According to a visiting speaker, the world is on the brink of financial armageddon. 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.
What to do:
Nicole Foss’ advice is essentially that propounded by Gil Scott Heron: “Panic now and avoid the rush”:
minimise your exposure to the risk by minimising debt, and take as much of your own money out of the system and turn it into something useful before it is too late.
According to Foss, the decades to come will be necessarily smaller scale, local and a great deal more self-sufficient. Her message is be informed, and be prepared. Of course, whether you believe her or not is up to you.
Check out her videos in the column to the right of this article.
By Andy Kenworthy