Ian Callaghan

The coming credit crash is one of the most worrying things in the world today. There are serious credit problems today in Argentina, in Italy and in Greece among other places. In a globalized economy there are no firewalls between credit hotspots and the more relatively healthy but still combustible economies.

In the modern centralized and bureaucratic state, much of the economic value in society is built on a foundation of credit or debt. In a one sense, credit is money. You can buy things with it. You can build new factories, roads, transportation facilities and provide services for citizens such as security and education. But in another sense, credit it is anti-money because it is money that only exists in the future. If credit and money are brought together in the same time frame, they annihilate each other like matter and anti-matter. If brought together in critical mass, the resulting destruction of value is like an explosion. Headlines say things like, “$500 billion wiped out overnight!” When it comes to credit and money, debtors always pray that the future never comes.

If the debt-money is spent on production capabilities, such as a new factory or a new seaport facility for large ships, then the future income possibilities are greater and it is possible to predict excess money after the debt is paid back that we sometimes call profit, although many now view that word with alarm.

If however, the money is spent on consumption, the possibilities of future earnings increasing (growth) can’t be counted on. If I say to you I will gladly pay you Tuesday for a hamburger today, I do so in the expectation that I will have the money, by some means, on Monday night or early Tuesday morning. I am spending my future money. All ends well if my check comes in on time and I am able to cash it. What if I go to five different people and borrow from each of them the price of a hamburger, telling each in turn that I will pay them next Tuesday. My expectation for income on Tuesday only equals the cost of two burgers and I have already consumed five. I now have what is called “unfunded liabilities”. I can’t pay back my creditors with my expected income , so I ask for a raise. The boss says no. I have two primary options. The first is to pay two of my creditors and then go to the other three that I borrowed from and tell them I am unable to pay them (default) and that they have lost the money they leant me. Their future money is annihilated by the present debt and both are cancelled out. The other option is to inflate the money I have by borrowing from more people and paying my hamburger creditors and pushing off my debt crisis for another week. I can do this repeatedly. Because interest is involved, the total owed is greater than the total borrowed.

When I realize I can do this indefinitely and that I am unable to experience any consequences of this increase in borrowing because the consequences are always in the future, I increase my velocity of borrowing and begin to spend more and more of my future money to have a more fun present. This is called a Ponzi scheme. Some governments don’t like the term “Ponzi scheme” so they call this cycle of irresponsible spending of future money “investing in the future”. It sounds better.

Politicians realized back in the early part of the 20th Century that they could spend future money (credit) as if it was the equivalent of present money. Unfortunately. those with an urge to power and control gave away many, many hamburgers to get people to vote for them to continue to be in control of the hamburger pile. Notice, while hamburgers are good and people are enjoying them, they do nothing to provide future value. They are consumed. Once consumed, they cease to exist as hamburgers and quickly become waste. The only hope of offsetting future demands for repayment, that of increasing productive capabilities, is lost. Meanwhile the unfunded liabilities are growing. Still, nothing bad has happened yet. The present money and future anti-money are separated by time – for now. They can’t annihilate each other. This can go on for years. Ponzi Scheme operators (and some countries) are able to run along expanding their liabilities without apparent consequences for decades. And yet, there is a requirement that the operator must continually bring in increasing amounts of fresh present money (real cash) to cover interest due and repayments that can no longer be put off into the future for various reasons. Certain politicians call for increase in taxes every single year. That is (or should be) one of the warning signs. Why is the cost of government going up every year? And why is it growing faster than production capabilities? And how long can that go on before…money and anti-money come together; the curves intersect. What are the curves? Why must they intersect?

The analogy of flight.

For an aircraft to remain aloft certain things are needed. The first is a wing for lift (profit – the excess value needed to raise the craft above ground) To generate lift, there must be a motor (the economy). The motor provides motion and the motion of the wing through the air (the medium or currency) generates lift. At the same time, drag is generated (waste and loss) and drag is directly related to lift. More lift creates more drag. Drag is parasitic. Lift is what we want, to get it we have to have enough motor (economy) to overcome drag (waste and loss). Once aloft, the faster we go up, the slower we go forward and the more drag is created. All is well as we climb out away from the ground. Altitude for a flyer is said to be like money in the bank. Speed can be traded for altitude, or altitude for speed. Point the nose up and we rise, but slow down. Point the nose down and we speed up but get closer to the ground. So far so good, we ascend.

The motor to move us through the medium requires fuel (the assets in the economy) which we must spend to stay aloft.

The problem of flight is one of a balance of forces. The output of the motor is fixed, once it is at full power, there is nothing more that can be asked. All of the other factors, speed, altitude, drag and the lifting ability of the air (it gets thinner with altitude) are related. Make a change in one factor and the others are influenced to some degree. The pilot (our politician) uses skill, knowledge, and experience (one hopes) to keep the forces in balance during the flight. But in analogies as well as in real life, upsets happen. Air (currency) is always in motion for reasons of its own and when the velocity of its motion is sufficient, we feel it as turbulence, little bumps along the highway in the sky. The pilot wishes to get above the bumps to give his passengers a more enjoyable flight and so he pulls the nose up and trades speed for height. He also uses more fuel (assets). At the same time the air is getting thinner. He can only go so high before the air is too thin to support flight. All of this can be plotted on a sheet of paper as a series of curves. Since all the factors are related, they can be drawn on the same piece of paper. At some point the curves will touch each other.

