WEBVTT 1 00:00:00.000 --> 00:00:03.100 Morning all, how are you? On this damp morning. 2 00:00:05.740 --> 00:00:09.100 Decades of broadcasting have taught me an interesting lesson, 3 00:00:09.300 --> 00:00:16.260 that sometimes the great brains of the age are lousy conversationalists. 4 00:00:16.980 --> 00:00:21.260 I won't mention names, but a couple come to mind who write brilliantly, 5 00:00:21.360 --> 00:00:25.740 but when they get to a microphone, become so deadeningly dull 6 00:00:25.740 --> 00:00:28.320 that you feel yourself losing consciousness. 7 00:00:29.360 --> 00:00:35.220 Conversely, often people who are quite ordinary in intellect 8 00:00:35.220 --> 00:00:38.640 can present their ideas such as they are brilliantly. 9 00:00:39.100 --> 00:00:42.480 So you can imagine the joy of this ageing broadcaster. 10 00:00:42.520 --> 00:00:46.060 When I came upon someone who not only thinks brilliantly, 11 00:00:46.900 --> 00:00:50.140 writes wonderfully, but is a dazzling broadcaster, 12 00:00:50.300 --> 00:00:56.240 such as he does, he's really, I think, presented himself as a canary 13 00:00:56.240 --> 00:00:57.700 in the coal mine of capitalism. 14 00:00:58.420 --> 00:01:01.680 And as he lost his feathers, no one took the slightest notice. 15 00:01:01.720 --> 00:01:04.680 He warned us what was happening in a book called 16 00:01:04.680 --> 00:01:10.200 Traders, Guns and Money, Knowns and Unknowns in the Dazzling World of Derivatives. 17 00:01:10.560 --> 00:01:13.920 That drew our attention to him, and on Late Night Live, 18 00:01:14.000 --> 00:01:17.260 he's now our resident risk assessor. 19 00:01:17.440 --> 00:01:21.640 I think you'll find him a very, very entertaining speaker. 20 00:01:21.820 --> 00:01:22.720 I always do. 21 00:01:22.820 --> 00:01:24.440 Ladies and gentlemen, DAS. 22 00:01:25.660 --> 00:01:26.220 APPLAUSE 23 00:01:36.060 --> 00:01:39.500 Built to fail, the age of Ponzi prosperity. 24 00:01:41.360 --> 00:01:43.760 We are the hollow men. 25 00:01:45.340 --> 00:01:47.580 We are the stuffed men. 26 00:01:50.380 --> 00:01:55.520 Our wallets filled with straw. 27 00:01:56.840 --> 00:01:57.600 Leaning. 28 00:01:58.320 --> 00:01:59.020 Into the storm. 29 00:02:00.900 --> 00:02:05.300 We now live at the end of the age of Ponzi prosperity. 30 00:02:05.520 --> 00:02:10.620 The wealth we thought we had, the wealth that we have become entitled to, 31 00:02:11.500 --> 00:02:14.860 was built on economic and social models, 32 00:02:15.740 --> 00:02:18.160 which are fundamentally and totally flawed, 33 00:02:19.020 --> 00:02:20.760 and are now failing. 34 00:02:22.560 --> 00:02:25.320 So what was this Ponzi prosperity based on? 35 00:02:26.380 --> 00:02:28.040 The world's entire wealth, 36 00:02:28.320 --> 00:02:30.580 has been driven by two factors. 37 00:02:30.780 --> 00:02:32.340 One is abundant and cheap debt. 38 00:02:32.960 --> 00:02:35.060 The second is free carbon emissions, 39 00:02:35.280 --> 00:02:39.300 and other forms of uncosted environmental degradation. 40 00:02:41.060 --> 00:02:44.040 Interestingly enough, despite the ideological debate, 41 00:02:44.220 --> 00:02:49.040 all political parties throughout the world have shared a reliance on growth. 42 00:02:50.700 --> 00:02:54.180 Harry Johnson, a rather famous economist, once wrote, 43 00:02:54.300 --> 00:02:56.420 when he was writing about Keynes, 44 00:02:56.640 --> 00:02:58.300 faster economic growth, 45 00:02:58.300 --> 00:03:01.560 is a panacea for all economic and political problems, 46 00:03:01.760 --> 00:03:05.160 and that faster growth can be easily achieved by a combination 47 00:03:05.160 --> 00:03:07.940 of inflationary demand management policies 48 00:03:07.940 --> 00:03:11.700 and politically appealing fiscal gimmickry. 