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THE COMFORT OF CENTRAL HEATING
This article examines the way in which government manipulation of the economy has grown increasingly since it began in the 1930s, and it describes reasons for fearing a potential global financial disaster. It draws a relevant and useful analogy with central heating which helps greatly in illustrating how effort is expended in ever greater amounts to keep a room (or an economy) pleasantly warm, until eventually the system breaks down.
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The fundamental principles governing national wealth generation were spelt out in the 1770s by Adam Smith, who was the first to describe a competitive free enterprise system and only a limited role for macro-economic management. The father of modern economics disapproved of meddling governments, which he viewed as possibly well intentioned but invariably counter-productive.
Steadily in the last 70 years we have seen key free enterprise principles being abandoned, and centralised macro-economic management being taken up by governments, without - apparently - any severe cost. On the contrary, our economic lives have improved immeasurably.
But the rules have probably not changed. Commentators just need reminding that Smith's laws are true only over long time periods. People and their governments are at liberty to prevent the principles of wealth generation through free enterprise applying in the short term, by expending sufficient energy working against them.
The pendulum and the thermostat
Traditional economics works like a pendulum. Natural laws apply on a pendulum to make it accelerate at all times towards its vertical (its equilibrium), and the further it is from vertical the more powerful the forces accelerating it back. Left alone it will eventually rest vertically, and once there any subsequent disturbance sets it oscillating backward and forward with the same predictable swinging motion. The world provides plenty of disturbances for the pendulum of economics to keep on swinging past its point of equilibrium, and then back again.
But modern economics is more like a central heating system than a pendulum. A central heating system uses a thermostat. A preferred temperature is chosen away from the natural temperature of the room, and then energy is consumed in trying to keep the temperature there. A central heating system is regulated by the action of the thermostat, rather than self-regulating under the forces of natural laws.
A pendulum with no energy input will always settle around the point at which we have watched it oscillate. But a central heating system - when the thermostat breaks, or it runs out of fuel - can no longer hold the temperature steady. The temperature will come to rest at the cooler outside temperature, well away from the thermostatically controlled comfort zone around which it has recently oscillated inside the room. This is the important point which shows the difference between a regulated and a self-regulating mechanism. In the whole history of the universe no pendulum has ever failed to seek its point of equilibrium - it is a 100% reliable equilibrium seeker. But in that same period no central heating system has ever been developed which can survive and continue to operate for more than a few decades. It is 100% unreliable over the long term.
A spider which lived in a centrally heated room would have have no knowledge of the managed system which causes the temperature to oscillate and, were it capable of thinking, would consider the average temperature an entirely natural one. Most investors behave like spiders. They make the easy assumption that they are in a safe environment and never dare to consider what is happening outside. More often than not they eventually lose their money.
Pendulums, central heating systems (and spiders) provide a useful analogy for comparing the state of older and newer economic systems and the people who inhabit them. To understand how it came to be like this it is necessary to look briefly at history.
Modern democracies like thermostats
Before 1930 modern governments recognised their relative impotence in the face of powerful economic forces and did not seek to control the directions of their economies in the way we would nowadays understand. But in the final 80 years of that period - i.e. from about 1850 - the western world adopted the principle of one person one vote. Under this system there was no alternative for prospective governments but to propose policies which were widely popular, even if they suspected these policies may lead to the ultimate destruction of private and national economic wellbeing.
From 1850 to 1930 there were, almost every 10 years, serious financial crises as the economic pendulum oscillated. This culminated in 1930 with the Great Depression.
Our grandfathers recognised a particularly severe oscillation of the business cycle. They believed with great conviction (and are widely criticised for it nowadays) that the correct economic policy was to avoid intervention and let the swing of the pendulum run its course. Their deeply held view was that once they started meddling there would be no end until, much later, the corrections which would be required to regain economic equilibrium would be cataclysmic.
But social attitudes were changing. Political parties were adopting the idea that economic pendulums were too cruel for the many ordinary people - i.e. voters - on whose widespread support these rulers now depended for their future existence.
In Scandinavia a new form of policy was applied. Scandinavian reaction to the Great Depression was to use borrowed money to stimulate demand for the good of society as a whole.
There was an immediate improvement in Scandinavian fortunes which, though it may have been largely luck, made the governments look particularly clever. Social market economics was born, defining the point at which it became necessary for democratic candidates to drop the pendulum as their economic model and adopt a policy of economic central heating - in the public interest of course.
