Inside Job: what's the deal with the credit crisis?

Yesterday we finally got around to watching Inside Job (despite having recommended it all the way back here). If you, like me, often feel out of your depth in discussions of banking, finance, stock markets and the global economic instability of the last few years, then this is the film for you. Bringing dry and complex details into vivid comprehensibility, this film cuts through the bafflement factor and, via a series of fascinating and jaw-dropping interviews with key players, lays out many of the key threads that that led to the headline-grabbing events of 2008 and its aftermath (which continues to play out today).

The film won best documentary at the 2010 Academy Awards and currently sits at 97% on Rotten Tomatoes. It is easy to see why. Tackling an important subject with insight, emotion and sensitivity, this film is pure outrage mixed with damning evidence of systemic problems in the US financial industry from traders to CEOs, from regulators to investors, from president to ratings agencies, from academic economists to congress. There is plenty of blame to go around. And yet, somehow, no one is in gaol for the greatest inside job in history.

And very little has changed.

Tunisia, Egypt and the food in your shopping trolley

Popular uprisings as seen recently in Tunisia and currently underway in Egypt usually have a complex network of contributing and enabling causes. One of the triggers in both cases may well have been a spike in food prices. Both Tunisia and Egypt import much of their food and have large segments of the population for whom food purchases comprise a hefty chunk of the weekly budget. A similar price spike in 2008 likely contributed to protests, rioting and unrest in at least sixteen countries.

Why the spike in food prices? That too is complex, but significant elements in the present mix include speculation, high oil prices and a string of weather-related disasters affecting crop production around the globe. Why speculation? Partially because of the cheap money being poured into major economies (or rather, into the financial system) and the unattractiveness of some alternatives in a downturn, that is, such speculation is one manifestation of the ongoing debt crisis that first publicly reared its head in 2008. Why high oil prices? Again, partially due to financial speculation, but this coming on top of long-term supply issues related to the peaking of conventional oil. Why crop failures? Many reasons here too, but among them are a string of destructive weather events consistent with predictions of climate change.

Yes, there are many other causes: repressive governments, rising economies shifting the balance of economic and political power, trends in global consumption patterns, biofuel and agricultural policies, local population growth and migration patterns, corporate interests, and of course the particular contours of various national histories and the actions and beliefs of certain influential individuals. But the triple converging crises of debt, depletion and degradation (also known as economy, energy and ecology) are likely to continue to contribute to these kinds of headlines.

So if you've noticed that some of the food in your shopping trolley has jumped in price recently, don't neglect to join the dots. What is a mild frustration to me in my wealth can mean the straw that breaks the camel's back for a nation closer to the edge. What can you do about it? All kinds of things, because it doesn't have to be this way.

"The next twenty years will be completely unlike the last twenty"

This is the first of six videos taking a total of 45 minutes to outline the ideas in Chris Martenson's "Crash Course". I don't agree with everything he says (for instance, he reduces "the environment" to "resources", making no mention of climate change or biodiversity decline) and some of the analysis is simplified (what do you expect in 45 minutes?), but this isn't a bad summary of the three interlocking crises on the horizon: economy, energy and ecology (I prefer the term ecology over "the environment").

I would love an economist to evaluate his analysis of debt and how money is created (which he skims over in this short version, but spends twenty minutes on in the full version, available here). This is the area with which I am least familiar and I have heard others characterise our money system in a similar way, but I wonder whether this is how experts would put it.

What good is Wall Street?

Much of what investment bankers do is socially worthless: "Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas. It is like a cancer that is growing to infinite size, until it takes over the entire body."

Forgive us our debts

Australian economist Steve Keen predicted the global financial crisis years ahead of when it broke, and doesn't think it is over yet, not by a long shot. He has given a somewhat lengthy and graph-heavy interview over here, in which he doesn't have a great deal of good news to offer.

For those without time to read it, he thinks the government response to the crisis (throwing lots of stimulus money at it) has mainly just masked the underlying debt problems (or rather deferred and increased them). America is already in a depression (hidden by misleading unemployment figures). A significant further period of deflation is inevitable. Australia (largely) avoided the bullet in 2008-09 through propping up a speculative property bubble which will come back to bite us (as speculative bubbles are wont to do). And he claims that the only responsible mitigation policies at this stage would be perceived to cause a crisis when really they would simply be unmasking the crisis that is currently ongoing. Here is his graphic analogy:

"[I]f my preferred remedies were enacted now, they would be blamed for causing an ensuing crisis, when in fact all they would do is make the existing crisis more obvious. I make the analogy between my situation and that of a doctor who has as a patient a comatose mountaineer who climbed too high without sufficient insulation and now has gangrene. If you operate before he regains consciousness, he might only lose a foot, but he’ll blame you for making him a cripple. If you wait till he regains consciousness and sees what the alternative might be, he’ll thank you for saving his life when you remove his leg.

"America in particular — but also much of the OECD — has substituted essentially unproductive Ponzi speculation for real productivity growth in the last four decades, which the rising debt bubble has obscured as it simultaneously allowed Americans to live the high life by buying goods produced elsewhere using borrowed money. There’s no way to come to terms with that without suffering a substantial fall in actual incomes."

