The End of an Era (Part II)

The overarching objective of the Bretton Woods Conference, which met at the Mount Washington Hotel in New Hampshire in the last months of the second world war, was to create a blue print for a new world order that would ensure – or so it was hoped – that such world wars would never happen again. To this end it laid the foundation for a new financial and monetary system designed to prevent the kind of economic depression the world had experienced in the 1920s and 30s and which had provided such fertile soil for extremist politics. The problem, as I pointed out in Part I of this essay (which you can find here) was that, based on gold, this system itself stored up monetary and financial problems of its own, the first of which – the tide of inflation that swept around the world when the system finally collapsed – took more than a decade to cure, while the second – the need for the USA to maintain the reserve status of the dollar at any cost – has still, I believe, to reach its inevitable dénouement, when it too will surely collapse under the accumulated weight of US Treasury debt, which currently stands at over $21 trillion and is growing at a rate of around $1 trillion per year, much of it used to fund the vast military and intelligence machine needed to defend what, in time, its very cost will ultimately destroy.

However, these were not the only problems which the Bretton Woods Conference set in train. Of potentially even greater destructive force was the political path upon which the conference set the world: a path which, at the time would probably have been called ‘internationalism’ but which we now refer to as ‘globalism’, and which, from its inception, had two main aspects.

The first, defined by what it was against, was what one might call anti-nationalism. Because both World War I and World War II were perceived as having been caused by either national rivalries or the need to assert or reassert national pride, nationalism, both as a political ideology and as a state of mind, were now seen as forces to be curbed. To achieve this, it was also therefore thought that both the role and the power of nation states had to be curtailed or counter-balanced by new international institutions – principally the UN – which would not only attempt to control how nation states behaved on the international stage but how they behaved domestically as well.

That this was not only inherently very difficult but essentially at odds with the even more important political principle that nation states should be both self-governing and democratic – thereby providing a bastion against authoritarianism – will be the subject of the final part of this essay – The End of an Era (Part III) – in which I shall discuss the consequences of this contradiction in the light not just of Brexit but of the numerous other nationalists movements throughout Europe which are currently attempting to wrest back sovereignty from an undemocratic and increasingly authoritarian EU. In Part II, however, I want first to concentrate on what, on the face of it, might be seen as the more positive aspects of this new internationalism, especially the efforts made, both at Bretton Woods and in the years that followed, to eliminate the kind of protectionism that had precipitated a fall of 65% in world trade during the great depression and which now led to the first ever signing of a General Agreement on Tariffs and Trade (GATT): a comprehensive template for future world trade which came into force on 1^st January 1948 and which had three main objectives:

1.      To make it illegal for one country to ban or restrict imports from another except under a small number of clearly defined conditions;

2.      To prevent countries from discriminating against some trading partners by providing preferential tariffs to others except under approved, formal trade agreements;

3.      To progressively reduce or eliminate tariffs altogether on as many goods and commodities as possible.

Even more importantly, it changed the nature of the relationship between the developed nations of the world and many developing economies which had previously been held back by asymmetrical tariff structures. Gone were the days, for instance, in which colonial or former colonial powers like Great Britain could trade manufactured goods for commodities without their own manufacturers coming under pressure from manufactured goods flowing in the opposite direction. Indeed, under the GATT, developing nations could now impose higher tariffs on imports from Europe and America in order to protect their own fledgling industries: a provision which effectively forced first world manufacturers wanting to sell to developing countries to physically set up factories in those countries themselves, thereby bringing into being the first truly multinational corporations, with US firms like Ford and Coca-Cola, in particular, setting up production plants all around the world, not just in order to service the local markets but to make use of low cost labour in order to export more cheaply elsewhere.

In fact, it didn’t take long for US multinationals to start offshoring production for importation back into the USA: a development which also very quickly revealed some of the negative consequences of this new globalist pattern of trade. For while the offshoring of manufacturing might have been good for both multinational corporations and consumers – providing the latter with cheap  imported goods – it was far less benign with respect to first world employment and became even less so after 1979 when, under the leadership of Deng Xiaoping, China finally opened itself up to the world, undertaking a number of economic reforms which ultimately led to a US/China accord that was greatly to China’s advantage. For in order to be able to buy the western technology that China needed for its widespread programme of modernisation, the US agreed to aid China’s own exports to the west by allowing the Chinese to peg their currency – the renminbi or yuan – to the dollar at an exchange rate set solely by the Chinese themselves.

