the last crisis, have been replaced by CLOs – ie securitised loans to companies, rather than mortgages. Most banks use a Value at Risk (VaR) model to quantify their own risks, and from what I have seen these are completely unable to cope with what we’re going through – they may model, for example, that of the loans to ten companies in their CLO, 4 may go bust over a period of time.  But what they won’t have modelled is the odds of the 4 companies going bust at the same time – which is exactly the situation we are facing. Bye bye CLO.

This is why we just don’t have an economy which you can turn off and on again. I’d wager we’re probably currently in August 2007, in terms of the last GFC.

Debt will catch up with us in the end. There simply hasn’t been this debt ratio in history without a major reckoning – in fact, the debt we have as a country, as a civilisation, in fiscal terms, private terms, any measurement you pick - is completely unprecedented in human history. I am also not heartened by the rise of the MMT people – the modern monetary theorists (MMT stands for “Magic Money Tree”, haha etc) - who believe you can print as much money as you like to finance government spending, as it just creates a liability on the balance sheet of the country, and nets off against itself. This argument, previously enthusiastically pushed by economic maestro Robert Mugabe, has rapidly gained the upper hand in all sorts of economic circles, and does not bode well for the future.

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Buy Food, Buy Gold, Bi-furcation

But what of house prices?

Well, oddly, I think house prices will increase in the short term, despite every other economic metric falling off a cliff. I have previously been consistently wrong on house prices, and I think that this is mainly down to my having viewed it through the wrong lens – I viewed the housing market as a classic equilibrium economic system, with supply and demand etc, and it’s not – it’s a complex system, with path dependencies.  

Interest rates for example are arguably more important in determining price levels than supply and demand: 

(https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate.pdf) 

...and these have dropped to 0.1%. Money is being pumped manically into the economy by the government. And just over half of the country have done ok economically speaking over the lockdown – those with fixed salaries and their own house have had fewer outgoings, with their income remaining the same, and the opportunity of a mortgage holiday. Banks are likely to be light on repossessing properties anyway, as this will harm their own fragile loan books, so a crash - normally driven by forced sales - will be put on ice as much as possible, if it does start to manifest itself.

Putting it brutally – those who have been completely wiped out economically tend to be people who have been hammered by our demonstrably unfair system already. None of this points to a short term housing collapse, widely anticipated by commentators.

So the short term could see an exacerbation of the trend of the past – namely what housing analyst Neal Hudson has termed bifurcation, ie those with housing assets getting better off on paper and those without assets getting much, much worse off. We could be in for one last hurrah, with the government attempting to pump one last blast of reflationary air into the dead corpse, until the whole rotting body explodes in a mess of flying organs.

And when the banks do go bust, it will be proportionally larger than the last time the banks went bust and had to be bailed out (which was proportionally larger than the previous time the banks went bust and had to be bailed out in 1998) – and will the public be happy about handing over a few trillion, again, to reflate the system? I have my doubts.

Perhaps it will be a moot point anyway – the sheer amount of money that will need to be injected to keep the system going simply won’t be feasible.

So recently we bought another chicken. Can't be too prepared.

We Wunt Be Druv

"And you may pook

And you may shove

But a Sussex pig:

He wunt be druv."

In a vain attempt to boost my readership and demonstrate how in touch with popular culture I am, I’ m going to shamelessly start this blog post with a reference to a couple that have been in the popular printing press recently, namely Prince Henry and Princess Mary Meghanmarkle (see? I keep in touch). Keen newspaper-enthusiasts will know that they are titled as the Duke and Duchess of Sussex (or, more informally: "the Sussexes of Sussex").

I grew up in Sussex. Although I am (according to a recent DNA test, non-court related) 98.4% Welsh genetically, my family have been in Sussex for around about a century now. In fact, in the Sussex village that I live in, I am now only two generations off being considered ‘local’. And if you grow up in Sussex, you will be aware of our county motto – also printed on bottles of our local brew, Harveys Beer:

“We wunt be druv”

In Sussex dialogue, this means “we won’t be driven” – in other words, you can’t tell us what to think.

I think there is something of this still in the Sussex character. I’ve no doubt that one of my heroes, Tom Paine, one of the inspirations behind the American revolution, had ideas forged by his Sussex background. He was from Lewes, and was, incidentally, arguably one of the three most famous people to come from the Lewes region (the other two being the puritan Anthony Stepley, a Lewes local who signed the death warrant for Charles I and played a part in banning mince pies, and journalist Piers Morgan, who comes from adjacent Newick. Scholars are currently divided over which of the two could be considered the biggest mood killer at parties).

Although they have only reportedly spent a total of 5.5 hours in Sussex, I like to think that something of this character has rubbed off on the Royal couple. Accordingly, I wish them well and I hope they enjoy Canada and competing in next year’s Celebrity Love Dancing Strictly on Ice.

One of the items to get the most coverage is the fact that the taxpayer ultimately underwrote the renovation of the house which they currently RENT. (Ed: See? I managed to segue seamlessly back to the housing market! Clever eh?) 

In this regard they are typical of their demographic: priced out of buying a palace of their own by sky-high asset prices, they are instead forced to rent their palace, unlike their baby-boomer Princely parents who obtained palaces whey they were comparatively cheap (ie approx. 1485). Is it any wonder they want to emigrate?

This is of course reflected throughout the wider housing market, right down to the hovels that us serfs live in, where house prices are through the roof, massively penalizing a generation, and setting the scene for the great Peasants' Revolt of 2024/5.

Now, despite being told consistently for years that my view is nonsense, and that high houses prices are actually down to a lack of supply, over and over again on this blog I have been ranting about the real cause: nothing to do with a lack of supply, but almost entirely down to low interest rates. I have been told repeatedly that I am wrong, in all sorts of different forums, by all sorts of different people (for example, see comments here: https://propertyindustryeye.com/we-dont-need-more-new-homes-to-solve-the-housing-crisis-claim/).

But I wunt be druv. And now - hurrah! - the Bank of England have published a paper more or less proving my point - saying that, if the main cause of rising prices was a lack of properties, then rents would also have increased sharply – but this has not happened.

And then, to quote:

“Nearly all of the rise in average house prices relative to incomes can be seen as a result of a sustained, dramatic, and consistently unexpected, decline in real interest rates. ”

I have already heard three separate housing experts on the radio say this is now the cause, and was all along, forgetting that almost no one outside my little tinfoil-hat wearing community thought this even six months ago.

I am admittedly consistently wrong about timings and predictions, but still: ta da! I win.

You can download the paper here, although it’s quicker to read my blogposts from 2013-2019 (and ignore the bits on timings and predictions – in economics, things always take longer to happen than you think, anyway – although when they do happen, they happen faster than you think they will):

https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

Worryingly, the paper also states that: “...average house prices could plunge by one-fifth if there is an unexpected interest rate rise of 1 percentage point”. This indicates that they have only read half of my blog posts so far.

I’ll update you when they read the rest of my posts, and publish their next paper *Spoiler alert*: it’s going to be titled “Oh Sh*t we’re all going to hell in a handcart, economically speaking, aren’t we?”.

So just goes to show: make your own mind up, and don’t listen to what 99% of the economists and housing experts say on the meedja, because three years later they’ll change their minds, and claim that they didn’t think that at all anyway.

In other words: don’t be druv, bruv.