Thread by @juliangough

"For now, few experts think that a broader crisis is imminent."

Well, I think a broader crisis is imminent. Let me put that on the record: We will have a worse global financial crisis than 2008, starting within the year. Let's see who's right.

washingtonpost.com/business/econo…

This is just irritating.

"Authorities in the United States and Europe took steps after the 2008 crisis to avoid a repeat episode."

No, they took steps that guaranteed a repeat episode. They tried to solve the problem at the wrong level.

The problem is that the main economic theory that all the authorities' actions are based on (general equilibrium theory), is wrong in its fundamental assumption. (Spoiler alert: it's that "equilibrium" bit.)

So it keeps being startled by crises it causes.
en.wikipedia.org/wiki/General_e…

Must cook dinner now, but I will return to this thread and expand, at length, on it. This has been annoying me ever since I predicted the last crisis. (Proof? Here's an old blog post, Biggest Crash In World History Coming Up, written in August 2007.)

juliangough.com/journal/bigges…

Wait, this is even better. My detailed prediction of the 2008 crash, from Feb 2007, "Debt & Derivatives: A Prediction". This, I think, qualifies me to talk about what's about to happen worldwide, and why.
Have a read. I'll be back when I've cooked dinner.
juliangough.com/journal/2007/2…

(I am cooking this jambalaya. It's a grrrrreeaaat meal, but takes me about three hours to cook it, thus the long gap...)

emilieeats.com/classic-cajun-…

Dinner was great... Where were we? Oh yes, on the brink of a debt-driven financial apocalypse, cause by flaws in general equilibrium theory. The nuts and bolts of this are a bit technical and boring, so let's do the fun bit first...

WHAT WILL BE DESTROYED IN THE NEXT YEAR?
Obviously, many stock markets will be cut in half. But also...
Most cryptocurrencies & initial coin offerings will go to zero.
Property will begin to lose half its value in Vancouver, Sydney, London, Seattle, and other "hot money" cities.

Bond markets will collapse, as corporations fail to roll over debt.
Oh, sovereign debt too. Entire countries will fail.
Corporate bankruptcies will begin to soar.
(Some of these processes – property, corporate bankruptcy – will take a while, but will start in the next year.)

Leveraged ETFs will implode.
Oh, China in general. Chinese property will go smash like you wouldn't believe. Their entire financial system will seize up. (But the government will intervene hard, lie like crazy, & suppress media, so it will be hard to tell what's happening.)

A lot of start-ups will go bust, as next-round finance evaporates.
A lot of big, well known tech names that don't ACTUALLY make money will go bust.
Oh, let's name names, that's always fun. Uber will go bust. (Their business model & debt structure won't survive a credit crunch.)

Basically, ten years after the last crash, almost every major asset class is in a bubble. (Just look at price/earnings ratios for stocks, at price-to-rent ratios for property, etc. All wildly bubbly.) And those interlocking bubbles are all about to go pop. WHY?

Well, I spent the last year writing & rewriting a long piece about WHY we were sleepwalking into another, even worse, financial apocalypse: the piece kept getting looonger, until I gave up (I think it was trying to become a book). So it's hard to squeeze it all into a few tweets.

There are three main layers to the problem.
The 1st (surface) layer involves faults in the way financial institutions model risk.
2nd layer involves flawed central bank behaviour, QE, that leads to 1st.
3rd layer involves the flaws in general equilibrium theory that lead to 2nd.

Ugh, that is way too compressed. Unhelpful. I need to tease this out for you, layer by layer, in straightforward language. That will take a lot of tweets, & it is my bedtime in Berlin. So how about I detail the reasons for the coming financial apocalypse over the next few days?

OK (after a good night's sleep, and a good morning's writing, and a good lunch, so I am a bit sleepy), I am going to add to yesterday's thread, in which I predicted a global financial apocalypse in the next year.
But, before we get into the details, let me make a broader point...

Money doesn't exist. Back in the days of the gold standard (or earlier, when it was things like cowrie shells), you could argue that money was at least vaguely connected to something that did exist; but since the early 1970s, money has been attached to nothing solid at all.

All money is now "fiat currency": let-there-be currency, called into existence out of nothing, and echoing "fiat lux", let there be light, in Genesis.
So who gets to call it into existence, and when, and why, are key questions to which we will return.

The monetary system, in other words, is entirely faith-based: it only exists because of our belief. It is religion; not science, not objective reality. But our current situation is rather like that of English-speaking peasants in the Middle Ages, when the Bible was only in Latin.