As mistakes go, I believe that this will one day be seen as one of the worst in post-war history, exceeded in its short-sightedness only by the decision at Bretton Woods to tie the rest of the world’s currencies to the price of gold. For the inevitable consequence of giving China this licence was a period of almost three decades – up until 2006, in fact – during which the yuan was traded at anywhere between 30% and 40% below its true value, making Chinese exports to the rest of the world so cheap that even the EU’s high import tariffs couldn’t protect European industry from the unfair competition. 

For this wasn’t the kind of free trade championed by the likes of Margaret Thatcher and others at that time. This was price manipulation by a communist government which suppressed the wages of its workers in order to produce consumer goods for export which its own people could not themselves afford. It could almost be described as a form of economic warfare, designed to destroy the industrial foundations of an enemy. Yet neither the multinational corporations which benefited from moving their production to such a low cost environment, nor the guardians of our new internationalist world order were inclined to do anything about it, not least, in the case of the latter, because they clearly regarded the political integration of China into the new global economy as being of far greater importance than the continued economic health of the West, which, to be fair, they probably didn’t even realise was under threat. For like everybody else, they told themselves The Big Lie: that growth in China meant greater prosperity for the entire world and that any loss in low-grade manufacturing jobs in Europe and America would be more than compensated for by the growth in higher grade jobs in the new technology sectors that were then emerging and in the services industries, especially the financial services industry, which duly took this opportunity to plead its case for deregulation, thereby preparing the ground for the financial crash of 2008 and the perilous state in which we still find ourselves even today. 

I say this because although banking deregulation is seldom cited as one of the causes or necessary preconditions for what happened in 2008, there was a very good reason why, up until the 1980s, the banking industry had been so closely controlled, with its operations strictly separated into five main types of financial institution which can be listed as follows:

1. Commercial or High Street Banks which provided short term loans, mostly in the form of overdrafts, to both retail and business customers, funded by short term deposits in the form of current or chequing accounts.
2. Building Societies (in the UK) or Savings and Loan companies (in the US) which provided long term loans in the form of mortgages to retail customers, funded by long term deposits in the form of personal savings accounts. In the case of many UK Building Societies, in fact, customers were often required to have saved with them for a period of up to five years before they were eligible for a mortgage, thus not only ensuring that these borrowers were reliable but providing the long term financing which this kind of banking required. 
3. Merchant or Investment Banks which provided medium term loans to businesses, mostly in the form of medium term debentures, funded by the capital of the banks, themselves: a high-risk form of lending which naturally tended to make these banks extremely cautious with respect to whom they lent their money.
4. Pension Funds which provided long-term income streams to long term savers, funded by long term investments in equities and bonds, the very nature of these long term liabilities making these funds also very conservative in the kind of investments they made.
5. Stockbrokers who made medium to long term investments in equities and bonds on behalf of individual clients whose own attitudes to risk largely determined the type of investments made.

Note that with the exception of stockbrokers – who never incurred any real risk to themselves except with regard to their reputations – the very structure of most of these institutions made them extremely risk-averse, with the result that getting a loan or investment out of any one of them required a very good business case and a lot of persuasion. The real importance of these divisions, however, was that they matched different forms of lending to different forms of funding, thereby avoiding the most serious mistake any banker can ever make, which is to borrow short to lend long. Once deregulation had taken place, however, nearly all the new financial institutions that were formed – whether by organic expansion or mergers and acquisitions – now covered most or all of the above functions, especially the first four, with the result that borrowing short to lend long not only became possible but, due to other, parallel developments – which I shall outline below – became more or less normal.

When Bear Stearns collapsed in 2008, for instance, it is reported that while almost 20% of its $365 billion in assets were in the form of highly illiquid mortgage-backed derivatives, nearly 40% of its funding was in the form of overnight loans which had to be renewed every day and which also vastly exceeded its own capital of just $11.1 billion. When the short term lenders began to worry about whether the bank’s long term mortgage-backed derivatives were really worth as much as they were supposed to be, and consequently refused to renew the overnight loans, it thus became instantly insolvent.

Another consequence of deregulation was the increased issuance of credit cards, with every former building society and other new financial institution eager to get in on this highly lucrative business. The trouble was that this was lending of a completely different type to any that had gone before. For prior to deregulation, nearly all lending had been for investment, whether in property or a business. Credit card lending, in contrast, is almost entirely for consumption. Indeed, it is this that justifies such high credit card interest rates. For whereas a borrower who borrows money to invest hopefully ends up in possession of an asset which he can then sell if necessary to repay the debt, the borrower who borrows to consume ends up with nothing: the meal having been eaten; the holiday having become a distant memory. Thus while borrowing to invest is still intrinsically risky – in that the investment may not turn out to be worth as much as one might have hoped – borrowing to consume is sheer reckless irresponsibility. And prior to deregulation, no bank manager would have ever allowed a customer to act in this way, both for the customer’s sake and the bank’s. Indeed, he would not only have regarded it as bad banking practice but as morally reprehensible. So lucrative was this business, however, with interest rates on many credit cards above 30%, that moral scruples were simply brushed aside, allowing yet another formerly abjured practice to become the norm.