In 1932 the USA’s economy was centrally heated with magnificent results. To this day all the major economies of the world are centrally heated by their governments. Nowadays politicians decide where they want economies to go, and they pull levers to try to engineer the desired result. Occasionally it even works as they intend.
This is a modern phenomenon. A hundred years ago the government’s task was to make and enforce law, to defend the state, and to fulfil a modest set of social services. Today's democratic governments believe that management of the economy is their most important function, because it is the thing which most reliably gets them re-elected.
So since the 1930s the economic thermostat has been steadily turned up in the quest for growth.
On the face of it we have all benefited from this increase in economic temperature. Certainly we have not seen a repeat of a depression on anything like the same scale. Perhaps this means our economic guardians have designed the first thermostat which never fails, but the odds are against it.
Unfortunately, as Adam Smith explained, the artificial stimulants which have been used do incur costs. What democracy has encouraged is the enactment of immediate stimulation packages where any cost is too subtle and distant to be clearly identified. The more subtle the cost, the less chance of ministers having to explain themselves to their opposition, or of them losing an election, and as a result the government initiatives which survive the test of time are those whose impacts are the most immediately generous while apparently incurring no clear future penalty. But these initiatives invariably store up potential economic trouble for the future, which can be seen on close enough examination. They centrally heat the economy, and the hotter we heat our living room the more we feel the cold when the heating system breaks.
Having proposed that unsustainable, government sponsored economic central heating exists there follows some illustrations of popular types of policy which generate it.
Social insurance is typical of left of centre governments;
Pension incentives are central political ground;
Private housing subsidy is typical of right of centre governments.
This is not a party political issue. All democratic governments are at it one way or the other.
Social insurance programmes
Maintaining a substantial welfare system is now well established in all successful western political parties.
We are all potential beneficiaries of the welfare state. Each of us fears one day being unwillingly unemployed, hopes one day to be old, and expects one day to be sick. Also we are mostly proud to identify ourselves with the general good character that care of the weak implies. The welfare state is a very easy policy to sell to a civilised electorate. It is also extremely difficult to criticise it on rational economic grounds without looking like a monster. But here goes.
The unwritten but implied promise of the welfare state is that when our time comes we will in our turn be looked after by the contributions of the rest of society - just as we have ourselves looked after society’s unfortunates while we have been earning. But the economics of the welfare state rest on a temporary surplus of working people. It was conceived at a time when the retirement age was close to life expectancy, and when - as a result of two world wars and a continuing up trend in the total population - a prolonged period of youthful bulge in the population profile could be anticipated (i.e. there would be disproportionately more people of working age than in retirement).
Critical examination at that early stage would have detected that any prolonged dip in the birth rate would spell the unsustainability of the system 50 years later, as would any tendency to longer lifetimes. We now have both.
There was a bulge in the population of the developed world which occurred between the post-war optimism of 1945 and the widespread take-up of effective contraception in 1965. This boomer generation now straddles the age of 50, and so the ratio of working people to dependents is steadily inverting from 3:2 to 2:3. Instead of supporting 0.66 dependents each, our children will each have to support 1.5, at more than twice the cost for each worker, but they cannot both pay this cost and be competitive with international producers who don’t have the same overhead.
So, having contributed to the financial security of our parents, when we boomers look to our offspring to do the same for us we will see that we are the unfortunate holders of what amounts to the last copy of a chain letter. There are not enough people left to honour the implied promise of our welfare system.
It is widely accepted that people now approaching retirement will receive rationed state health care and later, lower state pensions than their parents. The hidden future liability which has underpinned the welfare state and attracted the votes of people for 50 years is the deficit in payback for the majority - boomers - who worked through that period and dutifully made their personal contribution. Money which we would have been able to save for our own retirement, had we not paid it in tax, has already been spent on our parents, so its purchasing power was brought forward and resulted in a stimulation to the economy by providing previous pensioners who had never paid their full share into a scheme with immediate money to spend.
At the same time, confident of centrally funded support for our own future, we have been less inclined to save for it. Purchasing power which belonged in the future has already been spent.
