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CDOs, which were behind the last crisis, have been replaced
by CLOs – ie securitised loans to companies, rather than mortgages.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.
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:
...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.
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