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A presentation by Dr Mike Haywood How close are we to Systemic collapse of the global financial system?

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1 A presentation by Dr Mike Haywood How close are we to Systemic collapse of the global financial system?

2 Oil is the fuel on which the Global Economy runs and credit is the grease

3 Start of the use of fossil fuelsStart of the use of fossil fuels and fractional reserve banking and fractional reserve banking

4 The hydra with five heads Debt Mountain Peak oil Population growth Climate change Pension time bomb

5 The hydra with five heads Head I Global Debt Mountain

6 The Debt Mountain Someday soon all this will be yours

7 UK Post War Government debt high Government debt high State benefits paid out comparatively small State benefits paid out comparatively small No NHS, introduced in 1948 No NHS, introduced in 1948 Relatively simple financial system Relatively simple financial system Business Profits funded expansion Business Profits funded expansion High personal Income, spending out of income, saving high High personal Income, spending out of income, saving high Personal debt extremely low Personal debt extremely low Then, over decades Personal debt grew, saving fell Personal debt grew, saving fell Computerisation of Banking system Computerisation of Banking system Delusion that creation of debt = the creation of wealth Delusion that creation of debt = the creation of wealth Public sector mushroomed Public sector mushroomed Less prudent banking practices evolved Less prudent banking practices evolved

8 UK National Government debt is over £3 trillion or £3,000,000,000,000 If you include unfunded state pension liabilities, public sector pensions, private finance initiatives Every day, UK National debt increases by £345,800,000. As the government draws its income from much of the population, government debt is an indirect debt on future UK taxpayers

9 UK National Debt The green segments are linked to inflation, so cannot be eroded away by a bout of higher prices. Prices are in £bn - estimates from experts used for off-balance sheet items (the Government has in past only rarely provided official figures) Unfunded Pensions for:- Police Armed services M.O.D Teachers Civil servants MP’s Taxmen NHS workers Doctors Dentists Social Workers Quango employees

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11 WE DON’T SPANK THEM ANYMORE. WE JUST TELL THEM HOW MUCH THEY OWE TO THE NATIONAL DEBT

12 Individual personal Debt Total UK personal debt…. £1,452 bn Total UK personal debt…. £1,452 bn Total secured lending……. £1,236 bn Total secured lending……. £1,236 bn Average household debt is £8556 excluding mortgages Average household debt is £8556 excluding mortgages Average household debt is £57,624 including mortgages Average household debt is £57,624 including mortgages

13 Bottom Line….Who has caused the the UK National debt mountain Promises made by politicians over the past century pledging unsustainable future benefits to be paid by later generations. These benefits include Promises made by politicians over the past century pledging unsustainable future benefits to be paid by later 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 these promises, using FRB and electronic fiat currency, incentivised by short term bonus structure The willing cooperation of the Banking Sector to fund these promises, using FRB and electronic fiat currency, incentivised by short term bonus structure

14 What causes financial crises Some inter-related oft-quoted systemic causes…… Easy credit, causing credit bubble Easy credit, causing credit bubble Low interest rates Low interest rates Asset bubbles Asset bubbles Weak and fraudulent underwriting Weak and fraudulent underwriting Predatory lending Predatory lending Deregulation Deregulation And………….. And…………..

15 What causes financial crises ……Increased individual debt burden ……Increased individual debt burden Financial innovation and complexity Financial innovation and complexity Incorrect pricing of risk and poor risk models Incorrect pricing of risk and poor risk models Failure of economic models Failure of economic models Managers' capitalism Managers' capitalism Failure of rating agencies Failure of rating agencies Creative accounting procedures, mark to market, extend and pretend Creative accounting procedures, mark to market, extend and pretend And…… And……

16 What causes financial crises Some human and non systemic causes Greed, lust for power, lying, fraud, lack of accountability, the complete disregard for the rule of law and subsequent exposure Greed, lust for power, lying, fraud, lack of accountability, the complete disregard for the rule of law and subsequent exposure Change of public perceptions Change of public perceptions Changes in social attitudes Changes in social attitudes Transparency… financial state of Bank becomes public knowledge Transparency… financial state of Bank becomes public knowledge Insider whistle blowing and leaks Insider whistle blowing and leaks Loss of confidence Loss of confidence

17 But fundamentally what is really causing this financial crisis The real systemic causes that are rarely discussed … Fractional reserve banking system Fractional reserve banking system The rising price of oil during economic growth The 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 benefits to a burgeoning baby boomer population Investors (e.g. pension funds) who want high yields to pay benefits to a burgeoning baby boomer population Payment of interest on debt requires economic growth, which requires more energy Payment of interest on debt requires economic growth, which requires more energy Future income insufficient to pay interest on debt and leave enough to pay retired baby boomers Future income insufficient to pay interest on debt and leave enough to pay retired baby boomers Financial illiteracy of general public Financial illiteracy of general public Changes in social attitudes about debt Changes in social attitudes about debt The interconnection of Global Financial risks The interconnection of Global Financial risks Powerful vested interests wanting to maintain the status quo Powerful vested interests wanting to maintain the status quo Nothing has been done to address these issues

18 The importance of money Money is the foundation of the economy and society

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

20 Quotes about Bankers and Banks Henry Ford…… “It is well enough that the people of this nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -

21 Who creates Money Coins………….Royal Mint Bank notes…Bank of England, the UK Central Bank These account for 3% of the total money supply. Where is the rest of the 97%?

