Apocalypticist Now

I am quietly pleased with myself. I have invented a word and it is “apocalypticist”. Nobody with whom I used it had ever heard it, but they all immediately knew what it meant.  

As my summer recess draws to a close and before returning to regular writing duties. I spent a couple of days in London where I enjoyed what can only be described as a culinary assault course. This included amongst other a dinner at the inimitable Reform Club in The Mall, of which I had in my time also been a member. Some readers may remember the Club from the epic sword fight in the 2008 James Bond film Die Another Day although it did appear again in Quantum of Solace and due to its incredible interior, it remains a favoured movie location. Last Monday night it was its peaceful and serene self. On this occasion, I was at the Club at the invitation of a reader and in the presence of another reader who had  introduced my host to my scribblings.

Now in his mid-80s, my host had moved to London in the early 1960s and thus had been amongst the first American corporate lawyers to set up shop over here. The gentleman in question has a towering intellect, and with all due respect, knows it. In conversation he takes no prisoners. I certainly had to turn up with my A-game. So, more or less as we sat down to our starters, he postulated that within two years at most, our markets would have hit the skids and that the resultant collapse in the price of assets would make the Crash of ’29 and the ensuing global depression look like a walk in the park. And there one sits and struggles to find a set of coherent arguments which might prove his apocalyptic forecast to be entirely wrong. Hence the apocalypticist.    

His position is based on an edifice of thoughts constructed on the foundation of his fundamental assumption expressed in a paper he is working on with a probable title of “The Money Delusion”. This amused me as the author of the famous “The God Delusion”, Professor Richard Dawkins, hails from the next village to the one in which I live and he was also my better three quarters’ tutor when she was studying at Oxford, the fiftieth anniversary of her going up which falls next month. I have not yet read “The Money Delusion” but knowing the way the gentleman thinks, I cannot but assume that it will address an issue, the surface of which I have from time to time scratched, and that is the one concerning the glaring difference between value and price.

In his most recent IBWOC.com podcast titled “Old Chestnut Returneth”, Morris Sachs speaks of his training as a chartered accountant and reminds listeners of the basic principle that assets equal liabilities plus net worth. Add that to my interlocutor’s apocalyptic predictions and one arrives at a point where, if one continues to pile up the liabilities to an unchanged net worth, the assets appear ever larger. Expressed in other words, the quantity of rubber contained in the skin of a balloon does not increase, simply because one has puffed it up with a bit more air.

One of the many questions he pressed upon me, and our fellow diner, was what we thought would be the outcome of the war in Ukraine, two years from now and again in ten years’ time. Not what we hoped would be the outcome or what we thought should be the outcome but what we truly thought it would be. He was like a dog with a bone and every time we drew on history, he’d snap at us to stop looking back and to look forward. My own “conclusion”, and one arrived at without time for deeper consideration, was that Ukraine, despite being backed by America, could not win against Russia but that then again, Russia could not win against America. Might one mix one’s metaphors and suggest a Mexican standoff? I think the closest we came to a prediction was that a situation resembling the North and South Korean border would be most likely where there is a ceasefire but no peace agreement in which the Donbas and the Crimean peninsula remain under Russian occupation with no resolution on the matter of sovereignty. But that was only one of the intellectual exercises we conducted over a period of several hours.

The principal subject remained that of the potential for an apocalyptic outcome to the current economic and financial uncertainty. The central banks are out of ammunition. The governments are out of ammunition. And as higher interest rates chew at consumers’ ability to outrun inflation, so they too will soon be running out of ammunition. A closing of the gap between the price and the value of assets, so our host, would prove that prices are perfectly expressed in pounds and pence or dollars and cents but that they fail when it comes to circumscribing their value.

A quarter of a century of a synthetically low cost of money which begins with Alan Greenspan slashing rates in the aftermath of “9/11” has caused the price of assets to overtake their value and this gap must somehow and at some time be closed. The little piece which I last week wrote for Reaction on some of the philosophical – and financial – fallacies underlying the private equity market drew an unusually high volume of correspondence, not a single one of which stood up against my observations and a number of them felt that I might in fact have been a little bit too polite. Everywhere we look, we end up agreeing that there is too much debt, and that the authorities’ monetary and fiscal armoury is terminally depleted.

I was recently confronted by someone who referred to the deep recession which followed the Global Financial Crisis. I had to humbly point out that there was no recession in the aftermath of the GFC but that that outcome had been achieved by countering the underlying debt crisis by doing nothing other than shifting excess private sector debt onto the public sector balance sheet. The symptoms of the crisis were dealt with but not the causes. And as private sector debt was cleared, the financial system, fuelled by greed, could think of nothing better than to pump it straight back up again. We should, as an aside, never underestimate to what extent the liberal provision of student loans has spread the belief to our ambitious teenagers that being up to one’s neck in debt is a natural and entirely acceptable state.    

Using available UK government data, the number of 20-year-olds in higher education rose between 2001 and 2016 from around 33% to around 45%. That means that over 15 years a further 12% of the cohort of 21-year-olds will be setting out into professional life not as net savers but as net debtors to the tune of well in excess of one year’s pre-tax income and it is therefore understandable that many of them will be in their 30s before that can begin save for their future. When current state retirement programmes were first conceived, working age generally began at 16 and ended 49 years alter at 65 which at the time more or less coincided with average life expectancy. Now, half of the members of the working population do not become productive until they are five or seven years older and the proportion of the working age population in work, known as the participation rate, is falling. As the UK’s National Accounting Office recently noted, within 50 years the ratio of workers to pensioners is set to decline from currently four one to three to one. Now do the sums. How can the price of assets, let alone their value,  continue to rise unless pumped up by money injected into circulation by the likes of quantitative easing? My apocalyptic friend, the original apocalypticist, predicts an imminent re-evaluation in the relationship between price and value and woe betide those who miss the boat. Price is expressed in monetary terms, value is not. And therein lies the money delusion.

In practical terms, deflation would appear to be the outcome. Japan has spent nearly 20 years trying to fight deflation and other than increasing its debt to GDP levels to stratospheric heights, little has been achieved. There are worrying signs of the mighty Chinese economy, led by falling real estate prices,  heading the same way. And in truth, the West in general and the USA in particular are flirting with their own great repricing of the property sector and are in consequence facing huge problems for their banks. My apocalypticist, himself American, sees the US regionals as dead men walking.  

Write to us with your comments to be considered for publication at letters@reaction.life