A Coming Pound Sterling Crisis?

November 17, 2008

A few days ago Willem Buiter asked How likely is a sterling crisis or: is London really Reykjavik-on-Thames?. He found it possible as Great Britain, though bigger than Iceland, has the same problems:

The risk of a triple crisis – a banking crisis, a currency crisis and a sovereign debt default crisis – is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

Over the last year the pound sterling already went down from €1.50 per pound to €1.15 and from $2.00 per pound to $1.50. Could that slump be only the beginning of a currency rout?

Following a funny rant on why he blogs in such long and winded posts, Buiter today adds a long and winded post to analyzes the possibility of a Sterling crisis.

Great Britain’s taxpayers will soon be owners of 60% of the Royal Bank of Scotland (RBS). With that ownership comes a lot of debt, about £2 trillion, and assets of unknown value. The additional net debt on Britain’s asset sheet could be huge.

At the same time Gordon Brown plans tax cuts, which, as the recent tax rebate in the U.S. has shown, are an ineffective, costly way of providing stimulus. As they will also increase Britain’s debt the markets might start to doubt Britain’s solvency and the value of the pound sterling.

Writes Buiter:

If there is doubt in the markets about whether the solvency gap of the banking system is smaller than the fiscal spare capacity of the government, we could have a UK public debt crisis. Fear of default would cause an across-the-board rush of out sterling assets.

[..] much of the debt of the banking system is foreign-currency-denominated rather than sterling-denominated (total foreign currency liabilities and assets of the banking system are each over 200 percent of annual GDP). With the foreign currency liabilities of the banking system likely to have shorter remaining maturity and more liquid than its foreign currency assets (these are banks, after all), the UK would be likely to face a (partial) sovereign debt crisis as well as a foreign exchange liquidity crisis, even if the government tried to inflate its way out of trouble.

Because the Bank of England cannot issue foreign currency reserves, and because sterling is no longer a serious global reserve currency, the lender of last resort has to fall back on the deep pockets of last resort: the creditworthiness of the British state. That creditworthiness, I would argue, is now in worse shape than it has been since the days of the Stewarts. The reason is the fact that the UK authorities have effectively underwritten the balance sheet of the over-sized UK banking sector.

The tax cuts Brown is planing add to the above problematic situation.

To avoid a currency crisis there are two things, Buiter says, Britain needs to do immediately:

Introduce a Special Resolution Regime to avoid the nationalization of banks. This would probably be comparable to a Chapter 11 reorganization bankruptcy in the U.S., where a company keeps operating but shareholders and creditors have to take haircuts. Currently the UK only knows a Chapter 7 comparable liquidation bankruptcy where a company stops operating. As RBS is of systemic importance the lack of a Chapter 11 solution requires nationalization where the taxpayers take on all the risks, debt and assets.

The second point is to prepare the way to join the euro, though it is not clear if the criteria for that can be met. A pound sterling, officially bound to the euro in preparation for a currency change would make the sterling’s value defensible.

Wolfgang Münchau in his FT column sees additional reasons for Britain to join the Euro. Keeping the sterling has costs as it would likely result in higher interest rates and the loss of financial center status for London.

While there is tremendous public resistance to adopting the euro, as was in Iceland until a few weeks ago, the now imminent costs of monetary independence may push the British public into that direction.

But rather then join the euro and thos pesky French and Germans, could the Brits vote to join the U.S. dollar? Aren’t they already the 51St State?

Anyway – a sterling crisis may well be in the making. MoA readers in Britain should prepare for that while they still can.

Posted by b on November 17, 2008 at 13:05 UTC | Permalink

Comments

UK is the closest to an Icelandic meltdown right now, first of all because of their already massive involvement in covering banks’ losses and debts. That said, though the state’s official covering of the banks is lesser right now, Switzerland is just as risky, because the country is quite smaller than UK and would be even less able to defend its banks and save their sorry corrupt asses.
That said, nice to see that I’m not the only one expecting the pound to tank even more in the next months; I was beginning to wonder if I wasn’t becoming too loony.