He's a cheery chap. But then we get to the kicker: "I regard Peak Oil and Global Warming as far greater challenges to our species than the financial crisis — which I refer to sometimes as Peak Debt".

Keen is articulating something similar to the idea I put (briefly) here, namely, that of the three crises of economy, energy and ecology, the first is most immediate temporally, but is actually a smaller threat than the second, which in turn is closer to us but likely less significant in ultimate ramifications than the third (which, I would argue, is broader than climate change).

Fasten your seatbelts.

The party's over? Living on credit

So just how big is one trillion dollars? If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

- Michael Snyder, "3 Charts That Prove
We Are Living In The Biggest Debt Bubble In The History Of Our World".

Over the last few months, I've been starting to get a sense of the significance of a debt-based economy and why it is such a ludicrously bad idea. Effectively, living on credit only makes sense if you are confident that the future will be (economically) bigger than the past. This has proven to be true for the last sixty years (and especially for the last thirty, which is when the credit society has really got going), and yet the comforting image of year-over-year global economic growth has been fuelled by the creation of ever larger mountains of debt. Check out the linked article to get a sense of the scale of the issue in the US, though remember that many other countries have debts of proportional size (or larger).

While the bet we've been making with the future has held up so far, what was revealed in 2008 is the downside of this scenario. If we don't keep piling up more debt, we face a very nasty period of deleveraging, which could make the Great Depression look like a party. But the higher the debt levels get, the worse the hangover when we stop drinking from the debt bottle.

If infinite growth were actually possible, then perhaps this wouldn't be a problem (though it would still face the risk of systemic shock being made much worse by all the debt hanging around). But infinite economic growth on a finite planet is not possible. We are betting against the future and keep doubling down, making our ultimate inevitable loss many times greater.

I am not an economist nor an economist's son and perhaps I'm missing something crucial, but this doesn't really sound like good news to me.

The coming financial crisis and peak oil: two interviews

"I think a lot of governments are taking it very seriously but they are not mostly talking about it in public because nobody wants to frighten anybody. [...] But I think they understand perfectly well that peak oil is a reality."

- Nicole Foss (a.k.a. Stoneleigh from The Automatic Earth).

This podcast makes for sobering listening. It consists of two interviews. The second, and cheerier, one is with Antony Froggatt, Senior Research Fellow at Chatham House, who lays out the key trends in global energy resources. Froggatt helped to write a recent white paper by Lloyd's of London, titled "Sustainable energy security: strategic risk and opportunities for business" (executive summary can be found here).

From the forward: "We have entered a period of deep uncertainty in how we will source energy for power, heat and mobility and how much we will have to pay for it. [...] The bad times have not yet hit." In the interview, Froggatt discusses the problems with an economy based on just-in-time supply in a world that is no longer able to rely on cheap energy. He believes we may be heading for more supply crunches like 2008 in which the price spiked to almost US$150 (a five-fold increase in a matter of years). He then partially attributes the following economic downturn to this spike.

He points to three fundamental trends in the energy sector:

(a) Declining oil output from existing wells: "the current output from existing oil production globally is decreasing by about 4% per year. So just to maintain the current output for oil will require the discover and exploitation of a new Saudi Arabia every three years."

(b) Surging energy consumption in emerging economies: "If we carried on using energy in the same way we do at the moment, we would need 40% more of it by 2030."

(c) Increasing international recognition of the threat of climate change largely due to fossil fuel combustion.

All three combine to mean that "the age of cheap oil is over. [...] The current energy system will have to change". The only questions are when and how abruptly and smoothly this energy transition occurs. Previously, a transition on anything like this scale has only been achieved about once per century, and with momentous social and economic implications. We have mere years to achieve a larger transition than we've managed in the past only with concerted effort over many decades.

But that is the optimistic interview.

The first interview (transcript here) is with Nicole Foss (her background and credentials are summarised here), who calls herself a "big picture person". She also speaks of possible interactions between a further financial crisis and peak oil. However, rather than seeing rising oil prices undermining global economic growth, she sees a dangerous relationship in the other direction. She expects the next few years will witness a larger global credit crunch leading to a "greater depression" in which we'll look back at the 1930s as the good old days. She argues that the various government stimulus packages in 2008 merely postponed and made worse the inevitable deflationary period.

She is also very concerned about peak oil, but believes the timeframe for finance is shorter than for energy and so "finance is going to re-write the energy debate. [...] Demand collapse is going to set up a supply collapse. [...] Low prices are going to mean no investment, no exploration, no maintenance." So she predicts a double-whammy: a financial crisis for the next few years, which in turn will set up a longer and larger energy crisis. And she reminds us that being in debt during a major credit crisis isn't likely to be pretty: "When you have a large amount of indebtedness, the civilised methods of getting out of debt are likely to disappear." She is primarily talking about the US situation, but we live in a globalised world.

Listen with a grain of salt, but I'm not sure we can safely ignore these warnings.
The German article mentioned briefly in both interviews is here.