FinanceWriter

Buried in the latest minutes released by the Federal Open Markets Committee is a veiled warning that the tools to tackle the next financial crisis may be lacking

Is the FOMC toolbox is empty?

You are driving down a remote country road. It's a wild, wet and windy day and your poorly maintained car has a puncture. You realise it’s your own fault because you haven’t checked the tyres recently and you were driving too fast for the conditions.

You now that your ancient, rusty jack that has been used too many times in the past will buckle but you think that if you pump it up you will be able to limp to the next town and get a repair. As you give the foot pump the last push it breaks. "Phew!" you say to yourself, "that was lucky." You climb in the driver’s seat and resume your journey.

You've only gone a few yards when "Bang!" A wheel falls off. You've used your spare wheel; the jack is kaput, and the pump has blown it. And there is no mobile signal to call out the AA.

Puncture repair for central banks

Central banks used to have a toolbox that a range of devices for keeping economies on track, moral suasion, forward-guidance, raising and lowering interest rates, fractional reserves and more recently quantitative easing. It was, of course, governments that maintained the economy and were supposed to provide regular safety checks (like the annual MOT test for cars in the UK) but governments responded to the needs of interest groups like bankers and consumers and rather neglected their jobs and even central bankers didn't want to spoil the party and kept the punch bowl charged to overflowing.

2008 saw a lot of head scratching. A financial crisis with the tools in the toolbox having been used to exhaustion over the years what to do? A new tool for the job: the name gave it away "extraordinary monetary measures" or quantitative easing. The measures worked in so far as there was no mass unemployment and economic collapse, but asset prices and emerging market debt soared which the central bankers hadn’t entirely predicted.

Jackson, I'm in a Hole

In the days leading up to the annual US Federal Reserve jamboree in Jackson Hole, the Fed released the most recent minutes of Federal Reserve's Open Market Committee (FOMC) meeting held on 31 July and 1 August this year.

Focus on their content was on their justification for raising interest rates but those with longer time horizons will note the other angle to their discussion.

In its arcane language the FOMC "expressed concern about the potential limits on policy effectiveness stemming from ELB." In other words, the committee didn't think rock-bottom interest rates or other tools in its armoury would always be effective in the event of weakening of labour markets or a rise in demand for secure assets.

The FOMC admitted that researchers were uncertain about the costs and the effectiveness of such tools as quantitative easing and not only expressed concern about shaping public expectations about the potential future use of such tools but some participants in the meeting, "…cautioned against being too specific about how the Committee would deploy such tools." Or indeed "what" tools.

To the outsider it is not unreasonable to draw the conclusion that the FOMC is in the position of the driver of a car that has a broken jack and a busted pump isn’t sure what tools it will have at its disposal. If anything else goes wrong, even with a mobile phone signal, there is no AA for the FOMC.

Your data is property – whose mining yours?

The data is all mine

I need a snow plough to access my snowbound email box that is overflowing with the blizzard of General Data Protection Regulations (GDPR) emails from companies telling me that they want to mine my personal data.

But as the GDPR snowstorm abates it is questionable in this social media age whether the new regulations address the right questions. It's a pretty fundamental question in "property-owning democracies".

Is your data "property" and who actually owns your data and can mine it for commercial or more sinister purposes?

Does data have the same characteristics as other personal property? Do individuals have the right to possess it, to control it, to enjoy it, and to exclude others from it, as well as the right to dispose of it by selling it, gifting it, abandoning it, or bequeathing it?

So, who is trespassing on your property? Who is mining your data or DNA?

DNA & Data

The United States is founded on a belief in private property – both real and intangible, like software and patents. But even in the US, no one has staked their claims on two important pieces of potential property that seem to be up for grabs by the state or any commercial user who wants it. Individuals data and their DNA.

In 1951 cells were taken from an African-American, Henrietta Lacks, without her knowledge. The cells were used to create a stem cell line, which had enormous clinical significance and commercial benefit in the decades since, but not for her or her family. Such action today may well be construed unethical, but would it be theft?