Posted by: CluelessJoe | Nov 17 2008 14:12 utc | 1

Of all the countries on Earth, the global financial crisis will slug the U.K. the hardest. Unfortunately, a combination of poor education, pride and pretentiousness, will mean that, by and large, most of the English public will not admit to this until they are standing on the street in a bread line. London will devolve into a neo-feudal mini-state with rampant crime and wide-spread civil unrest, along with a shocking increase in class divisions and wealth inequality. In 10 years, the English government will hold (relative to now) practically no influence in international relations and is likely to become isolated from world affairs, focusing instead on its own domestic problems. Though I of course hope that this forecast proves to be incorrect, and that instead England can recover in 2-4 years, I fear that things have gone beyond the point of return. Could there be a revolution in England then? No. The English are genetically predisposed to submitting to, not revolting against government. Simply put, this is sad. It is sad because the entire GFC was completely avoidable. Now, however, a lot of innocent people will suffer and, worst of all (though of course the GFC was ignited by Wall Street), there is in a reasonable reality, no one person or organisation to blame, as it represents merely the reflection of our society; a society which we have nurtured and which has produced many good things, though also many bad things, such is evolution – the GFC being an example of the later of course. All we can now do is learn from our mistakes.
b,
The U.K. & U.S. share the same currency? Really? Do you think this is likely or merely an improbable option?

Posted by: Al | Nov 17 2008 15:45 utc | 2

The U.K. & U.S. share the same currency? Really? Do you think this is likely or merely an improbable option?
I find it unlikely, but with Gordon Brown and the europhobics in all British parties – who knows?

Posted by: b | Nov 17 2008 16:02 utc | 3

Al at 2.
If there were such a thing as the English government, maybe the English public would revolt against it. In the real world, the British gov is in the same self-dug hole as the rest of the military-industrial complex of nations. Perhaps the true sign of the times is HBOS being on the verge of going under after all these years?

Posted by: Raveheart | Nov 17 2008 16:20 utc | 4

Iceland. – What on earth led the citizens to borrow and borrow and spend? Where did they think the expansion was coming from? Why weren’t the dissenting voices listened to? (Leaving out the actions of the Banks and the Gvmt. which looks pretty much like one entity. Naturally their soft-soaping and garbled market-speech played a tremendous role.)
Iceland has a tiny, homogenous population, which has lived close together since the 10th century. On the tiny strip of livable coast.
In a bigger district setting – Mexico City? Paris outskirts?- this group would be a tight ethnic, soldered club, with their own language, culture, conventions, money – solidarity and lack of strife. Weird comparison.
Such groups are in fact quite vulnerable to crazes, fashions; they are also sources of innovation, social transformations, etc. as the group is small enough to experiment, and always looks to the outside for trade, new ideas, etc.
Iceland has a cold culture of hard work (no lazing under the palm trees and idly eying a plump wildebeest) and therefore cooperative work organization. Modern technology has made it hot – that is, energy independent, the only developed country in the world that has that advantage (geothermal energy.) Wiki says some of the pavements in Reykjavik are heated.
Given that base, that tremendous advantage, anything might seem possible. The recent craze for ‘green energy’ and the dire mutterings about ‘peak oil’ would lead to a perception being exceptional, clever (luck is usually framed in that way), immune, a base to spring from, the possibility or lording it over others, reinforcing the memes of independence and self-sufficiency. Their own perception of themselves as moral and on the right path, in the Scandinavian fashion, with high-ish taxes, staggering indirect tax (VAT) and the usual tax rebates for foreign cos, etc. no capital tax, etc. (details may differ but all this is ‘good for the people’..), gender equality, etc. might lead to a feeling of ethical rightness or moral superiority.
Perhaps all this made Icelanders a small group supremely primed for picking off. By their own leaders.
Potted, superficial, stuff, who knows.
Britain is in a different position.
wiki geothermal in iceland