If the wing goes through the air too slowly (or if the air is too thin) the flow of the air (currency) that generates lift flashes from an organized state into a chaotic state and no longer provides lift (profit). The higher the nose or the thinner the air, the more violent is the transition from lift to chaos. This is called an aerodynamic stall. The wing had ceased to function as a wing. At that moment, the plane requires a correction. We hear that term a lot when the economy takes a dip. The correction means that the plane is going to lose altitude, there is nothing that can be done to change that. The plane is going down. The pilot’s job skills are now critical to the outcome. The laws of nature determine that the plane is going down, the pilot determines how far.

He has three options. He can do nothing and the nose of the plane will drop by itself, the plane will fall until flying speed has been recovered and then it will start flying again at a lower altitude in an unknown attitude, which over time will tend to correct itself (in most planes but not all) because the plane was designed to be stable in flight. This is inelegant, wasteful and dangerous at low altitude, but it usually works. Next, the pilot can force the nose down under control, using the flight instruments as a guide (actual data not seat of the pants feel), wait for the speed to build up and then gently raise the nose to a proper flight attitude (austerity – do nothing to inhibit the restoration of lift but relax the demands on the wings until they are once again functioning). Proper use of all of the controls in a coordinated manner is important to prevent one wing from being more stalled than the other, flipping the plane on its side and resulting in a tailspin. In a modern passenger jet, a tailspin would most likely be fatal. Improper use of controls in a stall can lead to structural failure which is also fatal. So this option requires intelligence, wisdom, experience and discipline.

Lastly, the pilot could panic and pull back on the controls to force the nose back up where he wants to be in spite of the stalled wings (the wings can’t respond to his command because they are no longer capable of lift which we know is profit). This is the ideological approach. The plane always responded to his command to go up before (when he had plenty of lift) and so he commands it to rise. He can hold the nose high all the way to the ground, because that is where he will end up in a fatal meeting. This actually happened a few years ago to an Air France passenger jet over the ocean at night. The pilot got an erroneous reading from an iced up airspeed sensor and he pulled the wheel back until the big plane stalled. He held the wheel back all the way to the ocean below killing all aboard. He had perfectly good engines and wings and all of his other gauges were reading correctly, but he was unable to sort out the conflicting information he was getting. He wanted to be back up in the safety of the high altitude and so he commanded the pane to rise when it was incapable of doing do. He rode that misinformation down to the death. I wish one could say that such lack of awareness was rare in the political arena.

I apologize for the much too lengthy and for some boring metaphor but it shows a number of important factors at play in the economy. 1. Debt cannot continue to expand forever. The laws of nature (physics if you like) come into play at some point. 2. The bad politician acts as if debt can be extended infinitely and is essentially an unlimited commodity. 3. The forces at play in the economy are related. The relationships are many and complex and are not easily analyzed, but even so it should be obvious that (for a single example) as the government takes more of the profit (lift) out of the economy in taxes, altitude must be sacrificed. At some critical point when waste and loss equals productivity, the economy stalls and the flow of currency becomes chaotic resulting in a large correction in altitude (the market falls). If improper methods are used during the correction, the problems may be made much worse.

Most people sense that there is a reckoning coming. Many who clearly see what must happen given the nearly 100 trillion dollar debt load of the global economy, are so anxious about it they don’t want it discussed. The plane is still in the air. If we don’t think about the nose high attitude and the roaring engines barely able to keep us going, something will happen. We might even get that raise. It will be all right.

The fear mongers are out, saying that the next crash will be the big one. It will wipe out all value all over the globe in a computerized twinkling. When anti-money and money meet, possibly due to a market glitch or a war in Asia, there will be a nuclear sized annihilation of value. There have been seismic tremors in the credit markets in the past months, shaking that indicates massive instability in the system. Just before an airplane stalls, the wings begins to buffet as the onset of chaos alternates rapidly with organized flow. That tells the person in command that a stall is very close. We have been warned, some of us. The general news media is plumping for the next election cycle and they have ignored the disturbed flow patterns.

What will really happen when the stall comes?

If history is a guide, we can’t say. Many (perhaps most) people are creative and they get more so when their lives are threatened. An economy must respond to market forces, whether they are ideologically inconvenient or not to admit. Market forces come from natural laws and the exercise of free will. In addition computers will play a part that cannot be predicted because they are now fully weaponized as well as constantly evolving. People who don’t like us are looking for ways to hurt us through the network. Their full capabilities are not known (even by them) and will be revealed only during the coming computer wars. The advance skirmishes have already begun. When the big one comes, (and we can be sure it is coming) my guess is that we will see entirely new reactions from society, from computers and from nationalities. It probably won’t be an unmitigated stall, it will be a roller coaster muddle. The Great Depression was a classic mush to ground. The Japanese correction went on for decades. Most likely one or more nations will see the only way out for them is war. The Chinese are apparently in the planning stages.

Consulting the historical record, I would say that when money and anti-money collide, It won’t be as bad as you feared, but it will be worse than you could ever imagine.