Understand that this is not an expression of opposition to welfare because seeing unproductive people enjoying broadly comfortable economic circumstances is the objective of most investors. But it is still necessary to draw attention to the economic consequence of a safety net financed in the way it is. As long as benefits are financed like a Ponzi [footnote] scheme - i.e. a chain letter - out of today’s taxes and not yesterday's savings, they create a single once-off boost to demand as they transfer wealth from the productive, who would have saved it for their own future, to the unproductive who spend it immediately.
Maybe the principle is to be applauded, but the realists among us have to look to the quality of the guarantee. If it cannot be honoured when it's our turn to benefit we must admit it to ourselves, or end up poor.
Pension funds
Pension funds used to be unexciting things run by occasionally competent managers who searched for investments where predictable cashflows justified values.
Then a popular tax-break for savers was provided by governments which topped up pension funds with substantial tax credits on their contributions. The problem with the tax advantages on saving in this particular way is that the policy created an unnatural tidal wave of investment money flowing into pension savings - a wave which has continued for 40 years.
The saver’s deal with the government is that in return for the tax break the value in the investment would not be realised until the saver retired, which means this mass of investment money cannot sell at any price. It has produced a one way market with forced buying and prohibited selling and as an obvious consequence a bubble in qualifying financial assets has occurred. Instead of reflecting the earnings capability of the underlying assets (where over the last twenty years yields have all but disappeared) the assets’ returns are delivered in capital gains - i.e. by the inflation of a bubble.
There is the potential for a particularly vicious circle building up here.
Firstly the managers are stripping out their fees in cash. At typical levels of 2% these currently account for virtually all the cash generating power of share portfolios. Worse, if the market falls the previous year’s fee can be seen to be unnaturally generous (as the 1999 fee now looks after bad years between 2000 and 2002). We can already see that mid-term extraction of fees has robbed many funds of any chance of performance through their lifetimes. But that is the smallest of the three effects.
With the second effect the relatively small numbers of older people redeeming their funds have been getting unnaturally high prices for their investments as the wave of money behind them snapped up all available assets, holding up the prices. Older people have been made unnaturally rich and are consuming more than they otherwise would be able to.
And thirdly, as the current investing generation watched the value of their funds grow artificially fast they developed a feeling of wealth which encouraged them to feel secure, and to spend all their remaining income. Yet any reference to the cash generating power (the yield) of their investments would have shown the apparent additional value to be a bubble.
It is the 37-57 age-group who will be the losers again. They have overpaid for their investments, and for the management of them. All would be well provided the fund values could hold up when the boomers’ turn came to exit. But this is the problem. As we are already seeing there simply aren’t enough younger people behind them to keep the demand for investments above the supply from en-cashed portfolios, and we have already established that to maintain other spending (e.g. welfare) this smaller number of younger people will have a hard time saving anything at all. Indeed we can now see the smarter ones are not even bothering to try because they fully understand that the promises of pension benefits are essentially fraudulent - as has been clearly shown by assorted worldwide under-funding scandals breaking throughout 2002/3.
Meanwhile demand which ordinarily would have occurred in 15 years time - as boomers spend savings accumulated over a lifetime - will not appear, because it has already been enjoyed by our fund managers, our parents and ourselves, and it will not be there for our futures. That demand was central heating fuel for the economy, and it has been used up.
An analysis by Adam Smith would easily have identified that state interference in the form of tax credits specifically on pensions in an otherwise free savings market would end badly. He would have shown that there can never be a mass market conveyor belt to promised retirement riches, because no economy can support a significant percentage of its population being both unproductive and wealthy. It’s a simple equation. If unproductive people have a significant share of an economy’s purchasing power then the host economy cannot satisfy their demand. Imports will be sucked in and their currency will exit to pay for the goods, and rapidly weaken. The pendulum of natural economics eventually forces the value of pensioners money down to what their own domestic economy can produce. If their domestic economy - short on labour - can not produce what they would like then they will collectively have to consume less, but it will still cost all their money. Adam Smith could have told us that wealth and retirement can only go together for a privileged minority.
Housing
Everyone knows the high value of UK housing has been brought about by three fundamental forces :- the demand of baby boomers, tax relief and planning restrictions.
In the UK mortgage tax relief over 40 years from the mid 50s to the 90s made housing the cheapest capital asset to borrow against, and capital gains tax relief made it the most tax efficient way to make a profit. At the same time steadily more and more restrictions were placed around the development of property - reducing supply. The value of a property in many areas (particularly in the South East of England) now reflects the planning permission which allows the property to exist, which often multiplies the value of land by factors of 50 or more, and in smarter areas can make a built property worth 20 times its construction cost.