Posted by: Tangerine | Nov 17 2008 18:36 utc | 5

This sort of situation is where we will see the english political establishment at its worst (although afterwards of course they will claim it as their finest hour, while the rich eat the babies of the poor etc). The english treasury and reserve bank are far from democratic institutions and will make hank paulson’s ass covering antics appear mild in comparison to the sleazy deals, outright theft and generally scungey behaviour that the english have come to expect from their reserve bank governor.
There isn’t a hope in hell that the english will join the euro or the dollar. The euro would have been a great idea but the perfidious albion tactic of appearing to be standing on both sides of the fence at once by frenetically jumping backwards and forwards over it like a ritalin crazed asperger affected asshole, prevented that when the opportunity first presented. Now that there has been a decade of denial that this wasn’t because the english wanted to continue to wipe amerikan ass but was because “their money was better than any of that continental stuff” – pride worn like a cheap cotton housecoat in place of armour, will prevent the english from seeking either refuge until they grow tired of their rich eating babies.
That will take some time. As long as the babies remain at least vaguely unwhite and/or desperately poor (ie able to be dismissed as welfare cheats) no one will mind “terribly much”. Oh there will be the occasional failed attempt at a thundering editorial from the Guardian or other pseudo leftist organ, but no one will really care until the babies are named Rupert or Jemima.

Posted by: Debs is dead | Nov 17 2008 18:46 utc | 6

marx thought that either the english or the fermans were going to be the first to engage in a revolutionary war against capitalism
the levels of dissassociation(or what was once called alienation) are so strong – it has always appeared that their working classes defeated themselves
what capitalism does well is for people to forget they are human beings with specific & general interests. the ruling class have for a long, long time taught them that the interest of their class was also theirs. it wasn’t in the 19th & 20 th century where they were destroyed by war & fatigue
in the 21st century the ruling class is hoping the trick will work again
while the palestinian people die of neglect
rupert & jemmima will die of self satisfaction

Posted by: remembereringgiap | Nov 17 2008 19:03 utc | 7

I think Buiter is rather over-egging the pudding here. Considering that the UK was actually bankrupt after WWII, the assertion that UK creditworthiness is at its lowest point since the 17th century is utter bollocks. Things might not be great, but I doubt that we’re even in as bad a situation as in the 1970’s, when the government had to go to the IMF for assistance ( no chance of that happening this time around ).
I can remember a couple of fully-fledged echt sterling crises – 1992 and the mid-1970’s; I was too young to remember the mid-1960’s sterling crisis. Arguably, the early 1980’s, when there was pound-dollar parity would come close to a fourth crisis in my lifetime thus far.
Arguably, the precipitous move from $2.00 to $1.50 in the past 60-90 days or so, suggests that the “crisis” has already happened; if so, this is a “sterling crises” that we can all live with quite happily.
In a broader sense, I’m not averse to the UK joining the Euro, but there’s an awful lot of people who are wedded to the anglo-saxon model that would jump off of very high buildings if that happened. There’s no way that the UK would EVER join the USD – the longer-term prospects for that currency are actually worse than sterling’s!

