Credit bubble, globalisation and statistics
This column has looked at the causes of the Great Recession before, but according to Dr Morgan, the bubble was caused by globalisation - Western companies off-shored their manufacturing to developing nations, making huge profits for both Western companies and the new manufacturers: the profits were recycled through the banks and mortgage companies through too-cheap loans. When the music stopped playing, the loans went bad and the banks imploded (quickly passing on the bad loans to the governments (and ultimately the tax-payers) that bailed them out. As Dr Morgan states, 'The massive escalation in Western indebtedness is one amongst a host of indicators of a state of mind which has elevated immediate consumption over prudence throughout much of the world. Short-term thinking is blinding us to critical longer-term risks. The West is in deep (and perhaps irreversible) trouble because it has consumed more, just as it has produced less.' It is interesting that a number of Western companies are now attempting to bring home some of their manufacturing facilities, but the skills and the jobs have already been lost - possibly gone forever.
With interest rates at or near zero in the West (and Japan), and Quantitative Easing in the trillions of dollars world-wide, we are now busily re-inflating the credit bubble, ready for the next crash. Dr Morgan points out that governments (including the UK, US, France, Spain, Italy and even Germany) have systematically shifted liabilities (including for state pensions and future medical-care) off their balance sheets. However, if these liabilities were to be correctly identified and analysed, the resultant debt ratios are 'large enough to scare small monkeys.' The US, in particular, is bust.
Energy - the critical equation
Tim Morgan points out in his final chapter that economics is not, after all, about money, but is about energy. Food, work and the energy-rich minerals such as coal, oil and gas are just manifestations of the same thing, while money is just a way of 'tokenising' the purchase of energy or the products of energy such as goods or food.
Dr Morgan suggests that the value of money will be steady if the availability of energy continues to keep pace with demand. Essentially, if energy supplies dwindle (for example due to the passing of 'peak oil') then energy will become progressively more expensive, leading to increases in costs of everything else (not just the electricity and gas to heat our homes, but also the food we eat and the furniture we sit on).
According to Dr Morgan, it is possible to argue that 'the current chapter in economic history amounts to nothing more than a one-off event' (perhaps lasting 300 years, 1850-2150) 'in which mankind has squandered a multimillion-year energy inheritance in an evolutionarily-brief moment of history.'
However, Dr Morgan's analysis is slightly more nuanced than that given above: He suggests that while the amount of 'energy in the ground' will continue to increase with further exploration, the difficulty and cost with which this can be produced will increase yet faster. Energy will become progressively more expensive since we have already plucked the low-hanging fruits.
Optimists suggest that there will be a technological solution (fusion, or fracking or some other future energy source). However, Dr Morgan counters in pithy style: 'this argument is essentially equivalent to the statement that, if one locked up some boffins in a bank vault with enough cash and a powerful enough computer, they would eventually materialise a ham sandwich.' Furthermore, 'the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.' 'There... goes the car, the holiday, the bigger home, the MP3, the meal out, toys for the children, the afternoon at the golf club or the soccer match.... our consumerist way of life is over.' His final conclusion is that we have already reached the tipping point and that precipitous descent is now unavoidable.
Please make your preparations accordingly.
1 'Perfect Storm - energy, finance and the end of growth' Dr Tim Morgan, Global Head of Research at Tullett Prebon.
