End of the world as we know it

Ac­cord­ing to a vis­it­ing speaker, the world is on the brink of fi­nan­cial ar­maged­don.

Element - - Outside the box - Byandy Ken­wor­thy

Warn­ing: the fol­low­ing ar­ti­cle might freak the be­jeezus out of you.

It of­ten pays to think the un­think­able, if only to check the as­sump­tions on which we make our de­ci­sions.

Take money, for ex­am­ple. Most of us work on the as­sump­tion that the fi­nan­cial sys­tem will con­tinue to work pretty much as it does now. But what if that as­sump­tion is wrong?

Ni­cole Foss has just com­pleted a speak­ing tour of New Zealand, and she thinks it is. She is co-ed­i­tor of The Au­to­matic Earth blog, com­bin­ing eco­nom­ics, pol­i­tics and world af­fairs. She is also a for­mer Re­search Fel­low at the Ox­ford In­sti­tute for En­ergy Stud­ies. She be­lieves we are about to en­ter a world­wide Great De­pres­sion at least as se­vere as the one that rav­aged world economies in the early 1930s. The rea­sons, she ar­gues, lie in the roots of hu­man psy­chol­ogy and the way money and banks work, es­pe­cially how they have worked in the last few decades.

Foss says that all the many forms of money: whether it is hard cash, a cheque or the num­bers in your ac­count, are prom­ises made on trust that give the holder the po­ten­tial to make fu­ture claims on real re­sources. We ac­cept them in trade in an­tic­i­pa­tion that at some point the holder can trade them at the go­ing rate for real things.

At any one time only a few peo­ple choose to take their money from the bank and spend it. So rather than just pile the rest up, banks make more money by lend­ing it out. The process ef­fec­tively mul­ti­plies the money, far be­yond the ac­tual phys­i­cal cash float­ing around in the world: it is listed in your ac­count for when you need it, but ad­di­tional peo­ple now also have ac­cess to what are in re­al­ity the same funds, with an agree­ment to pay them back when re­quired, with in­ter­est.

Over the years, fi­nan­cial in­sti­tu­tions of all kinds have made this process into a mind-bog­gling web of high-speed global trans­ac­tions. This mas­sive mul­ti­ply­ing ma­chine has helped ac­cel­er­ate the eco­nomic growth of many na­tions, and made some peo­ple very rich. It has rad­i­cally in­creased op­por­tu­ni­ties for or­gan­i­sa­tions of all kinds and in­di­vid­u­als to bor­row, es­pe­cially in terms of mort­gages, the largest form of debt most peo­ple get into. And it has dra­mat­i­cally in­creased the amount of po­ten­tial fu­ture claims on re­sources in the form of the money cur­rently cir­cu­lat­ing.

Ob­vi­ously, the banks have a prob­lem if ev­ery­body wants their money back at the same time, as hap­pened in the early 1930s. They must then try and re­cover enough of the money they loaned out, or bor­row more to come through on all their prom­ises and sur­vive. If that doesn’t work, banks col­lapse, as hap­pened all over the world in 2008 when many fi­nan­cial in­sti­tu­tions re­alised that thou­sands of mort­gages in the sys­tem were un­likely ever to be re­paid.

The main thrust of Foss’ ar­gu­ment is that the hous­ing crash of 2008 is just a fore­run­ner to a to­tal break­down in the trust that the en­tire money sys­tem re­lies on. Be­cause un­der­neath all our fi­nan­cial wiz­ardry, and mostly ob­scured by it, lies the fact that the ac­tual re­sources un­der hu­man con­trol have not been in­creas­ing at any­thing like the rate that this gi­gan­tic bub­ble of money has grown.

“The re­sult is that there are now many more claims to wealth, than there is ac­tual wealth,” ex­plains Foss. “We are play­ing a gi­gan­tic game of mu­si­cal chairs, with very few chairs. When the mu­sic stops those who un­der­stand the game are go­ing to make for the chairs im­me­di­ately. And ev­ery­body else will be out of the game.”

The more peo­ple act on the fear that they are about to lose their wealth and try to con­vert their money into real things, the more likely the stam­pede will be­gin. And in the mid­dle of all this are the spec­u­la­tors of the fi­nan­cial mar­kets, who can se­verely desta­bilise or com­pletely bank­rupt whole economies by rapidly pump­ing money out of them if they be­come fear­ful about that coun­try’s fi­nan­cial fu­ture.

Right now this kind of fear is be­ing fu­elled by the spec­ta­cle of the global fi­nan­cial sys­tem strug­gling to deal with the vast amounts of debt owed by coun­tries like Ire­land, Greece and Spain. And Foss be­lieves this fear, and the re­sult­ing events, will soon over­whelm the var­i­ous bailout deals be­ing made.

The re­sult­ing global fi­nan­cial col­lapse would stall in­ter­na­tional trade for years, re­strict im­ports and ex­ports, in­crease un­em­ploy­ment, tax­a­tion and in­ter­est rates si­mul­ta­ne­ously and leave gov­ern­ments strug­gling for le­git­i­macy.

She be­lieves we are about to en­ter a world­wide Great De­pres­sion at least as se­vere as the one that rav­aged world

economies in the early 1930s.

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