Historically property has been sequestered by the powerful. Notable examples are the destruction of Common rights, the Enclosure Acts in England and the extinction of land rights of Native Americans and Australians Aboriginals. Today the same thing is happening to data, but few seem to be aware or concerned.

Knickerbocker glory dilemma

Powerful corporations, particularly social media companies, are trying to establish the precedent and the default. They want us to assume that because people have entered personal data on their platform or expressed a preference that data is in the public domain these corporations have property in that person's preferences as conveyed in data.

If you tell your friends on social media that you like eating knickerbocker glories do social media companies have the right to exploit that information? Surely they can do so only if you consent because you have property in that data, your data, to exploit should you so wish.

Congress and EU leaders both recently botched their attempts to get Facebook's Mark Zuckerberg to explain what he was up to in using people's data, so the trespass continues. GDPR creates transparency about the use of your data but does not allow you to stake your claim.

However, recent scandals about abuse of data could be a turning point where individuals reassert their ownership of their data and anyone wishing to use that data must obtain specific consent to use personal property in the same way that they must ask your permission to walk on your land.

Good ideas are sometimes slated when something goes wrong. It doesn’t mean they are bad ideas

Good idea?

Reliant Robins once rode the British highways. The three-wheeled, fibreglass-bodied car was small, light, economical, cheap to tax, manoeuvrable and could be driven with a motorcycle licence. However, its advantages did not stop it being the butt of jokes.

But while the Reliant Robin was actually a good idea, the Sinclair C5, despite being a pioneering electric vehicle, was a rotten idea – it was very slow and so low on the road one reviewer suggested it be fitted with a periscope! The Sinclair C5 was ill-conceived and was a bad idea from the start.

"I told you so"

But it is sometimes not a problem with an idea that makes it a "good" or "bad" idea in the public perception. A bad press can result in the baby being thrown out with the bath water. Critics, who are often themselves bereft of ideas are frequently the worst judges of innovation. The stock in trade of the populist journalist is, "I told you so" when the claim to have predicted the apparently failures in the financial markets.

The financial derivatives sector is a case in point. The catastrophe of Nick Leeson’s felling of Baring’s Bank in 1992 the hole Jérôme Kerviel blasted in the Société Générale balance sheet in 2008 and other frauds and misconceived derivatives transactions gave these financial instruments such a bad name that Warren Buffet described them as "Financial weapons of mass destruction".

In particular securitisation and credit default swaps (CDS) received a "bad rap" in the wake of the 2007 financial crash accused of submerging the likes of Lehmann Brothers, Bear Stearns and the American International Group (AIG). This week the Pope, no less, condemned CDSs.

But despite the negative public perception of derivatives the market continues to grow and people who actively engage in financial markets will say, that derivatives, securitisation and CDSs have been, and continues to be, hugely successful in increasing liquidity and spreading risk.

Private finance - Initiative or infamy?

In Britain the failure of the privatised East Coast railway and the collapse of Carillion a firm that relied on outsourced contracts from government and the private finance initiative (PFI) projects have tarred rail privatisation, outsourcing and PFI.

Critics have leapt on their respective bandwagons to condemn such all three.

Rail nationalisation has soared in popularity among those with a rosy view of puffing steam trains. They appear blissfully unaware the rail industry’s perennial financial problems in both private (prior to 1947) and public hands after nationalisation. But most telling is the ignorance that rail services in Britain serve a tiny minority – we travel around 654 billion passenger kilometres by car each year and a meagre 75 billion by rail. I’ll declare an interest, I prefer travelling by rail. But rationally speaking is the public ownership of trains inherently a "good idea"?

On the face of it outsourcing seems like a good idea: creating an environment in which many competing firms can achieve savings of 10% to 30% to the government. What’s not to like?

Well, it didn’t work out like that. In the past two years 80% of all public-sector outsourcing contracts have been awarded to five firms with Capita securing more than half of the contracts. A good idea badly implemented? The poor public perception of outsourcing has not been coloured by the domination of the sector by a few firms, but how those firms operate in sensitive areas like health care, immigration and dealing with the disabled and vulnerable where some of their behaviours have been appalling.