Posted by: dan | Nov 17 2008 19:24 utc | 8

I cannot suggest too strongly that those readers interested in the changing world and the death of the $US as the primary world reserve currency read Michael Hudson’s piece in today’s Counterpunch.
It neatly sums up the situation which I have been so ineffectively trying to articulate for the past few months.
Things cannot continue as they are, the rest of the world has wised up to the fact that they are subsidising amerika at considerable cost to their own citizens. The only thing delaying change is a deliberate policy of interference being run by amerikan interests and the few amerikan agents of influence still on board the USS Financial Chaos. Sarkozy, Merkel even Berlusconi have jumped ship, maybe Brown will follow (not that it is neccessary). Not to worry – NZ which was was in the process of jumping when the government changed last week, has a brand new PM who studied at the feet of Hank Paulson. NZ, all 4 million of us to the rescue. (satire alert Rick).
So as long as aamerika can divide and rule, which will be as long until China develops as an effective sphere of influence, and the Euros find some spine (one could be very soon the other less immediate)the rest of us will suffer to ensure amerikan obesity which as a matter of choice doesn’t interest me greatly but the business of funding the murder of humans in the ME, Asia and Africa does.
Of course amerika will bluster and threaten us with all of that high tech killing which will be moderately effective until the first major fuck-up in Afghanistan or Pakistan. Whereupon governments will be forced to listen to their citizens and stop turning a blind eye to amerika’s murders. Since no military exercise has ever been conducted which didn’t cause major blunders that killed lots more innocents than enemy, we can expect that very soon into the Obamaland fantasy of catching the ghost of OBL a major scandal will occur.
Of course the amerikans know this hence alla the shrub era restrictions on newsgathering in amerikan warzones, but Obama caught between the rock of his promised ‘new openess’ to win back the respect of furreners and the hard place of the reality of war will likely err on the side of openess and be caught out big time. Likely that will in turn precipitate the death of the $US as the primary reserve currency on the planet. My big call.

Posted by: Debs is dead | Nov 17 2008 19:34 utc | 9

If the UK was technically bankrupt after WW2 that was almost entirely due to a shortage of cash ie the english still had a lot of assets, albiet stolen from others in the name of empire.
That is no longer the case. This time england is technically bankrupt having no available cash, but this time it is also low on assets esp since Brown bolted from Basra. So this time is worse than 1945, especially considering the bulk of england’s post WW2 to debt was to other whitefella english speaking countries (amerika, canada, australia, even us mob in NZ who ended up paying england for he privilege of fighting in an english war, for nearly 50 years after the war ended) who felt kindly towards the motherland in back then. Now they don’t (see NZ war debt and the bad feelings it still arouses amongst NZers)and anyhow the money isn’t owed to those nations who are all in similar strife as well. It is owed to people and places who remember the worst of empire, those who were the oppressed, not the wanna be and has been foremen of empire.
Maybe the Chinese can get past the horrors that opium wreaked on their society most of the time. It probably hardly ever enters their consciousness but I know that anger is still there at a residual level because I have heard a few angry Chinamen sound off on that subject from time to time. Perfidious Albion doesn’t describe the level of pissed offness that many chinese feel towards england for that nasty trick to subjugate a much larger population. Indians certainly remember the mutiny and the massacres that came afterward and whilst the Indian relationship with england is far more complex than China’s relationship, there is no love lost.
In the 1970’s england still had the prospect of stealing the scot’s oil to keep the wolf from the door. Now that has been nearly completely sequestered and pissed up against the wall of daily disposable income rather than some sort of investment in a diverse asset base, there really doesn’t seem to be much else left.
Unless the Pennines prove to be a diamond reef or Loch Ness a repository of all the missing North sea cod, the game is up ‘good and proper’.
Whatever an anglo saxon model is and how it applies to ‘multi cultural britain’ the fact that some english imagine that has some relevance to whether they eat on a daily basis demonstrates exactly how fucked up and unrealistic the thinking is.

Posted by: Debs is dead | Nov 17 2008 20:11 utc | 10

I am not sure which is more ludicrous – the preposterous pretensions to nationhood of the Scotch, (pretensions based on a slight difference in accent and an eccentric style of menswear designed by Walter Scott for “King” George IV) – the Scotch who for two hundred years were deliriously happy to share in the plunder of the planet under the flag of the Evil Empire of ruled by that small island off the coast of Europe that is until Fat Alex (Salmond) decided he could get his podgy paws on the (diminishing ) oilfields in the North Sea – or the English who cling self importantly to the idea that there is such a thing as a “British” government, presumably under the delusion that there is still an (Evil)empire and that Britannia rules the waves – wider and yet wider shall her bounds become – and that they are a great power and their opinion matters in the capital cities of the globe’s nations and they have a “special relationship” with the true power across the Atlantic.
Equally preposterous, however, is the supposition that the Euro is a rock to which the sinking English (and sunken Scotch)will be welcome to swim for salvation. The Eurozone has troubles of its own. There is every likelihood of the Euro falling apart and Germany setting up its own currency; in the near future, within a couple of years, the Euro credit crunch will hit – Eurobanks own trillions in bad debts owed by struggling economies in Africa, Latin America and East Europe. Maybe the “United” Kingdom should try to get into NAFTA. Trouble is – the three existing members wouldn’t want ’em.