49 00:03:12.500 --> 00:03:14.320 But Harry Johnson was a little late, 50 00:03:15.600 --> 00:03:19.420 because Scott Fitzgerald had anticipated that in the great Gatsby. 51 00:03:20.420 --> 00:03:22.340 Gatsby believed in the green light, 52 00:03:22.460 --> 00:03:26.960 the orgiastic future that year by year recedes before us. 53 00:03:27.600 --> 00:03:28.280 It is not a future that we can imagine, but a future that we can imagine. 54 00:03:28.280 --> 00:03:29.080 It deluded us then. 55 00:03:29.740 --> 00:03:30.980 But that's no matter. 56 00:03:31.620 --> 00:03:33.440 Tomorrow we will run faster, 57 00:03:34.160 --> 00:03:36.980 stretch our arms out further. 58 00:03:38.840 --> 00:03:40.540 We lived in the Goldilocks economy, 59 00:03:40.800 --> 00:03:43.920 and it was driven by a curious combination of certain things. 60 00:03:44.060 --> 00:03:45.260 Low interest rates, 61 00:03:46.280 --> 00:03:47.060 low oil prices, 62 00:03:47.820 --> 00:03:52.680 low product costs driven by the emergence of China, India, Asia and Eastern Europe. 63 00:03:54.040 --> 00:03:58.080 Deregulation of the financial system, which fed our insatiable appetite for debt, 64 00:03:59.140 --> 00:04:04.440 and that cheap and abundant debt funded both consumption and trade. 65 00:04:05.800 --> 00:04:09.360 If you look at the graph, which is going to appear, 66 00:04:10.760 --> 00:04:12.940 you look at the oil price, which is the red line. 67 00:04:13.480 --> 00:04:16.800 In the period of the 80s and 90s, we enjoyed oil prices, 68 00:04:16.880 --> 00:04:20.280 which we have not seen since the 1950s and 1960s, 69 00:04:20.900 --> 00:04:22.280 if you adjust for inflation. 70 00:04:23.060 --> 00:04:25.320 But at the same time, the fall of the Berlin Wall 71 00:04:25.320 --> 00:04:27.320 and the entry into the economy 72 00:04:27.320 --> 00:04:31.780 of the old communist economies of Eastern Europe and Asia 73 00:04:32.320 --> 00:04:34.580 had some interesting effects in terms of costs. 74 00:04:35.080 --> 00:04:37.500 But there were some interesting aspects to that as well. 75 00:04:37.960 --> 00:04:42.560 For instance, occupational health standards changed somewhat. 76 00:04:42.620 --> 00:04:46.520 This is the new dust and particle free breathing mask that was being used. 77 00:04:47.300 --> 00:04:51.260 This was the approved scaffolding used in Eastern Europe and Asia 78 00:04:51.260 --> 00:04:52.660 to actually build things. 79 00:04:53.240 --> 00:04:57.060 And this was the approved construction side hard hat. 80 00:04:59.680 --> 00:05:04.400 And during this period, our consumption was built on a pyramid of debt. 81 00:05:05.520 --> 00:05:09.620 That graph behind me shows the uniform rise of debt, consumer debt. 82 00:05:09.780 --> 00:05:12.320 This is people borrowing to consume, to buy plasma televisions 83 00:05:12.320 --> 00:05:14.100 and everything else and their hammers. 84 00:05:14.280 --> 00:05:17.020 It grew across the whole Western world. 85 00:05:17.120 --> 00:05:18.060 It roughly doubled. 86 00:05:18.440 --> 00:05:21.460 And in the end, when you look at where the US stands today, 87 00:05:21.600 --> 00:05:22.900 it stands in hock. 88 00:05:24.480 --> 00:05:27.180 Debt, if you look at the total production of the economy, 89 00:05:27.320 --> 00:05:32.640 US debt peaked at 3.5 times the total annual production, 90 00:05:32.900 --> 00:05:34.760 which is about $15 trillion. 91 00:05:35.840 --> 00:05:41.580 That is a level that has not been approached since the Great Depression. 92 00:05:43.020 --> 00:05:44.580 But it wasn't only consumption. 93 00:05:44.800 --> 00:05:47.780 The entire trading system that we've relied on 94 00:05:47.780 --> 00:05:50.980 was built on a gigantic Ponzi scheme. 95 00:05:51.780 --> 00:05:53.440 We, of course, have China. 96 00:05:53.980 --> 00:05:56.400 And on the other side, we have the United States. 