The big daddy of outsourcing is the Private Finance Initiative (PFI). It was once such a good idea that it was embraced by both Conservative and Labour governments alike. At the time using private finance to fund much need infrastructure projects while pushing repayment onto future generations seemed like a splendid idea for the public purse.

But hold on, the National Audit Office recently revealed that some PFI contracts are costing the public 40% more than would have been the case had public money been used directly. Wasn’t it always the case that governments could borrow more cheaply than the private sector? And that was before the financial crisis and quantitative easing combined with high costs and inflexible contracts revealed PFI as a bad deal.

What ultimately seems to be a "good idea", or a "bad idea" has as much to do with public perception as from the intrinsic virtues of the idea. But what ultimately proves to be a good idea arises from the operation and implementation of the idea – whether it was well conceived and well executed, not whether, like the Reliant Robin, it was simply unloved.

Hedge funds are selling the advertising sector short. The era of "passive" advertising is over. Advertisers need "active", "disruptive" or "smart" strategies to interact with customers, consumers and investors

Advertising break or break from advertising?

Television viewers who fear the problems in the advertising sector means they have less time to put on the kettle for a cup of tea in the middle of their favourite soap need not worry. Big advertisers claim they are not cutting advertising time, just making it more productive.

But that message has not been bought by hedge funds. They see the advertising sector as a beast wounded by the big advertisers trimming their promotions - succumbing to pressure from shareholder activists whose goal is to increase shareholder returns.

Unquantified blunderbuss

It was Lord Leverhulme, the founder of what has become Unilever, who famously declared, "Half of my advertising is wasted, and the trouble is, I don't know which half". Firms like Unilever, in the consumer goods sector, are having to face up to the growing dominance of quantifiable, online advertising placed with the likes of Google and Facebook. The unquantified blunderbuss of advertising spend of Lord Leverhulme's days are over.

That is counterintuitive to some who think that more brand advertising, not less, that is required to increase revenues: after all, the endless "romantic sagas" and jiggling of a handful of coffee beans by Nescafé have preserved its position as the best-selling instant coffee.

Consuming commodification

Shareholder activism may be a red herring. Consumer multinationals may be suffering from the waning of brand loyalty as cheaper, more local, more innovative and exciting start-up brands erode the heights that famous brands have for so long commanded.

The South African supermarket chain Pick 'n' Pay pioneered competition with consumer brands by inventing the ironical "No Name Brand" in-house brand of baked beans, yoghurts etc.

Today the supermarkets are assaulting both ends of the consumer pay packet: Tesco with its cheap and cheerful "Everyday Value" brand opposite its top of the range "Finest" range. Sainsbury's with its "Basics" at the bottom end and its "Taste the Difference" at the top.

In retail financial markets too the commoditised, low-commission vendors of passive, indexed products are supplanting the "branding" of the skill and wisdom claimed for active asset management.

The Other Half

It is more than just the "other half" of Lord Leverhulme's passive advertising budget that needs to be reassigned to more direct, targeted and quantifiable approaches to market penetration and preservation.

There need to be active or reactive strategies like the search for a potential purchase on Google or a mention of one within earshot of Facebook's eavesdropping microphone that elicit a blizzard of advertising offers.

Thought leadership

Investment banks, private wealth managers and corporate financiers also need to react to disruption in the advertising "space". Glossy magazine advertisements are no longer an end in themselves – they have to work for their money. "Smart" advertising appeals to the readers' emotions, intellect or curiosity. An intriguing or provocative statement needs to incite potential customers to actively link to a thought-provoking read or a recipe for the solution of their commercial, investment or wealth management problem.

Proactive shorting of advertising stocks investment strategies by hedge funds is an allegory for the end to the era of passive advertising. All the components of branding, marketing and advertising increasingly have to earn their keep.

Or doing nothing by saying something. Central bankers unique messaging powers.

Hold the punch bowl!

Commentators tend to hang on every word uttered by central bankers. Central bank watchers read the runes or resort to the ancient rite of reading omens in the entrails of sacrificed animals to receive insight into the Delphic pronouncements from the Fed, the ECB or the Bank of England.