Posted by: Kelso | Nov 17 2008 20:27 utc | 11

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.
Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.
The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.

Posted by: aaron pules bladdock | Nov 17 2008 21:09 utc | 12

@12 – please stop using such stupid monikers. You also posted under the name “kelso”. Why? I’ll ban such abuse.
And please stop providing unattributed copies of other media. There is no value in such nutty stuff by Ambrose Evans-Pritchard, the fake-news distributor of the Telegraph, and his anti-European triades.

Posted by: b | Nov 17 2008 21:19 utc | 13

Armed gangs poaching game across UK to feed black market in food
http://www.independent.co.uk/news/uk/this-britain/game-beware-its-the-return-of-the-poacher-1021722.html

Posted by: Al | Nov 17 2008 23:01 utc | 14

Kelso,
“Maybe the “United” Kingdom should try to get into NAFTA”
Dude, are you crazy? England should enter into NAFTA? What? To get raped by multinationals? Do some research on NAFTA man.

Posted by: Anonymous | Nov 17 2008 23:36 utc | 15

@ b “Anyway – a sterling crisis may well be in the making. MoA readers in Britain should prepare for that while they still can.”
How do you suggest we prepare?

Posted by: Argh | Nov 18 2008 0:46 utc | 16

Stock up on storable long lasting food and organise a reliable supply of water. Make sure your house has high quality, very solid locks.
Do not underestimate the severity of the coming crisis.

Posted by: Al | Nov 18 2008 1:46 utc | 17

And clear whatever debt you may have, if possible.

Posted by: Al | Nov 18 2008 1:54 utc | 18

Debs,
Thank You – the CounterPunch article you linked to by Michael Hudson is truly excellent. It is easy to read and accurate.
Rgiap “what capitalism does well is for people to forget they are human beings with specific & general interests.” -Worth repeating and remembering.

Posted by: Rick | Nov 18 2008 3:01 utc | 19

Al@2:

London will devolve into a neo-feudal mini-state with rampant crime and wide-spread civil unrest, along with a shocking increase in class divisions and wealth inequality.

Good thing for the rulers that they have put up all those cameras everywhere. Behave, Big Brother is watching!

Posted by: a swedish kind of death | Nov 18 2008 3:26 utc | 20

Debs, ”…Obama caught between the rock of his promised ‘new openess’ to win back the respect of furreners and the hard place of the reality of war will likely err on the side of openess and be caught out big time. Likely that will in turn precipitate the death of the $US as the primary reserve currency on the planet. My big call.”
Don’t think so, but hey, don’t give them any ideas! The Republicans are already blaming the recession on Obama, and today Limbaugh blamed the whole global $ crisis on Obama!
(link to Limbaugh posted on the satire thread)

Posted by: Rick | Nov 18 2008 4:03 utc | 21

I seem to recall that the pound was about USD $1.45 when I visited the UK in 1975. The Italian lira, as usual, was in the toilet and the DM had appreciated to about USD$ 0.40 when it had before had pretty much been the same as a US 25-cent piece, whose physical size it just about matched exactly.
So what’s new? And what’s normal? And what’s your benchmark?
Currencies seem to fluctuate based more on what people think other people believe they’re worth. It’s a fiat world we live in.