Still, none of this would have led to the perfect financial storm to which it eventually gave rise without one further ingredient. Unfortunately, this was duly supplied in 1987 when the newly appointed chairman of the US Federal Reserve, Alan Greenspan, announced to the world the end of ‘Boom and Bust’, a phrase which the UK Chancellor of the Exchequer, Gordon Brown, was to repeatedly use a decade later to describe the intended consequences of his own economic strategy. The idea was to use monetary and fiscal policy to iron out the peaks and troughs in what is called the ‘business cycle’: a natural sequence of ups and down in economic activity brought about by the fact that all businesses tend to expand until they saturate their existing market or markets. The problem is that they do not usually know what the saturation point is until they have actually reached it, their first  indication of this very often being a build-up of unsold stock in their warehouses. Their immediate reaction, therefore, is to cut production and perhaps even lay off staff, which consequently has a knock-on effect on other businesses, both in their own supply chain and in the local economy at large. As a result, these ‘business cycle’ down-turns tend to be synchronised right across the economy and only come to an end when a new point of equilibrium is reached, thereby allowing the whole cycle to start again.

The new policy advocated on both sides of the Atlantic was therefore to intervene, both fiscally and monetarily, whenever the first signs of a general down-turn were detected: fiscally by increasing public expenditure to compensate for the decrease in business spending; and monetarily by reducing interest rates so as to encourage continued consumer spending. And initially it worked: so well, in fact, that during the Clinton administration and beyond, Alan Greenspan was thought to be a genius.

There were, however, a number of problems with this whole policy. On the fiscal side, the main problem was that increasing public expenditure very quickly began to seem like a general panacea for dealing with any economic down-turn and therefore soon became a habit, leading to chronic deficit spending: the very thing that the Bretton Woods convention was set up to prevent. On the monetary side, however, the problems were more acute. For reducing interest rates to maintain consumer spending effectively brings consumption forward. People buy today to consume today what they might otherwise have bought and consumed tomorrow. Which, in many cases, means that they won’t now be buying the item in question again for some time. After all, if you buy a new car this year, you are unlikely to buy a new car next year, especially if you have had to borrow the money for the purchase. For apart from anything else, you’ve now got this debt.

As a general policy, therefore, reducing interest rates to boost consumer spending in order to avoid an economic down-turn has diminishing returns. The first one or two times it is used, it works well. But there is only so much consumption you can bring forward and only so much debt you can load on to the consumer’s shoulders before it loses its attraction. For people just won’t borrow more money if they are already over-indebted.

Worse still, this policy works like a downward ratchet on interest rates. For while central bankers are quick to reduce interest rates whenever an economic down-turn is detected, they are generally much slower to put them back up again when the economy recovers, citing worries over whether a premature increase might ‘choke off the recovery’ as justification for the delay. Throughout the 90s and 00s, as a result, interest rates fell steadily all around the world, making it cheaper and cheaper to borrow money, especially for banks who found themselves able to borrow cheap short term money from other banks at 2 or 3%, while lending it at 30% on credit cards or, more importantly, at 11 or 12% on mortgages. 

I say ‘more importantly’ because while, by then, banks were providing 100% mortgages at up to six times annual salary to anyone who could sign their name – regardless of whether they had sufficient income to service the interest on them, let alone repay the principal – property backed mortgages were still inherently less risky than unsecured credit cards, and were made even less so by their massively increased availability. For their very cheapness and the fact that they were now available to many more people than was traditionally the case meant that demand for property was also greatly increased, which, in turn, increased house prices. This meant that even if an over-extended borrower were to default, the mortgage could simply be foreclosed, the house sold and the money recovered without loss. 

As a further consequence, this also meant that lending on credit cards to anyone who owned a property was also less risky. For if their credit card debt became unpayable – or even unserviceable – they could simply take out another mortgage on their rapidly appreciating property and start afresh. Indeed, for many, it actually took the worry out of credit card spending, allowing them to hit the High Street with gay abandon, running up debts they would never have otherwise dreamed of incurring.

