Merv presses the Panic button – incoming fire observed from all points

It’s not often you hear the early warning sirens go off in finance. They just did, when Mervyn King  said this

The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all
affected. Only the governments directly involved can find a way out of the crisis. But here in the UK, we must try to bolster the resilience of our financial system, better to withstand the
storms that may come in our direction.

What he said was there is little Britain can do to avert this shitstorm. It’s not just banks that need to take actions – for families around Britain the message is equally clear. Get out of debt, acquire no more, and for God’s sake live within your means. If that means beans on toast for the next couple of years then do it. And cancel Christmas if it means going into debt. No spending tastes as good as as debt-free feels when the wolves are howling at the door.

The world doesn’t owe you a living. It isn’t fair that other people get away with things you can’t, but that’s not a reason to give up the fight. A hostile world looks after people that look after themselves. Entitlements can be taken away and debt means someone owns you because they have a claim on your future work…

There may be opportunities for people prepared to fly into the economic storm, but these opportunities will come with stupendous risk. Many will lose their fortunes in it. I may well be one of them, perhaps left only with non-financial investments after the rubble stops falling.

I plan to invest into this shitstorm, because since I have only started investing post-credit-crunch, I do not have much to lose, and the potential gains if I survive the storm and reach the sunlit uplands are high. At no time in the last decade have valuations generally been this good, and they will probably get better when the Euro finally blows. In that time it will be people who hold an internal reference point that can hold their heads, because the storm will mask any external references.The falcon will no longer hear the falconer amidst the noise, and there is no riskless asset class any more that you can measure things against.

One of the obvious questions we could ask ourselves are how did we get here? The clumsy but talented Robert Peston will presumably ask this in his upcoming TV programme How the West Went Bust. He favours one possible explanation.

The overspending hypothesis

We overspent – basically the west got its credit card out and spent like drunken sailors, inflating an illusory increase in living standards without creating the extra wealth to underpin such an increase in living standards.

That is one possible explanation, however, there are other, more troubling possibilities.

The Limits to Growth/Peak Oil hypothesis

One of those was flagged up in a previous crisis nearly four decades ago, in particular in the 1972 report Limits to Growth by the Club of Rome which was one in the eye for the endless boosters who claim that the solution to all economic problems are ‘human ingenuity’. Yes, Warren Buffet, I’m talking about you too 🙂

Basically it postulated that human society needs a certain amount of resources from the world, and that the rich world was using these at a rate higher than could be sustained or renewed. For instance until 1950 human agriculture was generally renewable, whereas now one of our basic requirements, food, is produced by a process that makes a lot more output per worker. However, it does that at the cost of severe degradation of the soil, which used to be in balance with the crops, it uses water unsustainably. Two egregious examples of that are mining groundwater faster than it is renewed in the United States Ogalalla Aquifer and in India in the Punjab where the water table is falling at about a metre a year.

If the components of the limits to growth scenario are significant or increasing, then the prognosis for industrial economics are very bad indeed. Some elements of modern economics are predicated on continual growth. We could probably change these, after all human societies up to the Industrial Revolution managed economically in what was a fairly steady-state and sustainable balance with their environments. However, the experience of many people was certainly not the same as that which most Western democracies feel they are entitled to. Some of the credit card problem could in fact be the attempt by politicians to maintain the entitlements in the face of Limits to Growth problems.

I am going to take a chance on the issues being more a credit card problem, and take note of Jacob no longer ERE that empires fall over longer time-spans than in the movies. However, I have hedged some of my bets there with non-financial investments, because it’s not as clear-cut for me as it is for others.

It’s going to be a rough ride. People are already running for the exit, and I will be pushing past them into the maelstrom. I will lose a lot of money buying into the storm, but I hope to gain even more as it passes in the long years to come. There are no guarantees, however – I could be tossing cash into the fire. However, if the endgame is nigh for industrial economies, then even cash will lose its value. Germans know this already, which is why they aren’t rushing for a second bite of the cherry…

Another question we should really ask ourselves is how come we have become such a greedy bunch of SOBs as to always want the amount of Stuff we can buy to increase? Take a butcher’s hook at this article, telling us breathlessly

Families face ‘lost decade’ as spending power suffers biggest fall since 1950s

That sounds pretty rough, no? Okay, better than that flesh-eating zombies are coming out of Britan’s cemeteries at night and eating our children, but still pretty bad news. Until we read later on

Real average household incomes will be no higher in 2015-16 than in 2002-03, meaning middle-income families will have worked for more than a decade without any increase in living standards.

What exactly do they have against 2002? I mean if they said families living standards were no higher than 1962, when Britain heated its homes with coal fires and rationing had only just ended, then maybe. But 2002? I don’t remember 2002 was that terrible. People, particularly of a religious persuasion, sometimes used to take time out to give thanks for what they had. We should perhaps learn from that and stop being so damned greedy. 2002 was just fine. You may not have had a Kindle or an iPhone then, but if you measure the quality of your life against a yardstick of consumer goods them maybe you need to take a look in the mirror one morning and ask yourself if you’re on the right track.