The Great Leap Forward

From 1958 to 1964, Chinese leader Mao Zedong aimed to rapidly transform China through high-speed societal change, establishing large publicly run enterprises, and  remodeling energy policy in a new structure of production and consumption centred around the utilisation of back yard furnaces.

The policy outcomes were, sadly, disastrous – poor planning and unrealistic targets, along with the dismantling of the established means of energy and food production in a short period of time, led to significant inefficiencies, a subsequent widespread drop in output and – ultimately and tragically – a massive famine that led to the deaths of 50 million people.

On a completely unrelated note, Ed Miliband has just been appointed Secretary of State for Energy Security and Net Zero.

I’ve said this before, long before the right wing nutjobs got hold of the idea and decided that opposing it was a core part of their theology – but Net Zero is going to be wild. Unfortunately, left wing nutjobs have decided that whatever the opposite of the right-wing position is, is now a core part of their ideology. So the odds of us navigating our way successfully through the next few decades have decreased significantly.

We are now however, essentially, aiming to be the first country in the world, since the Upper Palaeolithic revolution 40,000 years ago, to try and successfully increase living standards by decreasing energy production. Ed Miliband is at the forefront of this now, our new Assistant Glorious Leader: a man who lost an election because he couldn’t eat a bacon sandwich normally now wants us all, for example, to reduce meat consumption. I assume this is not a co-incidence.

Now, the economy is, to a certain extent, a derivative of the energy market. A very good book by Vaclav Smil (ok, it is a bit dense: “Energy and Civilization - A History”) shows beyond any reasonable doubt that there is, essentially, a correlation between energy consumption and civilisation: it’s about 0.99 in fact. Reduce energy consumption, reduce civilisational standards of living (by quite a lot, as we’re going to find out).

You can either be a net energy exporter – and produce that energy yourself as a country, which is good, or you can be a net energy importer, and buy it in from abroad – which is fine, but you need to earn money to buy it: ie have a trade surplus. [As an aside: you can be the issuer of a reserve currency and just print money to buy it from abroad, but we Brits can’t do that since we all went on holiday to Suez by mistake in 1956.]

What you can’t do is buy energy in from abroad, whilst simultaneously having a trade deficit. Which is what, since 2005, we have been trying to do: for that’s the year the oil and gas from the North Sea started to dwindle, and we became a net energy importer again for the first time since the 1980s (when we started our last period of growth) – and consequently, since 2005, living standards have stagnated. This is simple physics.

This process will now accelerate: under Net Zero, it is explicit government policy to get rid of our existing hydrocarbon energy sources, and most of our reliable base load power, as fast as possible (ie 73% of current energy production) and therefore reduce energy production in toto (great band) - and try and replace it, somehow, we're not sure how yet, with intermittent renewables. The massive, whopping lie is that this will reduce our dependence on imported hydrocarbons, which would obviously be a Good Thing during a time of global geopolitical instability: this is, demonstrably, a clear lie as these renewables will themselves require vast amounts of carbon emissions to produce in the first place – except now we won’t be able to do it ourselves, as we will have shut down the domestic hydrocarbon sources that would otherwise have been used.

Eh? Whaddya mean?

Well, a wind turbine, for example, is mostly steel. How do you make steel? Well, really, you need coking coal, as that’s the only cost-effective way of getting the energy intensity required – even “green steel” not using coal has massive carbon emissions – as even without the coal bit you need to pump oxygen in to transform the pig iron into steel, which creates…carbon dioxide. Big, fuck off amounts of it. Except we won’t be using our own coal, because Coal Bad, and we won’t be producing our own steel, because Carbon Emissions Bad, but despite the fact it’s 2024 we still want to power ourselves using fucking windmills for some reason - so we’ll instead just import the steel we need from China, where they’ll happily burn anything they can dig out of the ground (including far worse lignite coal).

So as we dwindle down our own reliable energy sources before their time, we’re going to have to instigate large-scale rationing, all whilst killing growth. We’ll print money for a while to try and hide it – as I’ve said on previous posts, we might even get a bit excited in the process and have a sugar-boom - but ultimately physics will win.

What’s even scarier is reading government papers on this stuff (it’s well worth reading the Sixth Carbon Budget, which is now in law, btw: https://www.theccc.org.uk/publication/sixth-carbon-budget/) - as they basically say the above, but in coded language. They talk about demand management: but they mean, shortages and rationing. They talk about managing mobility demand: but they mean, you can’t travel where you want to travel. Go and eat ze bugs.

I should add that I am not a “climate change denier”. My Doctoral research is on Sustainability and Building Climate Resilience and Lots of Other Buzzwords I Thought Sound Good in a Dissertation Title, and I spend my spare time researching engineering strategies to mitigate hurricane activity in the Caribbean - activity which is, beyond doubt, increasing as a direct result of Climate Change (although I did mainly choose this area of research because I get to go to the Caribbean).

