A presentation by Dr Mike HaywoodA presentation by Dr Mike Haywood

mike@mikehaywoodart.co.ukmike@mikehaywoodart.co.uk

MeltdownMeltdownHow close are we to Systemic collapse of the global financial system?How close are we to Systemic collapse of the global financial system?

Oil is the fuel on Oil is the fuel on which the Global which the Global

Economy runs and Economy runs and credit is the greasecredit is the grease

•Start of the use of fossil fuels Start of the use of fossil fuels

• and fractional reserve bankingand fractional reserve banking

TheThe hydra with five headshydra with five heads

Debt MountainDebt Mountain

Peak oilPeak oil

Population growthPopulation growth

Climate changeClimate change

Pension time bombPension time bomb

TheThe hydra with five headshydra with five heads

Head IHead IGlobal Debt Global Debt

MountainMountain

The Debt MountainThe Debt Mountain

Someday soon all this will be yours

UK Post WarUK Post War Government debt highGovernment debt high State benefits paid out comparatively smallState benefits paid out comparatively small No NHS, introduced in 1948No NHS, introduced in 1948 Relatively simple financial systemRelatively simple financial system Business Profits funded expansionBusiness Profits funded expansion High personal Income, spending out of income, High personal Income, spending out of income,

saving highsaving high Personal debt extremely lowPersonal debt extremely low

Then, over decadesThen, over decades Personal debt grew, saving fellPersonal debt grew, saving fell Computerisation of Banking systemComputerisation of Banking system Delusion that creation of debt = the creation of Delusion that creation of debt = the creation of

wealthwealth Public sector mushroomedPublic sector mushroomed Less prudent banking practices evolvedLess prudent banking practices evolved

UK National Government debt is over £3 UK National Government debt is over £3 trillion ortrillion or

£3,000,000,000,000£3,000,000,000,000

If you include unfunded state pension liabilities, public If you include unfunded state pension liabilities, public sector pensions , private finance initiativessector pensions , private finance initiatives

Every day, UK National debt increases by £345,800,000. Every day, UK National debt increases by £345,800,000. As the government draws its income from much of the As the government draws its income from much of the

population, government debt is an indirect debt on future population, government debt is an indirect debt on future UK taxpayersUK taxpayers

UK National DebtUK National Debt

The green segments are linked to inflation, so cannot be eroded The green segments are linked to inflation, so cannot be eroded away by a bout of higher prices. Prices are in £bn - estimates away by a bout of higher prices. Prices are in £bn - estimates

from experts used for off-balance sheet items (the Government from experts used for off-balance sheet items (the Government has in past only rarely provided official figures)has in past only rarely provided official figures)

Unfunded Pensions for:-PoliceArmed servicesM.O.DTeachersCivil servantsMP’sTaxmenNHS workersDoctorsDentistsSocial WorkersQuango employees

US

WE DON’T SPANK THEM

ANYMORE. WE JUST TELL THEM HOW MUCH THEY OWE TO THE

NATIONAL DEBT

Individual personal Debt Individual personal Debt

Total UK personal debt…. £1,452 bn Total UK personal debt…. £1,452 bn Total secured lending……. £1,236 bnTotal secured lending……. £1,236 bn Average household debt is £8556 Average household debt is £8556

excluding mortgagesexcluding mortgages Average household debt is £57,624 Average household debt is £57,624

including mortgagesincluding mortgages

Bottom Line….Who has caused the the Bottom Line….Who has caused the the UK National debt mountainUK National debt mountain

Promises made by politicians over the past century Promises made by politicians over the past century pledging unsustainable future benefits to be paid by later pledging unsustainable future benefits to be paid by later generations. These benefits include generations. These benefits include • the State Pension, introduced in 1908, the State Pension, introduced in 1908, • the NHS, in 1948, the NHS, in 1948, • unfunded public sector pensionsunfunded public sector pensions• Burgeoning Social security benefit costsBurgeoning Social security benefit costs

The willing cooperation of the Banking Sector to fund The willing cooperation of the Banking Sector to fund these promises, using FRB and electronic fiat currency, these promises, using FRB and electronic fiat currency, incentivised by short term bonus structureincentivised by short term bonus structure

What causes financial crisesWhat causes financial crises

Some inter-related oft-quoted systemic Some inter-related oft-quoted systemic causes……causes……

Easy credit, causing credit bubbleEasy credit, causing credit bubble Low interest ratesLow interest rates Asset bubbles Asset bubbles Weak and fraudulent underwritingWeak and fraudulent underwriting Predatory lendingPredatory lending DeregulationDeregulation And…………..And…………..