Posted by: Obelix | Nov 18 2008 5:38 utc | 22

@Argh – How do you suggest we prepare?
If you have money, put it into various currencies and gold. If you have debt get rid of it as soon as possible. Try to find a ‘safe’ job. Don’t pick advice from the internets …

Posted by: b | Nov 18 2008 5:56 utc | 23

Just wait until the Pound is 1:1 against the Euro, peg the exchange rate there – against promisies of keeping it from falling any further – and voila! Great Britain will have joined the Euro zone!!!
You can fight them on the beaches, on the landing grounds, in the fields and on the streets, but they found your weak spot: the cash vault, which you carelessly left open, thinking that would make it easier for you to stuff it with your own ill-gotten gains…

Posted by: ralphieboy | Nov 18 2008 8:37 utc | 24

@b “Don’t pick advice from the internets …”
Heh…

Posted by: Argh | Nov 18 2008 11:20 utc | 25

Re: opium in China @ 10, DiD,
Do try to get your hands on Amitav Ghosh’s “sea of poppies”, a booker nominated one that lost this year Link. It is a novel based on Gov. of India archives of the opium trade in the early 18/19th century.
I haven’t read the book but read an interview with Amitav Ghosh on an inflight magazine, Swagat, I think.
The writer threw out some stunning numbers in that interview. some 3/4 districts in west bengal were producing all the opium to be sent to China. 10-20% of the GDP was just the money from that. And the farmers got screwed too, they were paid in kind, not cash; forced to buy all their needs from UK thus saving even more money for Empire.
He also said, that they stopped it in the 1920s and in 20 years left the country (probably they could not make the kind of returns they were used to)
One of the biggest myths out there is the liberation of India where it was supposedly achieved through the sense of “fairplay” or what shit of the Empire.
Poppycock.
It was a purely a business decision, Britain was spending more in India than what she was getting out. WW2. sold most assets to pay for war. Rational decision, get the fuck out of Dodge. Dropped everything and ran like bandits making out of a raided, stripped bare house.
That’s the economic rape of a country, the glorious non violent independance of Mother India. Drained of life, of vigour, self esteem and pride.
Patrick French’s Liberty or Death put paid to a lot of blinkered, misty thinking of Empire. A lot of people go around that we negotiated as “equals” to gain independance.
Utter Bull.
Since when did the slave talk on equal terms to the Master?

Posted by: shanks | Nov 18 2008 12:12 utc | 26

@Argh – How do you suggest we prepare?
First you do this, then you do this.

Posted by: DharmaBum | Nov 18 2008 13:24 utc | 27

Ok. I am now in a state of terror about my large student loans. Could someone refresh my memory as to why it is a good idea to get rid of debts now? I know there’s a little patch of deflation we’re moving through, but the central bankers are effectively expanding the money supply with bailouts and (I thought) this means inflation. Hence, debt burden will probably stay the same or even lessen a bit. Or not?
P.S. How do I go about organising a ‘reliable supply of water’?

Posted by: Ben | Nov 18 2008 17:46 utc | 28

@Ben – likely some bout of deflation and than an inflationary environment.
But that depends on political decision that will be made in the next months. If there is serious implementation of protectionism (maybe a hidden one through a run to subsidies everywhere: see car industry), expect the deflation phase to be long and hard.
In a deflation phase your debt will grow bigger in real terms as your income will sink.
In an inflation phase your debt shrinks in real term as your income increases.
If the deflation phase is short, you will be fine having debt. If it is longer, you are in serious trouble. But that length is determined by policy decisions.
How much trust do you have in politicians to do the right thing?

Posted by: b | Nov 18 2008 18:32 utc | 29

I have my doubts that the “politicians” are even capable of doing the right thing, given the compromises required for staying in office. If they were, this “crisis” could have been avoided, being that the warning bells were ringing loud for years before it actually occurred. Surprise? Boolshit.
So now with any trust you might have had in the leaders gone Ben, you must determine this cycle of deflation/inflation for yourself. I can’t imagine anyone reliably advising you on it: how long, how deep, what will happen to the various currencies, the banks and all that stuff. Nobody knows at this point.
I’d listen to Cliff High and his buddy George first since they at least have a sorta working decent method for predicting trends. None of this gets very specific though. Then there is the hypothesis (presented by some) that says the future is not certain; even if you know what it is it might very well change before you get there.