But surely, you say, someone had to know that this was going to end badly. The government for instance? Couldn’t they see where this was headed? Almost certainly yes. The problem, however, was that, while on the surface, the economy (in the UK at least) may have looked rosy – largely as a consequence of rising house prices and all this consumer spending – underneath things were slightly different. This can be seen from the GDP figures for the seven years leading up to the financial crash. For while, according to the Office of National Statistics (ONS), overall GDP in the UK rose by an average of 3.01% per annum, more than half of this was due to growth in just two sectors:

1. The financial sector, itself, which grew at an average rate of 9.08% per annum, exceeding 9% of the entire economy by 2008, and
2. Public expenditure, which grew at an average annual rate of 6.41% during the same period.

In  contrast, the real economy – that which produced the goods and services that people were actually willing to pay for and which employed 85% of the working population – grew at an average rate of just 1.49% per annum. Hollowed out by having exported its manufacturing core to the far east, the part of the economy which created the country’s real wealth was thus in a state of near stagnation.

From the point of view of the government, this therefore posed a number of problems. For there was no way that it could afford to rein in the financial sector. Not only was it providing a large part of the country’s economic growth, but it was also supplying a large slice of the taxes that were paying for the increases in public expenditure which comprised the other significant portion of what appeared to be a booming economy. On top of that, it was also UK banks that were financing most of the government’s annual deficit which, by 2007, had already reached around £50 billion. 

Worse still, the population at large, unaware of the growing financial bubble upon which their apparently affluent life-style was based, were partying like never before. With house prices having doubled in less than a decade and set to go rising, people felt as if they’d won the lottery. And there was no way that any politician was going to pour cold water on that. 

But surely the banks, themselves, saw the danger? Of course, they did. But they weren’t going to curtail their lending. They were making too much money for that. Making use of the fact that financial institutions which sold mortgages could now also create and sell such exotic financial instruments as mortgage-backed derivatives – something which building societies could never have done – they decided instead to simply spread the risk by packaging up their sold mortgages into blocs and then selling shares in these blocs to other financial institutions. 

And for a while, indeed, these Collateralised Debt Obligations, or CDOs as they were called, were actually very popular. For based on a percentage of the mortgage interest coming into the original lending bank, not only did they produce a good annual rate of return, they allowed secondary investors to share in this lucrative business without having to sell mortgages themselves. Even more importantly, with property prices continuing to rise, investors seemed certain to get their money bank upon maturity. Indeed, so safe did these long term mortgage-backed derivatives seem that banks like Bear Stearns were even prepared to borrow short to invest in them, making a significant profit on the differential interest rate. 

The problem, of course, was that, as with any rising market in which buyers have to borrow to purchase what is sold, there comes a point at which the price exceeds that which borrowers can practically manage: a problem which was further exacerbated by the fact that, as with all such tipping points, its exact location wasn’t known until it was actually passed and borrowers started to default. Worse still, defaults meant that lenders started tightening their lending policies, such that there were now fewer buyers to purchase the foreclosed properties, leading to a drop in prices in order to ensure disposal. This, in turn, then led to problems for borrowers who had been sold mortgages with graduated payments, in which the bulk of the burden only kicked in when the borrower was supposed to have already had enough equity in the property to dispose of it at a profit if required. The result was an increase in fire-sales and a crash in property prices right across both America and Europe, followed by a cascade of defaults, which now brought into question the real value of all the CDOs that had been issued and the solvency of those banks that had borrowed to buy them.

In fact, so bad was the contagion which now flowed through the banking system that many people will be surprised to discover just how little money the banking industry as a whole actually lost. In the four years from 2008 to 2011, for instance, the four largest UK banks – HSBC, Barclays, Lloyds HBOS and RBS – lost a total of just £47.34 billion, with RBS responsible for around three quarters of this amount. Of course, this figure, which is merely an aggregate of the losses stated on the four banks’ P&L accounts, doesn’t take into account lost profits. But even projecting profits forward from earlier years, the total figure would still not have exceed £100 billion. The real contagion, therefore, was not one of actual losses, knocking over banks one at a time like a row of dominoes, but one of fear and hence paralysis. For not knowing which financial institutions were solvent and which were not, banks around the world did not know who they could lend to and who they could not, and so simply stopped lending to one another altogether, freezing the circulation of money in a way that caused the collective balance sheets of the same top four UK banks to shrink by a massive £1.8 trillion.

If, like me, you find ‘money’ a bit of a mystery, you may of course wonder how this is possible. If the banks didn’t ‘lose’ the money, where did the £1.8 trillion go? What you have to remember, however, is that under normal circumstances only around 3% of the money supply is ‘base’ money issued by the central bank. The other 97% is largely created by the banking system itself, as I shall endeavour to explain.