We have a common religion (the financial system), but most of us cannot read the language (economics) in which that religion is encoded and discussed. And those who DO speak that language – traders, bankers, and the already rich – mysteriously end up with all the money.

So when there IS a crash, poorer individuals, who do not speak the language, lose everything, while rich institutions and individuals who do speak the language are made whole.
It is imperative the language of economics be translated. Change is impossible without understanding.

As I'm going to argue, these recurrent crises are down to flaws in the current system, at various levels. But for as long as those flaws are not understood by 95% of the population – and make the richest people richer – they will never be fixed.

That is why I want to translate what is happening in the financial world into plain English. I am not an economist, but I've read and thought a lot about economics. I've written BBC radio plays about economics. (I even wrote the first short story ever run in the Financial Times.)

Trained experts are usually the best people to talk about an area of expertise with a complex private technical language. (I want engineers, not novelists, to build aeroplanes.) But, in the case of economics, the theory keeps catastrophically failing, without being fixed.

In such cases, sympathetic outsiders can often see things that experts trapped inside the failed paradigm cannot, as they are blind to the unquestioned assumptions of their field. So, over the next week or so, I'm going to outline a few problems in the simplest language I can.

That is not to say that there aren't marvellous people inside the field of economics (and economics journalism), doing terrific work. But they are having great trouble changing the culture from within, and they are not understood by the general public.

Economists like @ProfSteveKeen and @GTCost have taught me a lot, and are always interesting. Journalists like @gilliantett and @martinwolf_ of the Financial Times have likewise enlightened me. And of course novelist John Lanchester did brilliantly explain the last crisis.

OK, I have to go and watch Winnie the Pooh and Christopher Robin in the cinema! More on the coming financial apocalypse later.

Apologies for the six-day break in my epic thread on the forthcoming financial apocalypse. I was waiting till there was a calm stretch in my life, to continue; but it looks like there will be no such calm stretch this year, so feck it, I'll just seize little moments here & there.

I'll try to describe why we're in an "everything bubble", with all asset classes overvalued; and why it's all about to pop. To do that, I'll start at the surface, and slowly work my way down to more fundamental reasons.

Let's start with a modest thing called VaR: Value at Risk.

Value at Risk is that classic thing in financial markets: a brilliant innovation that makes everything much less risky at first, when a few people use it wisely – and then, eventually, step by step, makes everything far MORE risky, when everyone is finally using it blindly.

(This is exactly what happened before the last huge crash in 2008, by the way, when securitisation – a marvellously simple innovation, designed to spread and lower risk – turned, slowly, over time, into a incredibly complex tool that invisibly concentrated and raised risk.)

So, Value at Risk (VaR) is a way of mathematically working out how much money you could lose on a particular investment over a particular span of time. A bank, for example, will tot up VaR at close of business every day, to make sure its traders haven't taken on too much risk.

It's a good idea (like all ultimately catastrophic innovations in financial services). Because it is a good idea, it has been adopted by everybody. And because it has been adopted by everybody, it has subtly changed the nature of the system, in a way that guarantees catastrophe.

At this point, Value at Risk models merely give the illusion of control, the illusion of safety. Which keeps institutions investing, deep into a bubble. Value at Risk models are the ratchet which keeps the markets going higher, way past the point when they should have corrected.

Here's the problem: Value at Risk models predict the future by looking at the past. And, as we move further and further away from the last crash, Value at Risk models tell the markets we are getting safer and safer, when we are in fact moving closer and closer to the next crash.

Value at Risk models are basically a guy sitting on the lip of a volcano that last exploded in 2008. And, each year, he says "This volcano hasn't exploded for 5 years... 6 years... 7... it's getting safer and safer!"
No: It's getting far more dangerous, and the models miss it.

Value at Risk models tend to leave out wildly unpredictable and extreme events (like total market implosions) because they are, by nature, wildly unpredictable – and highly unlikely, day-to-day. Outside of their probability margin. So such events lurk off the margins, unmodelled.

Another huge problem: Value at Risk models look at the historic volatility of the price of the asset: how much it has swung up and down recently. The lower the volatility, the less the risk! But over time, if everyone uses VaR, that lowers the volatility. So it looks ever safer.

Invisibly, behind the scenes, risk-taking crawls higher and higher, as volatility goes lower and lower. But that very process – investing in riskier and riskier assets, more and more fearlessly, at stupider and stupider prices – is what is lowering the volatility.

Nothing is dropping in price, if everyone is buying everything, no matter how stupidly priced it is. Volatility drifts lower, as prices get crazier: Value at Risk says it's safer and safer... And so the entire banking system sleepwalks into the whirling blades.