97 00:05:57.600 --> 00:06:01.380 What we thought was trade was actually a very interesting process. 98 00:06:02.080 --> 00:06:05.080 So what was happening was China was exporting goods and services 99 00:06:05.080 --> 00:06:06.460 to the United States. 100 00:06:06.780 --> 00:06:10.660 And in return, of course, the United States was stripping out dollars 101 00:06:10.660 --> 00:06:11.840 to the Chinese. 102 00:06:13.060 --> 00:06:16.480 Except there was a cycle which went the other way, 103 00:06:17.260 --> 00:06:19.700 which is the financial aspects of trade, 104 00:06:19.940 --> 00:06:23.100 which is the Chinese were taking the excess dollars they got 105 00:06:23.100 --> 00:06:25.520 and were actually lending it 106 00:06:25.520 --> 00:06:29.660 back to the United States by buying US government bonds. 107 00:06:29.880 --> 00:06:34.520 So it eventually flowed through into the US domestic economy. 108 00:06:35.180 --> 00:06:37.980 And what was happening was the actual consumption, 109 00:06:38.180 --> 00:06:41.040 the process of buying these goods from China, 110 00:06:41.100 --> 00:06:45.100 was purely actually being funded by the Chinese themselves 111 00:06:45.100 --> 00:06:46.940 through this circulatory mechanism. 112 00:06:47.800 --> 00:06:49.660 Now, there are some in the world, in the US Congress, 113 00:06:49.760 --> 00:06:50.820 which think this was all right. 114 00:06:52.020 --> 00:06:54.580 One particular politician remarked to me, 115 00:06:55.520 --> 00:06:57.400 that he thought this was an extremely fair exchange. 116 00:06:57.980 --> 00:07:00.600 He said, the Chinese send us toxic toys, 117 00:07:01.520 --> 00:07:03.660 we send them back toxic debt. 118 00:07:06.400 --> 00:07:08.560 The point I'm making is fundamentally 119 00:07:08.560 --> 00:07:13.140 the entire system of trade on which we built the world 120 00:07:13.140 --> 00:07:14.940 is actually a fiction. 121 00:07:15.140 --> 00:07:17.820 The fiction was driven purely and simply by the fact 122 00:07:17.820 --> 00:07:19.100 the Chinese never got paid. 123 00:07:19.400 --> 00:07:22.080 We actually paid, if I'm a Chinese individual, 124 00:07:22.460 --> 00:07:24.060 the Americans to buy our goods, 125 00:07:24.120 --> 00:07:25.360 and never collected on the debt. 126 00:07:28.080 --> 00:07:30.100 Now, for a moment, think about the world 127 00:07:30.100 --> 00:07:31.520 as two separate boxes. 128 00:07:31.900 --> 00:07:34.200 The first box, which is the left-hand side, 129 00:07:34.480 --> 00:07:36.800 is, let's call that, the real economy. 130 00:07:37.920 --> 00:07:40.300 Contrary to popular appeal, money is actually nothing. 131 00:07:41.220 --> 00:07:44.040 We have to actually make goods, we have to make services, 132 00:07:44.160 --> 00:07:44.920 and we have to sell them. 133 00:07:45.260 --> 00:07:48.820 The left-hand side, which is what we call the real economy, 134 00:07:48.920 --> 00:07:50.180 is Q times P. 135 00:07:50.780 --> 00:07:53.520 Quantity of goods and services produced multiplied by the price. 136 00:07:53.660 --> 00:07:55.040 That's the real value of production, 137 00:07:55.040 --> 00:07:56.780 old-fashioned stuff, making things. 138 00:07:57.200 --> 00:08:00.540 On the right-hand side is the financial economy. 139 00:08:01.420 --> 00:08:02.540 M times V. 140 00:08:03.360 --> 00:08:05.680 This is the amount of money that's in the economy, 141 00:08:06.380 --> 00:08:10.100 and then there is the speed with which it goes round. 142 00:08:10.460 --> 00:08:12.200 Because money goes to somebody else, 143 00:08:12.300 --> 00:08:14.100 and then it goes to somebody else and keeps circulating. 144 00:08:14.440 --> 00:08:16.940 Now, the two have to equate to each other, 145 00:08:17.060 --> 00:08:19.000 because the financial part isn't real. 146 00:08:19.160 --> 00:08:20.840 It's only a claim on the real economy. 