The unique availability of (i) subsidised gearing (mortgage interest tax relief) (ii) capital gains tax relief, and (iii) planning based rationing on the supply side of the equation, combined to produce the phenomenon of rising house prices and unshakeable private enthusiasm for house ownership. It has continued even after the withdrawal of mortgage interest tax relief leaving house prices extraordinarily high in places like London, where only a $millionaire can buy a basic family house within 5 km of the centre of the city.
So where is economic central heating operating?
In the UK (and the USA) a significant number of householders release equity in their houses to fund things - mostly consumer purchases like cars and holidays, which retain little or no value. As the value of their house rises these people add the price rise to their earned income, and end up consuming much more than they produce. When house prices fall these re-mortgagers will be underwater and doubtless squealing - as usual - about unfair mortgage selling practices.
The lender will suffer a bad debt, and money will be lost. Without that asset price bubble that same lost money would otherwise have been part of the future’s money supply, so its loss reduces the future’s capability for generating demand. In other words, a rising housing market allows the re-financing of houses and brings purchasing power which belongs in the future to the current time.
The effect is perhaps easier to see with good honest borrowers who come late to the market. Forced to mortgage at 95% or more just to get in on the property ladder young buyers are desperately exposed to falling property prices. Even the most responsible first time buyer, having borrowed £95,000 on a £100,000 studio flat, and worked hard to reduce the debt by repaying £25,000 over the first five years, will find a 30% house price correction removes a full £30,000 of effective spending power from the future economy. This model young citizen will never be able to spend the money saved, repaid and lost.
Rising asset prices discourage saving and increase current demand at the expense of future demand. Inflated house prices, or indeed any asset prices, make people feel well off, and consume more, which is how the economic central heating phenomenon works.
The broken thermostat
But when the fuel runs out in a central heating system the room temperature falls all the way back to its natural, unheated level. The same applies to economies.
In the Great Depression years - from 1930 to 1932 - the US economy lost about half of its economic output as people cut back on avoidable spending where they could. During the depression they didn’t go to restaurants, or take luxury holidays, or generally swan about spending money, all of which seems a normal response to bad economic times.
Yet they continued to buy heating fuel, and food, and other basic goods. The business sectors which were most damaged in the Great Depression were the ones which supplied life’s 'unnecessaries', many of which had only recently built up, during the roaring twenties.
So when pessimism was at its worst in the depression the world economy was propped by essential goods and services, and this ultimately arrested the downward deflationary spiral, stopping unemployment in the US at a ceiling of around 25%, and productive output at a floor of about 50% down from the output high of 1929. It was only when this production floor was reached that people looked round and realised that it actually couldn’t get much worse, and from then on, confidence started to rebuild.
If the same pattern applies to the world’s next great depression then we have a problem - possibly the cataclysm our grandfathers feared when they originally refused to prop up the western economies with printed money in the early thirties. The result of economic central heating is that demand for progressively more extravagant 'unnecessaries' has been ratcheted up year after year, with the result that food, fuel and basic goods and services are now a far smaller constituent of expenditure than they have ever previously been. In 1913 food production represented 70% of world trade, now it represents 17%. Food consumption over 35 years has doubled in the USA, while leisure and recreation have grown by around 10 times. The accretion of so much luxury productive output sets the scene for catastrophe.
If a slump is around the corner, there will be no natural floor until about 80% of output has been eliminated, and a very large number of jobs have been lost. An average US citizen of productive age would then have an income of between $4,000 and $5,000, comparable, for example, with Hungary.
The comparison with Hungary can be extended. We are behind the Hungarians in the bureaucratic cycle. Like them circa 1988 a growing number of our citizens now perform administrative tasks imposed by our laws [footnote], rather than productive tasks imposed by the free enterprise system, and they are paid out of overheads levied on the producers, who attempt to trade with the world. The effect has been quantified in America. In the last 55 years the bureaucratic share of their economy, incorporating federal taxation, local taxation, and regulatory compliance, has increased from 26% to 53%. Europe, surely, is considerably worse - which perhaps explains why no data can be found.