What causes financial crisesWhat causes financial crises …………Increased individual debt burdenIncreased individual debt burden Financial innovation and complexityFinancial innovation and complexity Incorrect pricing of risk and poor risk modelsIncorrect pricing of risk and poor risk models Failure of economic modelsFailure of economic models Managers' capitalismManagers' capitalism Failure of rating agenciesFailure of rating agencies Creative accounting procedures, mark to market, Creative accounting procedures, mark to market,

extend and pretendextend and pretend And……And……

What causes financial crisesWhat causes financial crises

Some human and non systemic causesSome human and non systemic causes

Greed, lust for power, lying, Greed, lust for power, lying, fraud, lack of fraud, lack of accountability, the complete disregard for the accountability, the complete disregard for the rule of law rule of law and subsequent exposureand subsequent exposure

Change of public perceptionsChange of public perceptions Changes in social attitudesChanges in social attitudes Transparency… financial state of Bank Transparency… financial state of Bank

becomes public knowledgebecomes public knowledge Insider whistle blowing and leaksInsider whistle blowing and leaks Loss of confidenceLoss of confidence

But fundamentally what is really But fundamentally what is really causing this financial crisiscausing this financial crisis

The real systemic causes that are rarely discussed …The real systemic causes that are rarely discussed …

Fractional reserve banking systemFractional reserve banking system The rising price of oil during economic growthThe rising price of oil during economic growth Financial innovation and complexity Financial innovation and complexity Investors (e.g. pension funds) who want high yields to pay Investors (e.g. pension funds) who want high yields to pay

benefits to a burgeoning baby boomer population benefits to a burgeoning baby boomer population Payment of interest on debt requires economic growth, Payment of interest on debt requires economic growth,

which requires more energywhich requires more energy Future income insufficient to pay interest on debt and leave Future income insufficient to pay interest on debt and leave

enough to pay retired baby boomersenough to pay retired baby boomers Financial illiteracy of general publicFinancial illiteracy of general public Changes in social attitudes about debtChanges in social attitudes about debt The interconnection of Global Financial risksThe interconnection of Global Financial risks Powerful vested interests wanting to maintain the status quoPowerful vested interests wanting to maintain the status quo

Nothing has been done to address these issuesNothing has been done to address these issues

The importance of moneyThe importance of money

Money is the foundation of the Money is the foundation of the economy and societyeconomy and society

'Money has no motherland; financiers 'Money has no motherland; financiers are without patriotism and without are without patriotism and without decency; their sole object is gain‘decency; their sole object is gain‘

Napoleon BonaparteNapoleon Bonaparte

Quotes about Bankers and BanksQuotes about Bankers and BanksHenry Ford……Henry Ford…… “It is well enough that the people of this “It is well enough that the people of this

nation do not understand our banking and monetary nation do not understand our banking and monetary system, for if they did, I believe there would be a system, for if they did, I believe there would be a revolution before tomorrow morning."revolution before tomorrow morning." - -

Who creates MoneyWho creates Money

Coins………….Royal MintCoins………….Royal Mint

Bank notes…Bank of England, Bank notes…Bank of England, the UK Central Bankthe UK Central Bank

These account for 3% of the These account for 3% of the total money supply . Where total money supply . Where is the rest of the 97%?is the rest of the 97%?

97% is electronic money that exists 97% is electronic money that exists as entries in Bank Computer recordsas entries in Bank Computer records

Fractional Reserve BankingFractional Reserve Banking In a speech on October 25In a speech on October 25thth, the , the

Governor of the Bank of England, Governor of the Bank of England, Mervyn King said “of all the many Mervyn King said “of all the many ways of organising banking, the worst ways of organising banking, the worst is the one we have today.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 He said that possible remedies included not just breaking up banks, but also not just breaking up banks, but also “eliminating fractional reserve “eliminating fractional reserve banking”banking”

Fractional Reserve BankingFractional Reserve Banking

Fractional Reserve BankingFractional Reserve Banking Whenever a bank gives out a loan in a fractional-Whenever a bank gives out a loan in a fractional-

reserve banking system, a new sum of digital money reserve banking system, a new sum of digital money is created is created

Only a fraction (8% or less) of a bank's demand Only a fraction (8% or less) of a bank's demand deposits (cash and other highly liquid assets) are deposits (cash and other highly liquid assets) are kept as reserves available for withdrawalkept as reserves available for withdrawal

Due to the prevalence of fractional reserve banking, Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a the broad money supply of most countries is a multiple larger than the amount of base money multiple larger than the amount of base money created by the country's central bank.created by the country's central bank.