147 00:08:21.560 --> 00:08:25.020 What actually happened in the last 25 to 30 years, 148 00:08:25.040 --> 00:08:31.260 was we saw an absolutely explosive growth in that right-hand side. 149 00:08:32.100 --> 00:08:36.800 What actually was happening was M was going up through a whole process, 150 00:08:36.880 --> 00:08:38.460 which was two elements. 151 00:08:38.800 --> 00:08:40.920 Once in a lifetime expansion of liquidity, 152 00:08:41.340 --> 00:08:43.600 essentially as governments pumped out more money, 153 00:08:43.720 --> 00:08:46.000 and at the same time, bankers, 154 00:08:46.100 --> 00:08:48.100 and I used to be a banker in my previous life, 155 00:08:48.340 --> 00:08:53.140 effectively increased the velocity with which that money was going around. 156 00:08:53.220 --> 00:08:54.020 That kept going up. 157 00:08:54.020 --> 00:08:56.340 So the right-hand side expanded. 158 00:08:57.180 --> 00:09:00.140 Now, the right-hand side is simply a fiction. 159 00:09:00.540 --> 00:09:02.880 It's a claim on the left-hand side, the real economy. 160 00:09:03.240 --> 00:09:05.920 So what now has to happen is the left-hand side has to adjust. 161 00:09:07.520 --> 00:09:10.480 Now, quantity of goods and services cannot expand very quickly. 162 00:09:11.080 --> 00:09:14.400 So what actually happened was this process set off 163 00:09:14.400 --> 00:09:18.020 a once-in-a-lifetime cycle of increasing asset prices. 164 00:09:18.560 --> 00:09:22.480 So simple things like your houses, commercial property, 165 00:09:22.480 --> 00:09:25.740 share prices, commodity prices, 166 00:09:25.940 --> 00:09:31.720 everything went up on the tsunami of money that was being created. 167 00:09:33.060 --> 00:09:37.100 Now, the problem with that is this is a very funny type of money. 168 00:09:37.280 --> 00:09:40.200 It's actually trapped in the asset world 169 00:09:40.200 --> 00:09:44.060 because essentially as prices go up, as your house goes up, 170 00:09:44.140 --> 00:09:45.880 you can borrow more against your house 171 00:09:46.480 --> 00:09:49.560 because you have more collateral, more security to borrow against. 172 00:09:50.000 --> 00:09:52.460 And that process means that essentially this money, 173 00:09:52.460 --> 00:09:54.280 this money can never really be released easily 174 00:09:54.280 --> 00:09:55.920 when it gets trapped in this world. 175 00:09:56.040 --> 00:09:59.340 So all you do is take money out of one asset and buy another asset with it, 176 00:09:59.360 --> 00:10:00.320 keep pushing it up. 177 00:10:01.260 --> 00:10:06.120 And this was the Ponzi growth that actually drove the entire global economy 178 00:10:06.120 --> 00:10:07.840 for the last 20, 25 years. 179 00:10:09.160 --> 00:10:11.740 And if you look at that figuratively, it's like a seesaw. 180 00:10:12.180 --> 00:10:14.600 What happened is the amount of money increased exponentially, 181 00:10:15.300 --> 00:10:17.660 forcing the seesaw to correct up, 182 00:10:17.840 --> 00:10:22.380 and on the right-hand side, obviously the price of every asset went up. 183 00:10:24.320 --> 00:10:26.560 Now, there were other signs the market was peaking. 184 00:10:26.740 --> 00:10:29.040 Not only were asset prices going up, 185 00:10:29.280 --> 00:10:32.620 Ferrari launched a car, the Otto Volante. 186 00:10:32.900 --> 00:10:36.460 This was the car for the time-challenged, 187 00:10:36.460 --> 00:10:40.660 traffic-impeded business executive for 2 million pounds. 188 00:10:40.900 --> 00:10:45.340 This would fly at 5,000 feet over traffic, not through it. 189 00:10:45.540 --> 00:10:49.620 If ever there was a sign that the excesses in the world had reached their limit, 190 00:10:49.820 --> 00:10:50.660 this was it. 191 00:10:52.800 --> 00:10:55.880 Now, we have a habit of confusing diseases and cures. 192 00:10:56.780 --> 00:10:58.360 The disease to me is very clear. 