To some degree that's unsurprising: central bankers really can move markets. What is more, like a fakir, they can, with apparently supernatural powers, make markets rise, fall or levitate. And they can do so confidently shouting, "look no hands" on the handlebars of the monetary or fiscal machinery.

Rating interest in markets

Open season has been declared for hunting hints on interest rate rises as central banks seek strategies for unscrambling quantitative easing. The professional rune-readers and entrails-examiners have their work cut out for them.

In the current, febrile, market conditions of volatile equities and bond yields rising to within a hair's breadth of recessionary signals, the merest hint of indecision, indiscretion or indecisiveness could have profound consequences. The new chairman of the US Federal Reserve, Jay Powell, knew the eyes of the financial markets would weigh up his every syllable when he gave testimony to Congress recently. In the glare of the spotlights he rendered his report with unblemished opacity; essentially saying nothing that his predecessor, Janet Yellen, had not previously left unsaid.

Given the circumspection or obfuscation with which central bankers are required to insulate their comments, the plain-speaking President Donald Trump was wise not to pursue a career within the cloisters of central banking!

Punch drunk

It's not that, occasionally, central bankers don't say something interesting and memorable: William McChesney Martin is probably remembered less as the chairman of the Board of Governors of the Federal Reserve System, and more for his famous remark that is trotted out every time a central bank's actions are questioned. Although the quotation is often misattributed, it was Mr. Martin who said that the Federal Reserve "is in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up."

Equally direct and memorable was Alan Greenspan's reference to "irrational exuberance" – an understanding of a situation that, paradoxically, did not have him chaperoning the punch bowl from the reach of intoxicated bankers.

Message massaging

In the 1980s, the world's central bank governors gathered in conclave at the Bank for International Settlements in Basle to address some grave threat to financial markets. Instead of a puff of smoke that the Vatican emits to indicate the progress on the decision to appoint a new Pope, a BIS spokesman told the awaiting press corps, "Central bank governors have agreed to take whatever steps are necessary to restore stability to the global financial system".

The markets duly steadied. But years later an insider at the bankers' meeting (with all the indiscretion for which central bankers are not known) admitted to a friend that the assembled bankers did not know what to do – so they decided to do nothing – only saying that they would do what was necessary.

That is a lesson that not only can doing nothing be a decision, but also that messaging is an art where a carefully crafted comment can exercise extraordinary leverage.

The magic that alchemists of old applied to transmute base metals into gold was clearly flawed. But banks, asset managers and corporate communicators can all learn from central bankers' messaging skills that a simple or even contrary message, carefully thought through as to the intended and unintended consequences, can be used to exert disproportionate power and influence.

Someone has coined a new bit of management jargon – zero-based budgeting – that its claimed reverse productivity’s dire decline. We wish!

Mickey-taking workforce.

The classic device used to "downsize" a firm is to make the employees apply anew for their existing jobs. "Zero-based budgeting" is the same except that it requires every budgetary item in the firm to be justified – to apply for its job back if you like.

Productivity has declined in most developed countries since the 2008 crash as investment shrank as a result of increased employment in low-productivity jobs.

Bean counter's wet dream

The proposed solution is ZBB - a bean counter's wet dream. Acres of spreadsheets and light years of tax-deductible accountant and consultant time will be devoted to whether money can be saved by staff using one sheet less of lavatory paper on each shift or by shrinking the size of a flange on the widget.

The fate of the tea trolley is writ large. That surely will be sent to the scrap heap or sold to a third world country without any consideration of the unquantifiable productivity gains of staff refreshed by a cuppa, engaging with the tea lady (man) or simply chatting about how they have found a better way of honing the flange on the widget.

Human-based productivity

If we are going to engage in jargon-based management strategies may I propose a new bit of management jargon HBP - human-based productivity? The Quakers who built some of the great businesses in the UK like Cadbury's, Lloyds and Barclays Bank, Clarks shoes and Rowntree knew about it. And not just the British, Sony was founded by a Quaker.