Fractional Reserve BankingFractional Reserve Banking

When a bank makes a loan, it increases the When a bank makes a loan, it increases the amount of money in the hands of the public, amount of money in the hands of the public, by increasing total amount of electronic by increasing total amount of electronic bank deposits….. And vice versa, when a bank deposits….. And vice versa, when a loan is repaid, money is destroyedloan is repaid, money is destroyed

Interest must be paid with more £’s, ie more Interest must be paid with more £’s, ie more debtdebt

Fractional Reserve BankingFractional Reserve Banking Why does the Government support this “alchemy”? Why does the Government support this “alchemy”?

Because the Government needs far more money Because the Government needs far more money than that raised by taxes, so they borrow itthan that raised by taxes, so they borrow it

Consequences…… new £’s dilute value of old £’s Consequences…… new £’s dilute value of old £’s in the economy, prices go up…….inflationin the economy, prices go up…….inflation

Who are the gainers?… the Government and the Who are the gainers?… the Government and the Bankers. Government can tax without people Bankers. Government can tax without people understanding they are being taxed. Bankers understanding they are being taxed. Bankers collect perpetual interest on nothing…. A river of collect perpetual interest on nothing…. A river of unearned wealthunearned wealth

Who are the losers?… the citizens and future Who are the losers?… the citizens and future generations of taxpayersgenerations of taxpayers

Quotes about Bankers and BanksQuotes about Bankers and Banks

““Give me the right to issue and control a Nation’s Give me the right to issue and control a Nation’s money and I care not who governs the Country”money and I care not who governs the Country”

Meyer Rothschild, International bankerMeyer Rothschild, International banker (1774 -(1774 -1812)1812)

Quotes about Bankers and BanksQuotes about Bankers and BanksSir Josiah Stamp, Director, Bank of England, Sir Josiah Stamp, Director, Bank of England,

1940…..1940….. “Bankers own the earth; take it away from “Bankers own the earth; take it away from them but leave them with the power to create them but leave them with the power to create credit; and, with a flick of a pen, they will create credit; and, with a flick of a pen, they will create enough money to buy it back again... If you want to enough money to buy it back again... If you want to be slaves of bankers and pay the cost of your own be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and slavery, then let the bankers control money and control credit. Take this great power away from control credit. Take this great power away from them and all great fortunes like mine will disappear, them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be and they ought to disappear, for then this would be a better and happier world to live in. But if you want a better and happier world to live in. But if you want to continue to be slaves of the banks and pay the to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue cost of your own slavery, then let bankers continue to create money and control credit.”to create money and control credit.”

Financial innovationFinancial innovationAsset backed securitiesAsset backed securities

Mortgage loans, home equity release loans, Mortgage loans, home equity release loans, home equity lines of credithome equity lines of credit ((Before the crisis, Moody’s Rating Before the crisis, Moody’s Rating

agency, had given AAA ratings to 42,625 mortgage-backed securities, the same 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 seal of approval U.S. Treasury bonds get. Of those rated in 2006, 83 percent have been downgraded)have been downgraded)

Student loansStudent loans ((In US, student loan debt has now surpassed all In US, student loan debt has now surpassed all

outstanding credit card debtoutstanding credit card debt ) )

Credit cards debtCredit cards debt Car loansCar loans Aircraft leasesAircraft leases Royalty paymentsRoyalty payments

As reported in The Times on September 15, 2008, the As reported in The Times on September 15, 2008, the "Worldwide credit derivatives market was valued at "Worldwide credit derivatives market was valued at

$62 trillion”$62 trillion”

Growth for the sake of growth is the ideology of Growth for the sake of growth is the ideology of the cancer cell. - Edward Abbeythe cancer cell. - Edward Abbey

TheThe hydra with five headshydra with five heads

Head 2Head 2

Population growthPopulation growth

In 1950, the In 1950, the World World

population population was 2 billionwas 2 billion

There are now 6.5 There are now 6.5 billion billion

(6,500,000,000) (6,500,000,000) people in the World, people in the World, all becoming more all becoming more and more addicted and more addicted

to oilto oil

World PopulationWorld PopulationEvery second, 7 babies are born, 4 people Every second, 7 babies are born, 4 people

die, 3 extra humans in the Worlddie, 3 extra humans in the WorldEvery day, there are 250,000 Every day, there are 250,000 extra humans in the Worldextra humans in the WorldThat’s the population of That’s the population of Cornwall every 2 daysCornwall every 2 days

