Meltdown
How close are we to Systemic collapse of the global financial system?
A presentation by Dr Mike Haywood
mike@mikehaywoodart.co.uk
Oil is the fuel on
which the Global
Economy runs and
credit is the grease
•Start of the use of fossil fuels
• and fractional reserve banking
The hydra with five heads
Debt Mountain
Population growth
Pension time bomb
Peak oil
Climate change
The hydra with five heads
Head I
Global Debt
Mountain
The Debt Mountain
Someday soon all
this will be yours
UK Post War
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Government debt high
State benefits paid out comparatively small
No NHS, introduced in 1948
Relatively simple financial system
Business Profits funded expansion
High personal Income, spending out of income,
saving high
Personal debt extremely low
Then, over decades
Personal debt grew, saving fell
Computerisation of Banking system
Delusion that creation of debt = the creation of
wealth
Public sector mushroomed
Less prudent banking practices evolved
If you include unfunded state pension liabilities, public
sector pensions , private finance initiatives
UK National Government debt is over £3
trillion or
£3,000,000,000,000
Every day, UK National debt increases by £345,800,000.
As the government draws its income from much of the
population, government debt is an indirect debt on future
UK taxpayers
UK National Debt
Unfunded Pensions for:Police
Armed services
M.O.D
Teachers
Civil servants
MP’s
Taxmen
NHS workers
Doctors
The green segments are linked to inflation, so cannot
be eroded
Dentists
away by a bout of higher prices. Prices are in £bn
- estimates
Social
Workers
from experts used for off-balance sheet items (the Government
Quango employees
has in past only rarely provided official figures)
US
WE DON’T
SPANK THEM
ANYMORE. WE
JUST TELL
THEM HOW
MUCH THEY
OWE TO THE
NATIONAL
DEBT
Individual personal Debt
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Total UK personal debt…. £1,452 bn
Total secured lending……. £1,236 bn
Average household debt is £8556
excluding mortgages
Average household debt is £57,624
including mortgages
Bottom Line….Who has caused the the
UK National debt mountain
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Promises made by politicians over the past century
pledging unsustainable future benefits to be paid by later
generations. These benefits include
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the State Pension, introduced in 1908,
the NHS, in 1948,
unfunded public sector pensions
Burgeoning Social security benefit costs
The willing cooperation of the Banking Sector to fund
these promises, using FRB and electronic fiat currency,
incentivised by short term bonus structure
What causes financial crises
Some inter-related oft-quoted systemic
causes……
 Easy credit, causing credit bubble
 Low interest rates
 Asset bubbles
 Weak and fraudulent underwriting
 Predatory lending
 Deregulation
 And…………..
What causes financial crises
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……Increased individual debt burden
Financial innovation and complexity
Incorrect pricing of risk and poor risk models
Failure of economic models
Managers' capitalism
Failure of rating agencies
Creative accounting procedures, mark to market,
extend and pretend
And……
What causes financial crises
Some human and non systemic causes
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Greed, lust for power, lying, fraud, lack of
accountability, the complete disregard for the
rule of law and subsequent exposure
Change of public perceptions
Changes in social attitudes
Transparency… financial state of Bank
becomes public knowledge
Insider whistle blowing and leaks
Loss of confidence
But fundamentally what is really
causing this financial crisis
The real systemic causes that are rarely discussed …
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Fractional reserve banking system
The rising price of oil during economic growth
Financial innovation and complexity
Investors (e.g. pension funds) who want high yields to pay
benefits to a burgeoning baby boomer population
Payment of interest on debt requires economic growth,
which requires more energy
Future income insufficient to pay interest on debt and leave
enough to pay retired baby boomers
Financial illiteracy of general public
Changes in social attitudes about debt
The interconnection of Global Financial risks
Powerful vested interests wanting to maintain the status quo
Nothing has been done to address these issues
The importance of money
Money is the foundation of the
economy and society
'Money has no motherland; financiers
are without patriotism and without
decency; their sole object is gain‘
Napoleon Bonaparte
Quotes about Bankers and Banks
Henry Ford…… “It is well enough that the people of this
nation do not understand our banking and monetary
system, for if they did, I believe there would be a
revolution before tomorrow morning." -
Who creates Money
Coins………….Royal Mint
Bank notes…Bank of England,
the UK Central Bank
These account for 3% of the
total money supply . Where
is the rest of the 97%?