But probably the clearest evidence of our productive enfeeblement is seen in our trade figures. Because we cannot sell bureaucracy Britain now runs a trade deficit of -$48bn a year. Where it will be with the weakening of the high earning City of London in an international financial rout, and after a further fifteen years of decline in North Sea oil output, is painful to guess at. Perhaps it will be as bad as the USA, which with a population of five times Britain consumes its way through foreign produced goods to produce a deficit nine times larger, of -$430bn annually - about $5,000 per US family per year.
That $5,000 credit - grabbed by US citizens from the producers of the world - is the fuel which heats the US economy. It could run out very soon.
Credit - the fuel of economic central heating
Credit is difficult to define. It is closely related to "credibility" and means something like "belief". It is the ability to execute transactions today with the belief that a payment will occur in the future, and it lies behind most financial disasters.
"Prosperity was assisted, too, by ... stimulants to purchasing, each of which mortgaged the future but kept the factories roaring while it was being injected ... People were getting to consider it old-fashioned to limit their purchases to the amount of their cash balance; the thing to do was to 'exercise their credit' ... 15% of all retail sales were on an instalment basis ...It was fun while it lasted." - Only Yesterday, an informal history of the 1920's, F.L.Allen (published 1931).
These 'stimulants to purchasing' were the initiatives of private businesses, and although reflecting our own times were benign by comparison. Credit was extended, at least a little cautiously, to people who had some prospect of paying back the money, and in a social environment where a lender had the legal means of collection. Nowadays access to credit is spoken of in the UK as a human right [footnote]. It is available through personal loans at the bank, credit cards by direct mail, and storecards at the till. Its mail-based advertising singlehandedly sustains the postal service.
Although current consumer indebtedness is bigger than it has ever previously been it is still only the tip of the iceberg. Corporate consumption of credit is worse and mirrors the retail sector in its extension of purchasing power to progressively less well qualified borrowers. It is geared up firstly by the international bond market, and secondly by the derivatives market, to levels which are almost beyond comprehension. This ratcheting up of credit comes directly from government's repeated re-setting - upwards - of the economic thermostat :
Our governments prevent economic shocks which would make them unpopular. At the hint of a tailing off in economic activity they can be relied upon to inject more demand with (i) a generous monetary policy to make borrowed paper money cheap and (ii) a loose fiscal policy to get people working and spending immediately (i.e. overspending & undertaxing, paid for by issuing state debt).
Companies adjust because under these circumstances the odds favour exposing their equity holders to more debt. If it is known that potentially severe economic downturns will be cushioned by government policy then the tendency is that at a given level of indebtedness a company is less likely to fail. Gentle, managed downturns allow borderline indebted companies which would otherwise have been destroyed by debt to survive. Meanwhile their return on equity is enhanced in the good times, because each borrowed pound multiplies up the performance of their equity. Improved return on equity enhances the standing of management in the capital markets, the company's share-price gains to reflect both the extra profits and this managerial brilliance, and the company is able to take over its cautious competitor, which has held back from expansion on debt, and has seen its return on equity suffer by comparison. This is how government intervention to sustain demand in the economy creates companies which issue debt to the maximum of their ability, and which consume cautious businesses in a flurry of debt-laden deals. Companies, like individuals, soon get the message that a state sponsored safety net will protect them, and they accommodate it by moving their businesses closer to the flames of destruction, to places they would never have approached without the confidence that government would intervene on their behalf. They have no choice. They have to do this or they fall into the hands of another company which had the necessary courage.
Eventually the credit rating agencies notice the level of borrowing, drawing attention to the top-heavy debt structure of these businesses and the risk of economic shocks. But it is not the end of the cycle. Although some managements quieten down, jealous of their investment grade credit rating, others, anxious not to be the victims of the next takeover, extend themselves ‘off balance-sheet’ into the derivatives markets. Here - under the disguise of clever financial management - they underwrite financial contracts for fantastic amounts of money and generate small profits on large but improbable risks. It's very similar to insurance, only the risk that is being insured is not a fire, or a flood, but the financial equivalent - something like "the yield on 10 year US Treasury bonds, less the yield on 5 year Japanese government bonds, divided by the yen/dollar exchange rate will not exceed 5% before the end of 2004". Procter and Gamble famously found out what can happen when their £200m borrowings were 'insured' by derivatives to 'save' $7.5m over 5 years. When the impossible happened their small saving turned into a loss of $157m. But for every Proctor and Gamble there are 50 smaller winners, for whom the risk pays off, resulting in what amounts to financial insurance profits being generated apparently out of nowhere - because, remember, these risks are 'off' the balance sheet. And what happens to these lucky companies? Their profits rise, their shares follow, and the brilliance of their management leads them to take over those companies more circumspect than themselves. So the derivative habit is perpetuated and companies start to rely for their profits on being lucky in financial insurance markets - rather than being good at doing something commercial. That they can do this at all is because government is acting as a central heating system for the economy, and preventing financial insurance underwriting from being found out by the swing of the economic pendulum. While governments intervene over-indebtedness and maximal exposure to risk pays handsomely, and being sensibly cautious spells certain doom.