70 million every year70 million every year

TheThe hydra with five headshydra with five heads

Head 3Head 3

Pension time bombPension time bomb

Growing population of baby boomers, Growing population of baby boomers, born between 1946 and 1964born between 1946 and 1964

Over 25% of Devon’s Over 25% of Devon’s Population is retiredPopulation is retired

Global Pensions 01 Dec 2010Global Pensions 01 Dec 2010

The pension plans of the world’s largest multinationals The pension plans of the world’s largest multinationals have fallen further into deficit despite record have fallen further into deficit despite record

company contributions, new research shows. company contributions, new research shows.

The European Pensions Briefing 2010 report by The European Pensions Briefing 2010 report by consulting actuary LCP, found the aggregate consulting actuary LCP, found the aggregate

accounting deficit stood at €160bn ($209bn) at the accounting deficit stood at €160bn ($209bn) at the end of September 2010, up from €150bn at the end end of September 2010, up from €150bn at the end

of last year.of last year.

Universities to change their deficit-hit Universities to change their deficit-hit pension fundpension fund

Reuters July, 2010Reuters July, 2010

British universities have won a key battle in efforts British universities have won a key battle in efforts to restructure the 30 billion pound pension to restructure the 30 billion pound pension scheme for academics after an executive scheme for academics after an executive committee backed their plan to tackle a £17 committee backed their plan to tackle a £17 billion deficit as of March.billion deficit as of March.

Bottom LineBottom Line

Anyone who does not work will not survive unless they Anyone who does not work will not survive unless they are supported by someone who does work. This has are supported by someone who does work. This has always been what happens. People who don’t work always been what happens. People who don’t work includeinclude

Retired, receiving occupational, private and state Retired, receiving occupational, private and state pensionspensions

ChildrenChildren Sick Sick Those at school and universityThose at school and university UnemployedUnemployed Very wealthy who have sufficient investment incomeVery wealthy who have sufficient investment income

““Anyone who believes exponential growth Anyone who believes exponential growth can go on forever in a finite world is either can go on forever in a finite world is either a madman or an economist. a madman or an economist.

Kenneth Boulding, economist Kenneth Boulding, economist 

TheThe hydra with five headshydra with five heads

Peak oilPeak oil

Climate changeClimate change

Heads 4 & 5Heads 4 & 5

So what is ‘Peak Oil’?So what is ‘Peak Oil’?• Consumers are only interested in delivery flowsConsumers are only interested in delivery flows

• • Many commentators talk of reserves and forget flowsMany commentators talk of reserves and forget flows

• • Reserves are only useful as flowsReserves are only useful as flows

Peak oil is the point Peak oil is the point when worldwide when worldwide production of conventional crude oil peaksproduction of conventional crude oil peaks

World population growthWorld population growth

China's oil consumption is expected to grow China's oil consumption is expected to grow by 7.5% per year for the next 20 yearsby 7.5% per year for the next 20 years

Climate changeClimate change

4 fold4 fold

Is the Financial Crisis over?Is the Financial Crisis over?

Why will epicentre of collapse Why will epicentre of collapse probably be USAprobably be USA

US economy represents 25% of global economyUS economy represents 25% of global economy

Baltic dry indexBaltic dry index

Ongoing US Financial crisesOngoing US Financial crises

1. The mortgage debt crisis1. The mortgage debt crisis

2. The sovereign debt crisis2. The sovereign debt crisis

3. The bank failure crisis3. The bank failure crisis

4. The city and state debt crisis4. The city and state debt crisis

5. Dependency on foreign oil imports5. Dependency on foreign oil imports

Much of UK infrastructure predates the Much of UK infrastructure predates the invention of the internal combustion engineinvention of the internal combustion engine

Playing field

Most of US infrastructure has been built Most of US infrastructure has been built after the invention of the internal combustion after the invention of the internal combustion

engine with cheap oilengine with cheap oil

You can’t go anywhere in the States without a carYou can’t go anywhere in the States without a car

The US Housing MarketThe US Housing Market

The world’s largest single asset The world’s largest single asset class in value is in deep troubleclass in value is in deep trouble