However, wind down our existing reliable base-load hydrocarbon energy sources too fast and we will, definitely, without doubt, have a Great Leap: just not fucking Forward.

Wake Me Up When It's Quitting Time

 I was listening to a Cabinet minister talk on Radio 4 recently, idly deciding who I was going to vote for, and quite a stark thought hit me: only a few years ago, saying that the financial system is at risk of collapse, society is on the brink of total anarchy and the world will shortly descend into World War III, used to mark you out as quite “outré”. This outlook tended to be the preserve of a very few, marginal tinfoil hat-wearing loons like me – niche issues of interest to the sort of people such as, for example, the three Very Special People who read this increasingly sporadic blog (I am to be fair only counting the Northern European readership).

Now, it’s quite common for senior Cabinet Ministers to say exactly this sort of thing on the Today programme, and no one really blinks. This is quite a shift.

But why?

I continue to think this is, as I have long argued, primarily down to our financial system. It is inherently destabilizing. In understanding it, the most important thing to get your mind around is simply that what we think of as money – the £10 note in your pocket (or digital equivalent) – is not money: it is credit.

And so, going back to the dawning of time itself (well, ok, 1694) when men were proper men and wore giant powdered wigs - the very first pound note minted by the Bank of England was issued – as a credit note, and issued to a member of the public at a set rate of interest through a commercial bank. So how was that pound paid back? Well, it was paid back at a slightly higher rate of interest – by another pound. But where did that pound come from? Well, it also had to be loaned into existence by the Bank of England. And had interest on it. So you know you have two pounds. And a third was needed to pay off that interest…

Once you have your head round that, you understand that our system requires an ever-increasing expansion of the money supply, or the whole thing collapses. And here we are today, with trillions floating around (until relatively recently, you never really heard the word trillion used in financial discourse, did you? QED). At some point the expansionary graph goes parabolic, and we arrive at our boiling-stones-for-soup stage.

Gordon Brown’s (do you remember his “I’m not Flash – I’m Gordon” line? That was great. What times) total government spend in his last year in 2010, was £550 billion. Since then we’ve had 14 years of Tory austerity, right? So how much will Hunt spend this year? Less right? As we’ve had austerity, innit? Actually, no: it’s £1.4 trillion. Oh.

Except the government isn’t taking in £1.4 trillion – it takes in 10% less than that, which will have to be borrowed. This is because of the nature of the system. Debt increases over time, faster than earnings. Consequently, today we spend more on interest on the debt we have accrued as a country than we will on Defence, and this amount is growing. Amazing.

This is inherently destabilising – because we are getting poorer in real terms as the ever increasing money supply degrades the value of the currency, and thanks to the Tory’s more or less open border policy there is no pressure for associated wage growth, not to mention the fact that we have had a long-term genius policy to remove reliable base-load home-grown power and make energy progressively more expensive – consequently living standards have been declining for twenty years. It also explains why inflation will come roaring back to even higher levels in due course, after its recent dip: it only dipped this year because the money supply has been artificially strangled, and it can’t keep decreasing for long otherwise the system will collapse, QE(D).  

Taxes will go up and up to try and keep on top of this debt, which it can’t, and at some point people will realize that the cost of their morning coffee isn’t going up – it’s the same cup of coffee, it’s just that the value of the pound is simply melting away. And, I mean, what’s the point of working when costs are sky-rocketing, and taxes are at insane levels? So maybe just check out. Quit your job to raise chickens. Live on a yacht (maybe not with the chickens). Even Tory MPs on their Ministerial salaries are barely covering the cost of their rent(-boys).

A 25% deficit is banana republic levels, realistically, so still a way off – but a financial crisis will easily add 14% to our current 10%, then we’re within cloth-touching distance. And once we have crossed through this phase transition, then it’s time to panic. Buy whatever hard assets you can. Empty the supermarkets of noodles. Quick tip: if you’re going to panic, panic first.

And this will, as I have said, likely be in 2026/2027. Among other things, Kondratiev was a very clever Russian chap indeed, and his commodity cycle analysis predicting major global-macro disasters hasn’t been wrong yet.

So who are you going to vote for? Well, none of the pre-selected candidates we are allowed to grant power offer any alternative to the financial Apocalypse which faces us, as they offer nothing different to our current trajectory. The OBR won’t let them, anyway. So maybe don’t vote. Who cares. I’ve never been fully on board with the view that we must vote, as people died for it: I mean, people died for the Crusades too, but I’m not sure even the famously war-like Liberal Democrats want us to re-take Jerusalem (but then I haven’t read their manifesto yet. Actually: NO ONE MENTION THIS TO RISHI FOR GODSSAKE).