22 97% is electronic money that exists as entries in Bank Computer records

23 Fractional Reserve Banking In a speech on October 25 th, the Governor of the Bank of England, Mervyn King said “of all the many ways of organising banking, the worst is the one we have today. In a speech on October 25 th, the Governor of the Bank of England, Mervyn King said “of all the many ways of organising banking, the worst 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 not just breaking up banks, but also “eliminating fractional reserve banking”

24 Fractional Reserve Banking

25 Whenever a bank gives out a loan in a fractional- reserve banking system, a new sum of digital money is created Whenever a bank gives out a loan in a fractional- reserve banking system, a new sum of digital money is created Only a fraction (8% or less) of a bank's demand deposits (cash and other highly liquid assets) are kept as reserves available for withdrawal Only a fraction (8% or less) of a bank's demand deposits (cash and other highly liquid assets) are kept as reserves available for withdrawal Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank.

26 Fractional Reserve Banking When a bank makes a loan, it increases the amount of money in the hands of the public, by increasing total amount of electronic bank deposits….. And vice versa, when a loan is repaid, money is destroyed Interest must be paid with more £’s, ie more debt

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28 Fractional Reserve Banking Why does the Government support this “alchemy”? Because the Government needs far more money than that raised by taxes, so they borrow it Why does the Government support this “alchemy”? Because the Government needs far more money than that raised by taxes, so they borrow it Consequences…… new £’s dilute value of old £’s in the economy, prices go up…….inflation Consequences…… new £’s dilute value of old £’s in the economy, prices go up…….inflation Who are the gainers?… the Government and the Bankers. Government can tax without people understanding they are being taxed. Bankers collect perpetual interest on nothing…. A river of unearned wealth Who are the gainers?… the Government and the Bankers. Government can tax without people understanding they are being taxed. Bankers collect perpetual interest on nothing…. A river of unearned wealth Who are the losers?… the citizens and future generations of taxpayers Who are the losers?… the citizens and future generations of taxpayers

29 Quotes about Bankers and Banks “Give me the right to issue and control a Nation’s money and I care not who governs the Country” Meyer Rothschild, International banker ( )

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

31 Financial innovation Asset backed securities Mortgage loans, home equity release loans, home equity lines of credit (Before the crisis, Moody’s Rating 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 have been downgraded) Mortgage loans, home equity release loans, home equity lines of credit (Before the crisis, Moody’s Rating 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 have been downgraded) Student loans (In US, student loan debt has now surpassed all outstanding credit card debt ) Student loans (In US, student loan debt has now surpassed all outstanding credit card debt ) Credit cards debt Credit cards debt Car loans Car loans Aircraft leases Aircraft leases Royalty payments Royalty payments

32 As reported in The Times on September 15, 2008, the "Worldwide credit derivatives market was valued at $62 trillion”

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

34 The hydra with five heads Head 2 Population growth

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36 In 1950, the World population was 2 billion

37 There are now 6.5 billion (6,500,000,000) people in the World, all becoming more and more addicted to oil

38 World Population Every second, 7 babies are born, 4 people die, 3 extra humans in the World Every day, there are 250,000 extra humans in the World That’s the population of Cornwall every 2 days 70 million every year

39 The hydra with five heads Head 3 Pension time bomb

40 Growing population of baby boomers, born between 1946 and 1964 Over 25% of Devon’s Population is retired

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42 Global Pensions 01 Dec 2010 The pension plans of the world’s largest multinationals have fallen further into deficit despite record company contributions, new research shows. The European Pensions Briefing 2010 report by consulting actuary LCP, found the aggregate accounting deficit stood at €160bn ($209bn) at the end of September 2010, up from €150bn at the end of last year.

43 Universities to change their deficit-hit pension fund Reuters July, 2010 British universities have won a key battle in efforts to restructure the 30 billion pound pension scheme for academics after an executive committee backed their plan to tackle a £17 billion deficit as of March.