Posted by: rapt | Nov 18 2008 20:28 utc | 30

GEAB Nov 17 bulletin:
Phase IV of the Global Systemic crisis : Breakdown of the Global Monetary System by summer 2009

The G20-meeting held in Washington on November 14/15, 2008, is in its essence a historical indicator that the Western – above all Anglo-Saxon – monopoly on global economic and financial governance, is coming to an end. Nevertheless, according to LEAP/E2020, this meeting also clearly demonstrated that this kind of summits is doomed to inefficiency because they concentrate on curing the symptoms (banks’ and hedge funds’ financial difficulties, derivative markets’ explosion, financial and currency markets’ dramatic volatility, …) rather than the fundamental root of the current crisis, i.e. the collapse of the Bretton Woods system based on the US Dollar as sole pillar of the global monetary system. Without a complete overhaul of the system inherited from 1944 by summer 2009, the failing of the current system and that of the United States at the center, will lead the whole planet to an unprecedented economic, social, political and strategic instability, and more specifically to a breakdown of the global monetary system by summer 2009. In light of the technocratic jargon and calendar of the declaration released after this first G20-meeting (totally disconnected from the speed and scope of the unfolding crisis [1]), it is more than likely that the disaster will have to happen for the fundamental problems to be seriously addressed and for the beginning of a reply to be initiated.
(snip)

Posted by: Alamet | Nov 19 2008 0:26 utc | 31

Ok. So I have questions, for those of you who’ll indulge me (longtime lurker in the US with a great depth of appreciation).
A wee bit of context – I began dialing things down to a more proactive and grounded day-to-day reality after about a decade in branding/high tech in a big city. Now I’m farming and am still trying to piece together some semblance of a ‘long-term’ plan…which tends to find me scratching my head while dealing with the pragmatics of short-term realities. I ‘organically’ raise vegetables/fruit and some animals (for meat/eggs) and focus on CSAs and a Farmers’ Market.
Curious about a few things:
A. Anyone else on the list farming? Large-scale, small-scale, chickens & garden in the back yard – could we discuss?
B. Al’s suggestion about strong locks on doors notwithstanding, any advice/suggestions for those of us that are farmers, that plan (hope) to be providing food, about how to possibly prepare ? I’m not a gun owner, though I could be borrowing one for hunting this winter, and my brain leans more toward things like fencing animals without electricity, having an ability to feed those animals without feed in feed stores, adequate supplies of fertilizer and seeds, etc.
C. My main question, I suppose, really – how does this approaching difficulty present itself? In the rural South, in small cities, large metropolitan areas…? Talks of revolution and riots and roving armed gangs are one thing, that’s the stuff of movies & sweats in the middle of the night. I know there are various and many possible scenarios, but I wonder, really, how do you envision some of what we are very definitely facing unfolding?
If I’ve missed a discussion across the topics ( I know I have), please forgive me. If you don’t mind repeating yourself, please consider me in appreciation.

Posted by: little grey duck | Nov 19 2008 0:57 utc | 32

Ben,
You can organise a rain catchment thing to be put in your backyard or on your roof or get anyone one of a number of products that will help you in this regard…just use google.
LGD,
Farming your own food is great. I do too. Get to know your neighbours, be on friendly terms, make sure you have enough feed, water etc etc.
I personally think that if you are able to be self-sustainable, you will not endure much hardship.