The price of crude oilThe price of crude oil

13.78 percent of U.S. mortgage loans now delinquent or 13.78 percent of U.S. mortgage loans now delinquent or in foreclosurein foreclosure

There is about $14.2 trillion in total U.S. mortgage debt There is about $14.2 trillion in total U.S. mortgage debt outstanding. There are about $8.9 trillion in total U.S. outstanding. There are about $8.9 trillion in total U.S. mortgage-related securities. The volume of pooled mortgage-related securities. The volume of pooled mortgages stands at about $7.5 trillion. About $5 trillion mortgages stands at about $7.5 trillion. About $5 trillion of that is securitized or guaranteed by government of that is securitized or guaranteed by government sponsored enterprises or government agencies, the sponsored enterprises or government agencies, the remaining $2.5 trillion pooled by private mortgage remaining $2.5 trillion pooled by private mortgage conduits. Mortgage backed securities can be considered conduits. Mortgage backed securities can be considered to have been in the tens of trillions, if Credit Default to have been in the tens of trillions, if Credit Default Swaps are taken into account.Swaps are taken into account.

US Commercial PropertyUS Commercial Property

$3.5 Trillion In US Commercial Real Estate Debt$3.5 Trillion In US Commercial Real Estate Debt

What is a Financial Crisis?What is a Financial Crisis?

Levels of severity of financial crisesLevels of severity of financial crises Bursting of asset bubbles such as property, Bursting of asset bubbles such as property,

stock markets, commodity pricesstock markets, commodity prices Collapse of large financial institutionsCollapse of large financial institutions Collapse of shadow banking system Collapse of shadow banking system

(investment banks and hedge funds)(investment banks and hedge funds) Sovereign debt defaultsSovereign debt defaults Currency crisesCurrency crises Credit crunchCredit crunch Bank bankruptcyBank bankruptcy Series of minor Bank runsSeries of minor Bank runs

All of the above, cause loss of paper wealth but real economy All of the above, cause loss of paper wealth but real economy may continue. The next crisis is potentially catastrophicmay continue. The next crisis is potentially catastrophic

Systemic collapse of Systemic collapse of Global financial systemGlobal financial system

What happens in Systemic collapseWhat happens in Systemic collapse Internet outagesInternet outages Schools and universities closedSchools and universities closed Suspension of full banking activity for daysSuspension of full banking activity for days Nationalisation of banksNationalisation of banks No or limited withdrawals from cash machinesNo or limited withdrawals from cash machines Credit/debit cards won’t workCredit/debit cards won’t work Petrol stations running out of fuelPetrol stations running out of fuel Mass disorder, panic, riotsMass disorder, panic, riots Martial law imposed, curfewsMartial law imposed, curfews Rise in popularity of extreme political partiesRise in popularity of extreme political parties Total collapse of old order followed by a command Total collapse of old order followed by a command

economy and loss of personal freedomeconomy and loss of personal freedom Near-total unravelling of the socio-political order.Near-total unravelling of the socio-political order. Local Resource warsLocal Resource wars Generational conflictGenerational conflict

OpportunitiesOpportunities

SolutionsSolutions

We have to learn to do 4 things fastWe have to learn to do 4 things fast Learn to live without fossil fuelsLearn to live without fossil fuels Adapt to the end of economic growth as Adapt to the end of economic growth as

we have known itwe have known it Support 7 billion human beings and Support 7 billion human beings and

stabilize the population at a sustainable stabilize the population at a sustainable levellevel

Deal with our legacy of environmental Deal with our legacy of environmental destructiondestruction

Is this going to happen?Is this going to happen?

How can we prevent another crisis in How can we prevent another crisis in the future?the future?

Abolish fractional reserve banking Abolish fractional reserve banking Replace with…… Replace with…… full reserve bankingfull reserve banking

modern Islamic bankingmodern Islamic banking

or something completely different…. or something completely different…. a private, a private, asset-based global currencyasset-based global currency

The State and corporate cartels have every incentive The State and corporate cartels have every incentive to maintain the status quo to maintain the status quo at all costsat all costs , so change , so change will probably come from unconventional will probably come from unconventional innovationsinnovations

Some Recommended readingSome Recommended reading

Post carbon readerPost carbon reader Chris Martenson’s crash Chris Martenson’s crash

course for building resiliencecourse for building resilience New Economics FoundationNew Economics Foundation Positive MoneyPositive Money

The End