193 00:10:58.520 --> 00:11:00.300 It's the excessive debt in the system. 194 00:11:01.400 --> 00:11:03.680 And we all know what we have to do. 195 00:11:04.540 --> 00:11:05.820 We have to take the cure, 196 00:11:06.360 --> 00:11:09.320 which is this very ugly word called deleveraging, 197 00:11:09.360 --> 00:11:10.740 which, by the way, I looked up the Oxford dictionary. 198 00:11:11.000 --> 00:11:11.720 It doesn't exist. 199 00:11:12.540 --> 00:11:13.280 But it will. 200 00:11:14.300 --> 00:11:17.260 When they come to the new edition, you will see the word deleveraging. 201 00:11:17.460 --> 00:11:20.280 What it basically means, once you strip the jargon away, 202 00:11:20.540 --> 00:11:22.320 is this is basically the process 203 00:11:22.460 --> 00:11:24.580 by which the amount of debt in the global economy 204 00:11:24.580 --> 00:11:27.220 will have to be reduced to a sustainable level. 205 00:11:28.940 --> 00:11:32.080 Effectively, if you look at this, this is almost Freudian. 206 00:11:33.340 --> 00:11:35.020 Illusions commend themselves to us 207 00:11:35.020 --> 00:11:37.140 because they allow us to save pain 208 00:11:37.140 --> 00:11:39.660 and allow us to enjoy pleasure instead. 209 00:11:40.340 --> 00:11:42.720 We must therefore accept it without complaint 210 00:11:43.460 --> 00:11:45.640 when they sometimes collide with a bit of reality 211 00:11:46.460 --> 00:11:48.200 against which they are dashed to pieces. 212 00:11:48.820 --> 00:11:51.780 The global financial crisis was essentially 213 00:11:52.520 --> 00:11:54.760 the rock, the reality, 214 00:11:54.980 --> 00:11:58.740 on which the Ponzi prosperity of the last 30 years 215 00:11:58.740 --> 00:12:00.060 was dashed to pieces. 216 00:12:02.340 --> 00:12:04.340 Now, this is a crash course in banking. 217 00:12:04.480 --> 00:12:05.420 This is how a bank operates. 218 00:12:05.980 --> 00:12:08.400 A bank is actually an exceedingly simple creature. 219 00:12:09.200 --> 00:12:10.900 Otherwise, I wouldn't have been able to be a banker. 220 00:12:11.860 --> 00:12:14.440 If you look at the bank, it makes loans. 221 00:12:14.540 --> 00:12:15.920 So the assets on the bank 222 00:12:16.460 --> 00:12:19.320 are basically loans and securities it holds. 223 00:12:19.440 --> 00:12:20.620 Let's say that's $95. 224 00:12:21.060 --> 00:12:22.500 It might have some cash 225 00:12:22.500 --> 00:12:24.740 because you might want to take some money out, 226 00:12:24.780 --> 00:12:26.960 take out a deposit, so it has to have some cash there, 227 00:12:27.020 --> 00:12:28.860 so it's 5%, so $5. 228 00:12:29.360 --> 00:12:31.720 On the other side, it borrows the money, of course, 229 00:12:31.720 --> 00:12:33.280 from us in terms of deposits. 230 00:12:33.740 --> 00:12:35.320 And by statutory rules, 231 00:12:35.660 --> 00:12:38.620 they can roughly borrow 92 out of every $100. 232 00:12:38.620 --> 00:12:39.280 That's the maximum. 233 00:12:39.900 --> 00:12:41.440 And of course, the rest, the $8, 234 00:12:41.440 --> 00:12:43.180 is the share capital that the bank has. 235 00:12:44.160 --> 00:12:45.540 Now, one way to think about this, 236 00:12:45.560 --> 00:12:47.740 this strange entity called a bank 237 00:12:49.000 --> 00:12:50.600 effectively is geared, or at least, 238 00:12:50.600 --> 00:12:53.040 levered roughly 12 1⁄2 times. 239 00:12:53.980 --> 00:12:55.500 Let me show you what happens 240 00:12:55.500 --> 00:12:57.120 in terms of what we call leverage. 241 00:12:58.520 --> 00:12:59.820 Let's assume you take losses, 242 00:12:59.940 --> 00:13:01.980 and in the global financial crisis, as you know, 243 00:13:02.420 --> 00:13:04.380 everybody has taken some degree of losses. 