Posted by: Al | Nov 19 2008 2:12 utc | 33

Seems like the Bank of England has some Sterling concerns too: DJ BOE Nov Minutes: Concern Larger Rate Cut Would Hit Sterling

The Bank of England slashed interest rates by 1.5 percentage points in November after weighing up the impact a larger cut may have had on sterling, the minutes of the Monetary Policy Committee showed Wednesday.
…
The decision was unanimous to cut rates to 3.0% after a substantial downward shift in the outlook for inflation due the banking crisis, a deteriorating economic outlook and weaker commodity prices.
…
“Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive,” the minutes said.

Posted by: b | Nov 19 2008 10:05 utc | 34

b:
Everyone is talking a good line right now about preventing protectionism. But, yeah, on reflection I think the chances of stealth protectionism seem pretty high. And perhaps that will drain some of the inflationary pressures away…. At any rate, I’d be a fool to think I knew what was going to happen next in this crazy show….guess it’s time to do some ‘personal deleveraging’.
—
Al:
Rain catchment, will google it. Thanks!

Posted by: Ben | Nov 19 2008 12:39 utc | 35

little grey duck:
I’m as new to this as you are but I have one thought about the fear of roaming gangs…it seems less likely than the fear of reeducation camps and martial law. Life in the US has a ways to fall before it becomes like life in Colombia, say, and a long way before it’s going to resemble the Congo or Somalia. Anything is possible, but I’d factor in the near-totalitarian power of government authority, all the new jails they are building, the likely growth of the security sector in the next few years.
It doesn’t have to be a great Socialist State that will step in prevent anarchy. If the future is less 1984 and more Neuromancer or Snowcrash, it may not be a national government agency breathing on the other end of the telephone line or fielding swat teams, but the local neighborhood watch.
Overall, I think that the downturn wont be quite as harsh as some are predicting, but that it will push the crime rate up enough to lead to another decade of lost civil rights.

Posted by: Ben | Nov 19 2008 12:57 utc | 36

LGD:
We started down your route as well: chickens in the back yard, some sheep. Unfortunately we’ve had to bale out on the sheep – sold them just last week. We’re in Vermont and we couldn’t afford to buy them hay for the winter. If we had more land, enough to hay, it wouldn’t have been a problem. We’ve been growing much of our food for years. I’ve noticed that many more people are going in for back yard chickens, pigs, big veg patches etc etc. Up here, people aren’t too far from the land and so perhaps it isn’t such a big leap for them to go back to a bit of self-sufficiency. The downside, here, is that if you aren’t extremely fond of kale and leeks, winter (5 months of it) gets pretty lean.
Meanwhile we’re planning to end up in a climate with a year-long growing season and set up some sort of micro-community with family and/or close friends. It very possibly will be necessary in the coming years, but in any case we’re finding that it’s the only way we’ll save our sanities. I tend not to believe in the imminent arrival of violent scavenging gangs, but I do believe that those who know how to dig potatoes, brew beer, bake, preserve meat or pluck a chicken are about to gain a very big advantage.

Posted by: Tantalus | Nov 19 2008 14:32 utc | 37

Just so the above isn’t a total thread hijack, I should add that we’ll possibly be in the UK. I don’t share Al’s prediction for a total collapse of British society. What I suspect we’ll see is a resurgence of the capacity of Britons to go ‘on the fiddle’ and find ways to live outside the dictates of the state, or use those dictates for their own ends. I would disagree that the British have an innate respect for authority, despite the best efforts of the Sun and Mail. They do like stability on their own terms, however. The cities will become hollowed-out again, there’ll be a return to post-industrial misery on a scale probably worse than that created by Thatcher’s gutting of nationalized industry, a lot of farmers will very grudgingly give up land for new traveller communities. The clash won’t necessarily be between the urban rich and poor but the antagonism between town and country that has been growing since WWII will intensify as pressure grows on the remaining farmland. There will be a collapse of (subsidized) industrial farming and a return to smaller production which, with the pressure from incoming, hungry urbanites, will be hand-to-mouth for a while. I can envision something like a pre-war Italian economy emerging in the mid-term.

Posted by: Tantalus | Nov 19 2008 15:09 utc | 38

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