It is based on treating your employees with kindness, respect and loyalty instead of as zero-hours contract, zero-based productivity commodities that are infinitely interchangeable and fungible. It is based on the premise that the overwhelming majority of people want to work and that they want to take pride in their work and not only seek to earn money, but also to earn respect and have the desire to return to the same job tomorrow and the next day.

Mickey-taking workforce

The conjuring up of a concept like ZBB is based on the historic failure of management to extract from their employees the minimum beyond the basic work-a-day from a clock-watching, mickey-taking workforce because that workforce is underpaid, undervalued and uncommitted to their overpaid, disloyal and incompetent managers. Reversing the jargon and adopting "Zero-budgeting businesses" in which employers trust their employees by giving them responsibility, rather than focusing on cost cutting and illusory targets, is likely to be more successful than those likely to embrace the zero-based budgeting fad.

Don’t tell the children but there is no such thing as a "crypto-currency"

All I want for Christmas...

As Christmas approaches and the elves are mining. They are working day and night, night and day to create what will make people happy.

This year people hope they will open their eyes on Christmas morning and when they have verified that Santa has eaten his reward of a glass of sherry and a mince pie that they will find a stocking filled to the brim with crypto-currency.

They will discard the unshelled nuts and the tangerine and give thanks for the Bitcoins, Ethereums, Litecoins or other crypto-currency that has been launched in an initial coin offering over the past year.

Unreal

Of course what they will be waking up to is a paper or computer representation of a virtual currency, money that, at least physically, has no substance and that it is claimed will consign gold and banknotes to history.

Perhaps, there is no reason to believe that digital currencies will not replace the hard stuff.

But on closer examination, there is good reason to reach the conclusion that there is no such thing as a "crypto-currency". The hyperbole about the soaring price of the supposedly virtual currencies overlooks that the real and physical impact of the currencies "mining".

The creation of so-called crypto-currencies is undertaken by "miners" who resolve mathematical problems and are rewarded in crypto-currency. The problems are set by the promoters of the currency.

So far so digital

So far so digital. But what has been overlooked until is the increasing consumption of real, physical resources required to solve the algorithms that have to be resolved to release new currency. Other than the human brainpower, the process also involves the highly-intensive use of computer capacity.

Using computers requires energy, Bitcoin alone is said use as much energy as the island of Ireland consumes in a year. That means coal, oil, wind, sun or wave energy being devoted to the creation of these coins that only exist in the form of binary numbers on computers.

Chip chop

But that is not the end of it. The mining of crypto-currencies has had a dramatic effect on the physical computer chip market. Because of the way they are constructed it turns out that graphics cards, as opposed to run of the mill processors in computers, lend themselves to processing the data that deciphers the mining algorithms that creates crypto-money. Graphics cards have the speed and versatility that make them ideal for crypto-currency problem solving.

While computer chips do not have moving parts, they have a shelf life. They are superseded by more efficient - better, faster, cheaper chips. The intensive application of these graphics cards to solve the problems required to create digital coinage means their processing capacity may degrade as a result of the heat generated by their intense use.

Cost is a significant issue as heavy power use and the need to upgrade can render mining of crypto-currencies uneconomical.

The physical materials required to replace these chips are dug out of the ground in real mines by sweaty people with heavy machinery wearing hard hats.

Don’t tell the children, but crypto-Santa doesn't exist.

Happy Christmas

Norway dropping oil from its sovereign fund is salutary for producers of the new "celebrity minerals"

Is that a sinking lithium tanker?

Was the recent decision by the Norwegian sovereign wealth fund to drop fossil energy shares from its holdings an act of smugness, environmental rectitude or simply the rebalancing of its portfolio?

One can forgive the Norwegians some smugness; their Oil Fund has reached a value of $1 trillion - and ahead of schedule. By comparison, the long-term savings Britain made from its "North Sea Bonanza" are zero. Britain did not feel the need to establish such a fund.

If the jettisoning of the fossil fuel holdings was a gesture of environmental rectitude or sustainability the decision might be seen as a trifle hypocritical – having been build on the proceeds of climate-changing emissions it is akin to a social responsibility prize being awarded to old-established Hong Kong companies the foundation of whose wealth was the misery created by opium trade.