244 00:13:04.560 --> 00:13:07.540 So let's say the loans and securities that you own, 245 00:13:07.700 --> 00:13:09.080 the loans you've made to people, 246 00:13:09.580 --> 00:13:11.920 like people in the United States in subprime 247 00:13:11.920 --> 00:13:13.860 or other places who are not going to pay you back, 248 00:13:14.280 --> 00:13:15.920 let's say that's gone down by 10. 249 00:13:16.180 --> 00:13:17.080 It's gone to 85. 250 00:13:18.100 --> 00:13:20.580 Now, effectively, the asset side has come down to 90. 251 00:13:21.420 --> 00:13:23.600 Unfortunately, assets must equal liabilities, 252 00:13:24.120 --> 00:13:25.820 so your liability side has to adjust. 253 00:13:26.240 --> 00:13:28.160 And essentially, you've wiped out 254 00:13:28.160 --> 00:13:29.380 all the share capital you have. 255 00:13:29.620 --> 00:13:30.900 And unfortunately, the share capital 256 00:13:30.900 --> 00:13:32.700 can't take the value of minus 2. 257 00:13:32.780 --> 00:13:34.040 It's constrained at zero. 258 00:13:34.720 --> 00:13:36.840 So under those circumstances, what that means 259 00:13:37.600 --> 00:13:39.560 is essentially the banking system 260 00:13:39.560 --> 00:13:41.380 is actually insolvent. 261 00:13:41.860 --> 00:13:44.040 In aggregate, the global banking system 262 00:13:44.040 --> 00:13:45.260 is close to insolvency. 263 00:13:45.420 --> 00:13:47.320 That doesn't mean every bank is insolvent. 264 00:13:47.440 --> 00:13:48.620 The Australian banking system, 265 00:13:48.820 --> 00:13:49.960 the Canadian banking system, 266 00:13:49.960 --> 00:13:51.800 the Chinese banking system are quite solvent. 267 00:13:52.020 --> 00:13:55.240 But in aggregate, if I take the whole entire banking system, 268 00:13:55.980 --> 00:13:57.160 essentially it's insolvent, 269 00:13:57.280 --> 00:13:59.600 which means that's not very good news for American banks 270 00:13:59.600 --> 00:14:01.460 and British banks and European banks. 271 00:14:01.840 --> 00:14:03.380 To give you some idea of the perspective 272 00:14:03.380 --> 00:14:04.960 on European banks, 273 00:14:05.220 --> 00:14:06.740 is if you look at the European banks, 274 00:14:06.940 --> 00:14:09.860 the country of Austria has lent 80% 275 00:14:09.860 --> 00:14:12.980 of Austria's total gross domestic product, 276 00:14:13.060 --> 00:14:13.820 its total production, 277 00:14:14.080 --> 00:14:15.620 to Central and Eastern Europe, 278 00:14:16.520 --> 00:14:18.900 which is a remarkable achievement by any standards. 279 00:14:18.900 --> 00:14:22.740 It certainly doesn't approach the Icelandic level, 280 00:14:22.940 --> 00:14:24.940 which was 5.5 times GDP. 281 00:14:25.380 --> 00:14:27.700 Their debt was 5.5 times that lent to other people. 282 00:14:28.340 --> 00:14:29.720 But the problem for us is, 283 00:14:29.840 --> 00:14:31.840 initially when the global financial crisis, 284 00:14:31.980 --> 00:14:34.160 there was a lovely sense of that lovely German word, 285 00:14:34.960 --> 00:14:35.480 schadenfreude. 286 00:14:37.600 --> 00:14:40.360 Bankers were finally getting their comeuppance, 287 00:14:40.480 --> 00:14:41.680 except we very quickly realized 288 00:14:41.680 --> 00:14:43.900 when bankers get their comeuppance, so do we, 289 00:14:44.040 --> 00:14:46.820 because they do everything with other people's money. 290 00:14:47.760 --> 00:14:48.880 And so what is now the problem? 291 00:14:48.900 --> 00:14:50.440 What is now happening is essentially 292 00:14:50.440 --> 00:14:53.620 the global economy is being starved 293 00:14:53.620 --> 00:14:56.500 of its lifeblood, 294 00:14:57.260 --> 00:14:58.660 which is debt, credit. 295 00:15:00.080 --> 00:15:01.920 Credit is one of those wonderful things in life 296 00:15:01.920 --> 00:15:03.340 you don't notice unless it's absent. 297 00:15:03.620 --> 00:15:04.580 It's like a motor car. 298 00:15:04.700 --> 00:15:07.120 You might have a 2 million pound Ferrari. 