97% is electronic money that exists
as entries in Bank Computer records
Fractional Reserve Banking
In a speech on October 25th, the
Governor of the Bank of England,
Mervyn King said “of all the many
ways of organising banking, the worst
is the one we have today.
“To work, this financial alchemy
requires the implicit support of the tax
payer.”
He said that possible remedies included
not just breaking up banks, but also
“eliminating fractional reserve
banking”
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Fractional Reserve Banking
Fractional Reserve Banking
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Whenever a bank gives out a loan in a fractionalreserve banking system, a new sum of digital money
is created
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Only a fraction (8% or less) of a bank's demand
deposits (cash and other highly liquid assets) are
kept as reserves available for withdrawal
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Due to the prevalence of fractional reserve banking,
the broad money supply of most countries is a
multiple larger than the amount of base money
created by the country's central bank.
Fractional Reserve Banking
When a bank makes a loan, it increases the
amount of money in the hands of the public,
by increasing total amount of electronic bank
deposits….. And vice versa, when a loan is
repaid, money is destroyed
Interest must be paid with more £’s, ie more
debt
Fractional Reserve Banking
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Why does the Government support this “alchemy”?
Because the Government needs far more money
than that raised by taxes, so they borrow it
Consequences…… new £’s dilute value of old £’s
in the economy, prices go up…….inflation
Who are the gainers?… the Government and the
Bankers. Government can tax without people
understanding they are being taxed. Bankers
collect perpetual interest on nothing…. A river of
unearned wealth
Who are the losers?… the citizens and future
generations of taxpayers
Quotes about Bankers and Banks
“Give me the right to issue and control a Nation’s
money and I care not who governs the Country”
Meyer Rothschild, International banker (1774 1812)
Quotes about Bankers and Banks
Sir Josiah Stamp, Director, Bank of England,
1940….. “Bankers own the earth; take it away from
them but leave them with the power to create
credit; and, with a flick of a pen, they will create
enough money to buy it back again... If you want to
be slaves of bankers and pay the cost of your own
slavery, then let the bankers control money and
control credit. Take this great power away from
them and all great fortunes like mine will disappear,
and they ought to disappear, for then this would be
a better and happier world to live in. But if you want
to continue to be slaves of the banks and pay the
cost of your own slavery, then let bankers continue
to create money and control credit.”
Financial innovation
Asset backed securities
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Mortgage loans, home equity release loans,
home equity lines of credit (Before the crisis, Moody’s Rating
agency, had given AAA ratings to 42,625 mortgage-backed securities, the same
seal of approval U.S. Treasury bonds get. Of those rated in 2006, 83 percent
have been downgraded)
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Student loans (In US, student loan debt has now surpassed all
outstanding credit card debt )
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Credit cards debt
Car loans
Aircraft leases
Royalty payments
As reported in The Times on September 15, 2008, the
"Worldwide credit derivatives market was valued at
$62 trillion”
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Growth for the sake of growth is the ideology of
the cancer cell. - Edward Abbey
The hydra with five heads
Head 2
Population growth
In 1950, the
World
population was
2 billion
There are now 6.5
billion
(6,500,000,000)
people in the World,
all becoming more
and more addicted
to oil
World Population
Every second, 7 babies are born, 4 people
die, 3 extra humans in the World
Every day, there are 250,000
extra humans in the World
That’s the population of
Cornwall every 2 days
70 million every year
The hydra with five heads
Head 3
Pension time bomb
Growing population of baby boomers,
born between 1946 and 1964
Over 25% of Devon’s
Population is retired
Global Pensions 01 Dec 2010
The pension plans of the world’s largest
multinationals have fallen further into deficit
despite record company contributions, new
research shows.