On the other hand, a portfolio adjustment might be overdue. The fund was funded by fossil fuels; there is, therefore, a logical justification for reducing dependence on that source of funding and investment.

The new oil

The oil era wanes, and with it the fate of metals such as palladium that will no longer be required for catalytic converters. New stars are rising. Demand for the constituents to make the batteries for solar power, the storage of electricity and to drive electric cars and electric trucks is soaring.

There are ominous rumours that the Chinese are trying to corner the markets in lithium, nickel, cobalt, and copper. Given CO2 emissions reached a record this year largely as a result of the Chinese stuffing coal in old-fashioned power stations, perhaps the concern that the Chinese wish to lay their hands on the minerals that will help reduce greenhouse gasses should perhaps be welcomed!

Peak lithium

For years the world has been warned about "peak oil" and how economies were going to grind to a halt when the global oil tank ran out of fuel. Now the world is expressing a collective sigh of relief: "we are saved" the transport system no longer requires intravenous oil; we have new minerals to pillage for current prosperity.

But hold on, lithium, nickel, cobalt, and copper are all finite resources. Like all specialist minerals, their exploitation will be on the basis of mining companies plucking the lowest hanging fruit first. Then as resources and reserves diminish migrating their prospecting, exploring and producing to more and more remote (and often more dangerous) locations at higher and higher cost.

As visibility of reserves and resources and exploitation rise, some producing countries will suffer the "resource curse" of dependence on the export of the minerals and the damage that high exchange rates inflict to their domestic economies.

End game

And then there was none. The reserves will be depleted or the march of the army of technology will move with future energy generated by seaweed, silica or discarded sandwiches, we simply don’t know.

Few countries will suffer the fate of Nauru in the south Pacific that has, literally, seen its resources, cut from beneath its population’s feet, but many mineral producers could bask in the wealth of today's demand for their products and pay no heed to their future or the prospects for future generations as Norway has done.

Are you talking to clients in another language?

Will you get the message if I shout?

Husbands and wives, workers and bosses, Donald Trump and Kim Jung Un – we all seem to be speaking to each other, but no one seems to hear what the other is saying.

In a bizarre outcome, Facebook recently abandoned an artificial intelligence experiment when two robots took matters into their own hands (not that they had hands, only heads) and began speaking their own language to each other – a language no one else understood.

Perhaps it would have become really surreal if Facebook had left "chatbots" Alice and Bob to their own devices and watched the outcome. Alice might have asked Bob to go on a date; they may have had a massive row; they may completely missed the point of what each other was saying. Oops! that would have made them human!

Truth, too often, is stranger than fiction

Do you ever look at advertisements on television and ask yourself what were they trying to get across? Do you read some marketing material or an annual report and scratch your head thinking, "And the message is..."?

Like Alice and Bob, the banks and corporations sometimes create and address their own worlds with written communications.

They occupy that world oblivious to their expression and articulation of ideas being in language alien to their putative audience or customer base.

Their desire to populate their planet with the like-minded is thwarted because they construct language barriers of unadulterated ...jargon. So steeped are they in the detail and nuances of their products or services that they are unable to communicate the advantages to a wider audience.

They need to ask the questions...

• Have they thought about the people they really, I mean really want to reach? What is the audience they want and need to target?
• Does their audience have the same grasp of the subject as they do? Are the audience specialists like the writers are - in which case why do they need the product or service being written about?
• Is their message clear, precise and accessible? Or is their message bogged down in detail, jargon and flummery?
• Does their message and its delivery tell a story? Is there a narrative that is a vehicle for what they want to say?

If the answer to any of these questions is "No" then and they are doing their firm, service or product a disservice. Or if they want to continue with their current communications strategy they should recruit Alice and Bob to write thought leadership articles, marketing material, annual report, newspaper and magazine articles about their firms or websites.

The world is becoming increasingly specialised. People know and often need to know more and more about less and less. Such detail is vital to achieving the level of excellence required in highly competitive markets.

But mostly people buying cars or computers or shares want to drive them, compute with them or invest in them, they don’t want to know about the tolerances of the valves, the overclocking speed of a processor or the wages of a company’s office cleaner.