299 00:15:07.900 --> 00:15:09.420 The problem with the Ferrari is, 300 00:15:09.480 --> 00:15:10.980 if you don't put $50 of oil in it, 301 00:15:11.080 --> 00:15:12.340 it doesn't go anywhere very quickly. 302 00:15:12.880 --> 00:15:14.900 And the oil in the global economy, 303 00:15:15.040 --> 00:15:15.840 which is the debt, 304 00:15:16.040 --> 00:15:17.440 is basically drained out. 305 00:15:18.100 --> 00:15:19.560 And what that sets off 306 00:15:19.560 --> 00:15:22.400 is the wretched deleveraging process, 307 00:15:23.000 --> 00:15:24.920 which is the banks now have to reduce 308 00:15:24.920 --> 00:15:27.120 the amount of debt that they have, 309 00:15:27.260 --> 00:15:29.020 the amount of, because they don't have any capital, 310 00:15:29.220 --> 00:15:30.820 so they basically can't make loans, 311 00:15:30.880 --> 00:15:32.220 so they reduce their balance sheets 312 00:15:32.220 --> 00:15:33.400 and stop lending to people. 313 00:15:33.880 --> 00:15:35.380 The only person in Australia who thinks 314 00:15:35.380 --> 00:15:37.580 the banks are lending is Wayne Swan and Kevin Rudd. 315 00:15:37.620 --> 00:15:39.260 If you actually look at the aggregate figures, 316 00:15:39.420 --> 00:15:41.260 it actually doesn't show that at all. 317 00:15:41.300 --> 00:15:42.060 It's actually shrinking. 318 00:15:42.760 --> 00:15:44.500 And that sets off the second phase 319 00:15:44.500 --> 00:15:45.440 of this ugly word deleveraging, 320 00:15:46.240 --> 00:15:47.120 which is the, 321 00:15:47.120 --> 00:15:48.920 the companies and individuals 322 00:15:48.920 --> 00:15:50.720 who have borrowed money have to repay that. 323 00:15:51.100 --> 00:15:52.620 So as they try to do that, 324 00:15:52.740 --> 00:15:56.880 it sets off what we call a negative feedback loop. 325 00:15:57.180 --> 00:15:59.840 What you were seeing before was a positive feedback loop. 326 00:16:00.040 --> 00:16:01.740 The level of debt coming into the economy 327 00:16:01.740 --> 00:16:03.820 was driving up all the asset prices, 328 00:16:03.860 --> 00:16:05.000 enabling us to borrow more, 329 00:16:05.080 --> 00:16:06.620 which drove up the prices even further. 330 00:16:06.860 --> 00:16:08.860 Now what's happening is it's gone into reverse. 331 00:16:09.380 --> 00:16:11.460 It's basically the law of financial gravity. 332 00:16:11.540 --> 00:16:12.740 It's very Newtonian. 333 00:16:12.740 --> 00:16:14.440 What goes up must come down. 334 00:16:14.800 --> 00:16:16.640 And as that occurs, what happens, 335 00:16:17.120 --> 00:16:17.880 is Wall Street, 336 00:16:18.160 --> 00:16:20.240 the financial institutions on the one side, 337 00:16:20.400 --> 00:16:22.280 restrict credit to Main Street. 338 00:16:22.440 --> 00:16:24.280 But as Main Street starts to take losses, 339 00:16:24.660 --> 00:16:27.680 what actually happens is it triggers more losses in the banks, 340 00:16:27.780 --> 00:16:29.560 leads to further compression in credit. 341 00:16:30.600 --> 00:16:32.680 Now I don't know whether you have the good news or the bad news. 342 00:16:32.920 --> 00:16:34.500 The good news is the process has started. 343 00:16:34.540 --> 00:16:36.400 The bad news, it's about a third of the way through. 344 00:16:38.300 --> 00:16:40.120 Now if you actually have debt now, 345 00:16:40.220 --> 00:16:41.640 perhaps if you like karaoke, 346 00:16:41.780 --> 00:16:43.760 this is the song of the day 347 00:16:43.760 --> 00:16:46.860 from the late Michael Jackson in Thriller. 348 00:16:47.440 --> 00:16:48.640 You hear the door slam 349 00:16:48.640 --> 00:16:50.520 and realize there's no way left to run. 350 00:16:50.700 --> 00:16:51.980 You feel the cold hold 351 00:16:52.660 --> 00:16:55.400 and wonder if you'll ever see the sun. 352 00:16:56.960 --> 00:16:59.520 And what we're going to see over the next couple of years 353 00:17:00.120 --> 00:17:01.920 is a Van Morrison journey 354 00:17:01.920 --> 00:17:05.560 into not the mystic, but the real. 355 00:17:06.520 --> 00:17:08.980 The financial economy will continue to take losses. 