44 Bottom Line Anyone who does not work will not survive unless they are supported by someone who does work. This has always been what happens. People who don’t work include Anyone who does not work will not survive unless they are supported by someone who does work. This has always been what happens. People who don’t work include Retired, receiving occupational, private and state pensions Retired, receiving occupational, private and state pensions Children Children Sick Sick Those at school and university Those at school and university Unemployed Unemployed Very wealthy who have sufficient investment income Very wealthy who have sufficient investment income

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

46 The hydra with five heads Peak oil Climate change Heads 4 & 5

47 So what is ‘Peak Oil’? Consumers are only interested in delivery flows Many commentators talk of reserves and forget flows Many commentators talk of reserves and forget flows Reserves are only useful as flows Reserves are only useful as flows Peak oil is the point when worldwide production of conventional crude oil peaks

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50 We’re Not “Running Out of Oil” Peak Oil means we’ve used up about half of of the recoverable oil and gas Peak Oil means we’ve used up about half of of the recoverable oil and gas This sounds good; however, the half we’ve used was the easy stuff to get - - the cheap oilThis sounds good; however, the half we’ve used was the easy stuff to get - - the cheap oil

51 World population growth China's oil consumption is expected to grow by 7.5% per year for the next 20 years Climate change 4 fold

52 Is the Financial Crisis over?

53 Why will epicentre of collapse probably be USA US economy represents 25% of global economy

54 Baltic dry index

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63 Ongoing US Financial crises 1. The mortgage debt crisis 2. The sovereign debt crisis 3. The bank failure crisis 4. The city and state debt crisis 5. Dependency on foreign oil imports

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65 Much of UK infrastructure predates the invention of the internal combustion engine Playing field

66 Most of US infrastructure has been built after the invention of the internal combustion engine with cheap oil You can’t go anywhere in the States without a car

67 The US Housing Market The world’s largest single asset class in value is in deep trouble

68 The price of crude oil

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72 13.78 percent of U.S. mortgage loans now delinquent or in foreclosure percent of U.S. mortgage loans now delinquent or in foreclosure There is about $14.2 trillion in total U.S. mortgage debt outstanding. There are about $8.9 trillion in total U.S. mortgage-related securities. The volume of pooled mortgages stands at about $7.5 trillion. About $5 trillion of that is securitized or guaranteed by government sponsored enterprises or government agencies, the remaining $2.5 trillion pooled by private mortgage conduits. Mortgage backed securities can be considered to have been in the tens of trillions, if Credit Default Swaps are taken into account. There is about $14.2 trillion in total U.S. mortgage debt outstanding. There are about $8.9 trillion in total U.S. mortgage-related securities. The volume of pooled mortgages stands at about $7.5 trillion. About $5 trillion of that is securitized or guaranteed by government sponsored enterprises or government agencies, the remaining $2.5 trillion pooled by private mortgage conduits. Mortgage backed securities can be considered to have been in the tens of trillions, if Credit Default Swaps are taken into account.

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

74 What is a Financial Crisis?

75 Levels of severity of financial crises Bursting of asset bubbles such as property, stock markets, commodity prices Bursting of asset bubbles such as property, stock markets, commodity prices Collapse of large financial institutions Collapse of large financial institutions Collapse of shadow banking system (investment banks and hedge funds) Collapse of shadow banking system (investment banks and hedge funds) Sovereign debt defaults Sovereign debt defaults Currency crises Currency crises Credit crunch Credit crunch Bank bankruptcy Bank bankruptcy Series of minor Bank runs Series of minor Bank runs All of the above, cause loss of paper wealth but real economy may continue. The next crisis is potentially catastrophic

76 Systemic collapse of Global financial system

77 What happens in Systemic collapse Internet outages Internet outages Schools and universities closed Schools and universities closed Suspension of full banking activity for days Suspension of full banking activity for days Nationalisation of banks Nationalisation of banks No or limited withdrawals from cash machines No or limited withdrawals from cash machines Credit/debit cards won’t work Credit/debit cards won’t work Petrol stations running out of fuel Petrol stations running out of fuel Mass disorder, panic, riots Mass disorder, panic, riots Martial law imposed, curfews Martial law imposed, curfews Rise in popularity of extreme political parties Rise in popularity of extreme political parties Total collapse of old order followed by a command economy and loss of personal freedom Total collapse of old order followed by a command economy and loss of personal freedom Near-total unravelling of the socio-political order. Near-total unravelling of the socio-political order. Local Resource wars Local Resource wars Generational conflict Generational conflict

78 OpportunitiesSolutions

79 We have to learn to do 4 things fast Learn to live without fossil fuels Learn to live without fossil fuels Adapt to the end of economic growth as we have known it Adapt to the end of economic growth as we have known it Support 7 billion human beings and stabilize the population at a sustainable level Support 7 billion human beings and stabilize the population at a sustainable level Deal with our legacy of environmental destruction Deal with our legacy of environmental destruction Is this going to happen?

80 How can we prevent another crisis in the future? Abolish fractional reserve banking Abolish fractional reserve banking Replace with…… full reserve banking Replace with…… full reserve banking modern Islamic banking or something completely different…. a private, asset-based global currency or something completely different…. a private, asset-based global currency The State and corporate cartels have every incentive to maintain the status quo at all costs, so change will probably come from unconventional innovations

81 Banking crisis digest Weekly compilation of articles on the internet Copies of powerpoint presentation

82 Some Recommended reading Post carbon reader Post carbon reader Chris Martenson’s crash course for building resilience Chris Martenson’s crash course for building resilience New Economics Foundation New Economics Foundation Positive Money Positive Money

83 The End


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