FinanceWriter are specialists in language, tone, messaging, channels of communication. We are not specialists in every aspect of banking, finance and business. But we can take your ideas, enthusiasm and knowledge and make them accessible to your target market.

10 years after Financial Crash the governments, corporates, financials and households hold record debt. What strategies is each adopting to pay it down?

Debt, what debt?

A sign that someone is in financial trouble is when they stop opening their post. Letters from credit card companies, the mortgagor and others become too frequent, too demanding and their ink too red. The debtor closes their mind to the problem.

The world has stopped opening its post. Global indebtedness has reached perhaps 325% of global output or $217 trillion according to the Institute for International Finance. Yet governments, central banks and the financial sector appear quite sanguine or are they just pretending there isn't a problem?

Governments are the biggest offenders; their share of the total global debt has been soaring. Corporate debt is second in line followed by financial and household debt that has, by comparison to the first two, risen modestly.

Fretting about such a magnitude of debt is the broken record of the gold bugs talking their own book. But an illustration of the equanimity with which the world is facing up to its debt is that, surprisingly, gold has hardly budged in recent years. There is no rush into bullets, beans and bullion as they head for the hills and away from some impending disaster.

How the debt will be repaid

But let's put aside hysterical talk of a global crash and the actions that will be required to redeem the situation. If the bubble goes "pop", it is interesting to speculate (if that is the appropriate term) about how the debt will be repaid.

That is unless it is assumed that this level of indebtedness is sustainable. It wasn't in 2007 when indebtedness was less than half what it is today. Uncontrolled credit expansion then led to the global financial crisis when the world was "saved" by "extraordinary monetary measures" that were invented for the occasion.

It is ironical that these extraordinary monetary measures in the form of quantitative easing have been responsible for the acceleration of debt surpassing the starting point in 2008 when they were implemented.

Strategy, what strategy?

So how is the debt going to be repaid? Has government borrowing been applied to such social investment as education and improved health or physical investments like restoring battered infrastructure that will raise productivity levels and future prosperity? No, not really.

Have governments been cutting back to reduce current expenditure? No, not a lot. Are governments projecting that tax receipts will rise because of improved supply side conditions? That would be the triumph of hope over experience.

Central banks have been buying debt to "print money" to stimulate the world’s economies. They have been warehousing unheard of volumes of debt that it is likely they will hold to maturity in the expectation that the issuers will be in a position to repay the debt.

Corporates have been borrowing because interest rates are low. But have the borrowings led to greater capacity and productivity that will give the corporates greater profits and raise the capacity to pay down the debt. Or have corporates fallen for the error of buying things in the sale because they are cheap, not because they need them?

Assessing assets

Financials have been borrowing to invest into the assets that have risen as a result of QE. They are congratulating themselves on the gains in stock markets and property investments.

And households have been spending instead of saving. Saving levels are amongst the lowest in modern history. Households too have benefitted from artificially low interest rates. An illusory "wealth effect’ has made them feel better off than they are. It this "wealth effect" has led households to borrow more than they can afford if interest rates take off. Wages have been constrained. Perhaps there is the hope that when wages return to the long-term trend that debt will be paid off. Perhaps there is the expectation that increased productivity will be rewarded if that productivity can be found.

But what is more likely is that an unspecified "event" probably the collapse of a financial institution like the New York Stock Exchange crash in 1929 or the collapse of Credit Anstalt in the 1920’s and 1930s or the failure of Long-Term Capital Management (LTCM) in 1998 that was the canary in the mine that died before Lehmann Brothers collapsed in 2007 will be a trigger.

The Great Depression saw global GDP cut by 15%. If global GDP were to drop by that proportion today indebtedness to GDP would, by merely staying the same in nominal terms, soar as a proportion. Any belief or expectation that there would be an orderly retreat from the flood of credit that has been created would be dashed.

This comment sought to discuss the strategies that different, indebted, sectors of the economy could adopt to manage their debt downwards in a more orderly fashion than has been achieved in the past. Time will tell whether lessons have been learned.