These are the forces which cause irresponsible corporate credit to be demanded and extended. It is not just theory because the evidence is there in the financial figures. The world bond market, i.e. debt which has been issued in the form of traded bonds, has grown from $800bn in 1970 to over $35,000bn in 2001. This is 43 times. Yet while governments pass regulations which require investment funds to hold increasingly more of this questionable paper [footnote] the marketplace accumulates the debris. British Airways, Marconi and Railtrack were three UK FTSE100 investment grade bond issuers whose credit rating has disintegrated through over-indebtedness. These were rich companies. It is hard to remember just how respectable their bond liabilities looked as recently as 1st Qtr 2001, yet by 2002/3 they were junk.
But even this newly colossal bond market is a runt next to derivatives, which have caught the prevailing wind of off-balance-sheet accounting and exploded out of control - allowing financial products to be constructed which are way beyond the regulatory abilities of the banking authorities to control. The BIS [footnote] estimated the main financial derivatives markets at $1,100bn in 1986. The figure for 2001 for the exchange traded contracts monitored by the BIS was $150,000bn. A further $98,800bn in Over The Counter (OTC) derivatives have to be added as well. In 15 years the notional sum of derivatives outstanding has grown by nearly 250 times. This combined $250,000bn in derivative exposure is about $50,000 for every person on the planet, or $250,000 for every person in the developed world. It's $1m per head of financial insurance risk for each of the 250 million richest people on earth, even though there are only about 15 million dollar millionaires out there. If 1% of it were lost in a contained default it would leave a $2,500bn hole in the world's finances - about 25 LTCMs [footnote]. Of course that's only counting what gets monitored; Enron's derivatives were too well hidden ‘off balance sheet’ to show on the BIS figures.
Yet in the minds of the investment bankers every cent of these derivative exposures is secure. Consistent with the very concept of ‘credit’ they believe.
"One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of all investments. They are protected by stocks which under all ordinary circumstances are instantly saleable, and by a cash margin as well....A few firms made this decision: instead of trying to produce goods with its manifold headaches and inconveniences, they confined themselves to financing speculation...This was, possibly, the most profitable arbitrage operation of all time." The Great Crash 1929 - J.K.Galbraith describing in 1954 how the brokers' loans which ultimately brought disaster looked so attractive and safe before the event.
Credit is way beyond all reasonable limits. This quantity of credit can only be sustained while the economic outlook is benign, because any major shock to the system will catch out some of the underwriters of those derivative insurance risks. Because of the size of risks the system is underwriting it can no longer absorb something large and unusual. So a hint of a modest recession in the USA during 2001, which after a 9 year boom should have been accepted as natural, resulted in an extraordinarily generous monetary loosening to encourage immediately yet more demand. The number [11] and extent [down from 6.5% to 1.75%] of interest rate cuts in the USA through 2001 were required to prevent serious defaults in the context of one of the lightest recessions in US history. Why should the Fed go to such lengths to stop a mild cooling off? It was because the stalling of demand risks a debt implosion far larger than occurred even during the Great Depression.
During 2001 the thermostat of economic central heating was notched up to buy some time, close to the highest possible temperature on the dial, where it remains. But next time, whatever unlikely event causes international concern, there will be no more notches on the thermostat because - as Japan has already found - interest rates cannot fall below zero.
The low levels of US interests rates, down now to 1.25%, is the clearest indication that the world’s financial system cannot now cope with another serious shock. The economic thermostat is turned up to within a whisker of the maximum power. The central heating system is consuming colossal quantities of fuel to hold the temperature so unnaturally high, yet already the room is starting to cool. The fuel tank of credit is all but empty.