356 00:17:09.600 --> 00:17:13.140 There's going to be a scarcity of banks being able to lend 357 00:17:13.140 --> 00:17:14.400 because they don't have share capital. 358 00:17:14.600 --> 00:17:15.980 They will shrink their balance sheet. 359 00:17:15.980 --> 00:17:18.780 And then what that will set off is on the right-hand side, 360 00:17:19.040 --> 00:17:20.440 the shrinkage in the economy. 361 00:17:20.800 --> 00:17:23.400 There'll be higher credit costs, tighter credit conditions, 362 00:17:23.560 --> 00:17:24.940 reduced availability of debt. 363 00:17:25.120 --> 00:17:27.120 It'll lead to lower growth, higher unemployment, 364 00:17:27.360 --> 00:17:28.420 which we're starting to see. 365 00:17:28.760 --> 00:17:30.780 And I just want to make one comment about the higher unemployment. 366 00:17:31.320 --> 00:17:33.440 Looking at the headline unemployment now is meaningless. 367 00:17:34.020 --> 00:17:36.300 You have to look at not the headline unemployment 368 00:17:36.300 --> 00:17:38.240 because of the nature of part-time work 369 00:17:38.240 --> 00:17:39.640 and contracting work in the economy. 370 00:17:39.860 --> 00:17:41.740 What you need to look at is the hours worked 371 00:17:41.740 --> 00:17:43.060 and the actual income. 372 00:17:43.440 --> 00:17:45.820 What the government will not tell you is those numbers 373 00:17:45.980 --> 00:17:47.000 that are falling off the edge of a cliff. 374 00:17:47.680 --> 00:17:52.360 If you went back to 1920s and 1930s and 1940s and 50s 375 00:17:52.360 --> 00:17:54.900 and restated current employment numbers to those standards, 376 00:17:55.180 --> 00:17:56.760 it would be significantly higher. 377 00:17:56.980 --> 00:17:59.360 It would probably be like three times as an economist 378 00:17:59.360 --> 00:18:00.880 in the United States who's done work. 379 00:18:01.700 --> 00:18:03.920 Unemployment in the US is now about 9.5%. 380 00:18:04.460 --> 00:18:06.800 If you did it the old-fashioned way with an old-fashioned economy, 381 00:18:06.940 --> 00:18:08.120 it would be close to 20%. 382 00:18:08.920 --> 00:18:11.980 And that basically sets off the second part of the deleveraging, 383 00:18:12.040 --> 00:18:13.440 which is in the global economy. 384 00:18:13.840 --> 00:18:15.960 The US consumption has driven 385 00:18:15.980 --> 00:18:18.480 the global economy and the US consumer has borrowed 386 00:18:18.480 --> 00:18:19.560 to fund the consumption. 387 00:18:19.900 --> 00:18:22.960 And as they cannot now borrow to fund the consumption, 388 00:18:23.280 --> 00:18:25.380 what happens is our trading partners, 389 00:18:25.560 --> 00:18:27.340 which is in East Asia, 390 00:18:27.520 --> 00:18:30.900 basically suffer a great contraction of their exports. 391 00:18:31.360 --> 00:18:34.840 And so what that happens is they no longer buy commodities from us. 392 00:18:35.180 --> 00:18:40.320 And this sets off the massive, massive process of reduction 393 00:18:40.980 --> 00:18:44.120 in prices across the economies of the world. 394 00:18:44.120 --> 00:18:46.500 And there are obviously feedback loops. 395 00:18:46.800 --> 00:18:49.640 What happens in the financial sector affects the real economy. 396 00:18:49.880 --> 00:18:53.080 What happens in the real economy then affects the financial sector. 397 00:18:53.220 --> 00:18:54.740 Then it affects the real economy. 398 00:18:55.160 --> 00:18:59.420 And essentially, it's like a person who's visually impaired in a room. 399 00:18:59.640 --> 00:19:02.900 You feel your way through the walls to find where you have to sit down. 400 00:19:03.080 --> 00:19:04.500 We have some way to go. 401 00:19:05.960 --> 00:19:07.740