The European Pensions Briefing 2010 report by
consulting actuary LCP, found the aggregate
accounting deficit stood at €160bn ($209bn) at
the end of September 2010, up from €150bn at
the end of last year.
Universities to change their deficit-hit
pension fund
Reuters July, 2010
British universities have won a key battle in efforts
to restructure the 30 billion pound pension
scheme for academics after an executive
committee backed their plan to tackle a £17
billion deficit as of March.
Bottom Line
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Anyone who does not work will not survive unless they
are supported by someone who does work. This has
always been what happens. People who don’t work
include
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Retired, receiving occupational, private and state
pensions
Children
Sick
Those at school and university
Unemployed
Very wealthy who have sufficient investment income
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“Anyone who believes exponential growth
can go on forever in a finite world is either
a madman or an economist.
Kenneth Boulding, economist
The hydra with five heads
Heads 4 & 5
Peak oil
Climate change
So what is ‘Peak Oil’?
• Consumers are only interested in delivery flows
• Many commentators talk of reserves and forget flows
• Reserves are only useful as flows
Peak oil is the point when worldwide
production of conventional crude oil peaks
World population growth
Climate change
China's oil consumption is expected to grow
by 7.5% per year for the next 20 years
4 fold
Is the Financial Crisis over?
Why will epicentre of collapse
probably be USA
US economy represents 25% of global economy
Baltic dry index
Ongoing US Financial crises
1. The mortgage debt crisis
2. The sovereign debt crisis
3. The bank failure crisis
4. The city and state debt crisis
5. Dependency on foreign oil imports
Playing field
Much of UK infrastructure predates the
invention of the internal combustion engine
Most of US infrastructure has been built
after the invention of the internal combustion
engine with cheap oil
You can’t go anywhere in the States without a car
The US Housing Market
The world’s largest single asset
class in value is in deep trouble
The price of crude oil
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13.78 percent of U.S. mortgage loans now delinquent or
in foreclosure
There is about $14.2 trillion in total U.S. mortgage debt
outstanding. There are about $8.9 trillion in total U.S.
mortgage-related securities. The volume of pooled
mortgages stands at about $7.5 trillion. About $5 trillion
of that is securitized or guaranteed by government
sponsored enterprises or government agencies, the
remaining $2.5 trillion pooled by private mortgage
conduits. Mortgage backed securities can be considered
to have been in the tens of trillions, if Credit Default
Swaps are taken into account.
US Commercial Property
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$3.5 Trillion In US Commercial Real Estate Debt
What is a Financial Crisis?
Levels of severity of financial crises
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Bursting of asset bubbles such as property,
stock markets, commodity prices
Collapse of large financial institutions
Collapse of shadow banking system
(investment banks and hedge funds)
Sovereign debt defaults
Currency crises
Credit crunch
Bank bankruptcy
Series of minor Bank runs
All of the above, cause loss of paper wealth but real economy
may continue. The next crisis is potentially catastrophic
Systemic collapse of
Global financial system
What happens in Systemic collapse
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Internet outages
Schools and universities closed
Suspension of full banking activity for days
Nationalisation of banks
No or limited withdrawals from cash machines
Credit/debit cards won’t work
Petrol stations running out of fuel
Mass disorder, panic, riots
Martial law imposed, curfews
Rise in popularity of extreme political parties
Total collapse of old order followed by a command
economy and loss of personal freedom
Near-total unravelling of the socio-political order.
Local Resource wars
Generational conflict
Opportunities
Solutions
We have to learn to do 4 things fast
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Learn to live without fossil fuels
Adapt to the end of economic growth as
we have known it
Support 7 billion human beings and
stabilize the population at a sustainable
level
Deal with our legacy of environmental
destruction
Is this going to happen?
How can we prevent another crisis in
the future?
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Abolish fractional reserve banking
Replace with……
full reserve banking
modern Islamic banking
or something completely different…. a private,
asset-based global currency
The State and corporate cartels have every
incentive to maintain the status quo at all costs ,
so change will probably come from
unconventional innovations
Some Recommended reading
Post carbon reader
 Chris Martenson’s crash
course for building resilience
 New Economics Foundation
 Positive Money
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The End