So best of luck everyone. Vote if you want. Here’s to a new Glorious Leader. And wake me up when it’s quitting time.

“Gold is money. Everything else is credit.” - J.P Morgan (1912)

What’s going to happen to house prices over the next two years? Most people think they'll collapse. They might - but I don't think they will.

Why? Well, let’s start with looking at where money itself comes from, and the money that goes into housing in particular. Despite what some think, it’s not mostly printed by the Bank of England: in fact, banks notes are a tiny percentage of our money supply. The vast majority of money in our economy - well over 90% - is loaned into existence: in other words, it starts off as credit, being extended by a bank to a borrower, created out of thin air by the bank on a computer screen.

Now, imagine you’re a banker. Think of it! The money! The power! The sheer sexiness of staring at excel spreadsheets all day in a very well-cut suit….. mmmmmm…… crumbs I miss being a banker. Anyway: now imagine you have to lend £250,000 pounds to meet your bonus criteria, and you have a choice - you can lend to: 

(a) a person to buy a house

or

(b) a new start-up business.

Option (a) takes all of ten minutes to do due diligence on - just look at a few pay slips, and the house valuation, then pop out for a long cocaine-themed lunch - and best of all, if it goes wrong, you can confiscate the property, or force them to sell it and get the money back that way. 

Winning!

Option (b) however, is quite tricky: how on earth are you to judge whether their business plan is going to work or not? I mean you’re a banker for Chrissakes, not someone who knows anything about commerce or money. And what if it goes wrong? You’ll just lose the £250,000 and have nothing to confiscate. Crumbs. I think I need a long lunch to recover from just thinking about it.

Accordingly, most bankers would far rather lend into the housing market than to productive businesses - and the statistics bear that out: 60% of new bank lending goes into residential housing, less than a third into new businesses.

Keep that in the back of your mind. 

Now imagine you’re a politician, with an election coming up - or maybe you've just won one and need to get things motoring. A politician! Think of it! The power! The erm, lack of legitimate sources of money. The sheer sexiness of….erm….legislating, erm….. Anyway: you need to get GDP expanding, as otherwise you’ll lose and have to go back to being a banker.

Now, expansion in GDP can be driven by three things: (i) productivity growth, (ii)  population increase, or (iii) debt.

Take the first driver of growth, productivity: this has been flat in the UK since 2005. Since that year, we have been a net energy importer, and combined with a current account deficit, this element of growth has effectively stalled. Unsurprisingly, as you can’t escape physics: the correlation between energy and economic productivity is approximately 0.99 - and if you need to import energy, you need to buy it with money you’ve earned in exports. Which we’re not. Hence we’re stagnating. Simple (FYI this, not the fact she liked being nasty to northerners, is why we started growing when Thatcher came to power: we happily at the time found large amounts of oil and gas in the North sea. Which is now running out…)

Ok, so option (i) is not going to help.

What about option (ii)? Well, importing more and more of the world every year to boost GDP is increasingly off the cards: people are starting to work out that per capita GDP is partly negatively correlated with this, and if continued, it might lead to a British Trump. Or a second one, depending on your viewpoint.

So this leaves you option (iii): debt. Lots more of it. Let’s pump more into the stagnant corpse of the British economy so it makes a “wheeeee” sound as it leaks out, which in the short term voters will mistake for actual, real, growth, not just debt-fulled GDP expansion. This is basically all you have left at this stage.

Combine this with a recent collapse in money supply after the unprecedented interest rate hikes: the one thing that a government fears, other than scary monsters, is deflation - as given the unprecedented debt levels we have as a country, this could easily spiral into outright default, which is unthinkable. Hey presto, you have the perfect rationale for the government to initiate a final, gratuitous debt-binge, before the whole thing inevitably collapses, like a banker on cocai….(ok, might stop that metaphor before you get the wrong impression of my former life in banking).

So, as a politician, how are you going to do this, and get the debt pumps flowing so all those lovely votes will flow after them? Well, by leaning on banks to lend. And where will this debt go? Well ultimately obviously into lunch-expense accounts for bankers, but first…into housing.

There could be a major geo-political event that means this doesn’t happen - this process is not inevitable. Xi Jinping might fancy an extended summer holiday in Taiwan (and take the People’s Liberation Army with him as a special treat - good beaches apparently). The Houthis might decide to invade Wales. New Zealand might invade Australia. Or the bubble may pop through subconscious political hari-kari. This argument does suppose that politicians have some capacity for rational thought left, which is not a given. Who knows.

House prices will go down eventually. Our fiat current currency system is going to collapse - it’s simple mathematics. But, what’s my short-term base case - ie what is probably going to happen to house prices in the next two years? Well, they'll probably go up.

And why? See above.