Suppose, for instance, that Mr. Brown wants to buy a house from Mr. Green. He therefore goes to his bank (Bank A) and borrows £250,000. Bank A doesn’t actually have £250,000, but once the deeds to the house have been exchanged, it simultaneously borrows the money from Mr. Green’s bank (Bank B) and transfers it back again so that it can be credited to Mr. Green’s account. We now have a situation in which Mr. Brown owes Bank A £250,000 (in the form of a mortgage); Bank A owes Bank B £250,000 (in the form of an inter-bank loan); and Bank B owes Mr. Green £250,000 (in the form of an account from which, in principle, he may withdraw the money at any time but, in practice, probably won’t). The upshot is that, depending upon which way you look at it, either £250,000 or £500,000, which didn’t exist before, has now been created out of thin air, expanding the balance sheets of both banks involved by this amount, with each bank gaining an extra £250,000 in both liabilities and assets.

Thus it is that, while banks keep lending to each other, the money supply expands. When they stop – and more especially when they start to unwind their respective positions, calling in debts in order to repay debts of their own – it contracts. And that is precisely what happened here. Unable to borrow money from other banks but with liabilities falling due, each bank had to call in money lent, not just from other banks, but also from commercial customers as well, in many cases reducing or even removing overdraft facilities from businesses, thereby not only shrinking the money supply but adding even further to the economic downturn which, in Britain at least, was to become the deepest recession since the early 1920s, with a fall in GDP of over 6%. 

What this revealed more than anything else, however, was not just the anarchic dysfunctionality of our deregulated financial system but the inherent weakness in the underlying economy, which, as a result of two decades of accumulated debt, lacked the kind of robustness necessary to bring about an early recovery. Worse still, with interest rates already at rock bottom and government spending already at record highs, it also very quickly became apparent that the previously relied-upon policies for dealing with such economic downturns – reducing interest rates and increasing public expenditure – had all been used up.

Not, of course, that this prevented governments all around the world from attempting to apply these policies anyway. In a coordinated effort, central banks worldwide duly cut interest rates once again, in many cases reducing them to below zero in an attempt to deter commercial banks from placing money on deposit with them, thereby forcing them – or so it was hoped – to lend to consumers and businesses instead. The problem was, of course, that with consumers already up to their eyes in debt – and actually starting to pay down their credit cards – and businesses disinclined to invest in the middle of a recession in which demand was still declining, there just weren’t that many takers. And even though politicians still attempted to morally shame banks for not lending enough – especially after all the public support they, themselves, had received – the fact is that you can’t force people to borrow money if they don’t want to. 

So that left increasing public expenditure as the only other weapon available. And, as in many other countries, that’s what many people in the UK also called for. The problem was that, due to the recession, UK tax revenues had fallen massively, tripling the annual deficit from £50 billion to £150 billion in just one year. Any additional borrowing to finance increased public expenditure, therefore, would have risked lender resistance, very probably forcing the Treasury to increase the interest paid on its bonds or risk the failure of a bond issue altogether. 

In fact, with the exception of the USA, most countries that tried to borrow and spend their way out of the recession – most of them in Europe – found opposition in the bond markets and, in many cases, had to turn for support to what became known as the troika: a combination of the IMF, the ECB and the EU, which duly forced supplicant nations to cut public expenditure as a condition of their help.

With an annual deficit of £150 billion – around 9% of GDP at the time – this might also have been the fate of the UK, even without an increase in borrowing to finance increased public expenditure, had it not been for the early introduction of a programme of quantitative easing (QE) by the Bank of England, which duly printed additional base money with which to purchase UK Treasury bonds from subscribing commercial banks, thereby not only ensuring that these banks had enough liquidity to subscribe to the next Treasury issue, but guaranteeing that the price of the bonds stayed high while their corresponding yield remained low. 

Not, of course, that it was ever admitted that this was the programme’s primary purpose: an admission which, had it occurred, would have severely dented confidence and would therefore have been self-defeating. Instead, the programme was usually presented as simply another tool in the BoE’s armoury for increasing general liquidity within the banking system and therefore for helping to stimulate economic growth. The fact remains, however, that without the BoE’s purchase of £325 billion worth of UK Treasury bonds from UK commercial banks between 2008 and 2011, it is very doubtful whether UK banks, on their own, would have been able to purchase even half of the £520 billion worth of bonds issued by the Treasury during that period. Even more tellingly, all this money printing and purchasing of bonds had absolutely no effect on the real economy which remained stubbornly stagnant throughout the entire three and half years in which the programme was in operation. 

Indeed, as a tool for stimulating economic growth, QE has proven itself to be spectacularly ineffective almost every time it has been used. Since 2015, for instance, the European Central Bank (ECB) has been pouring between €60 and €90 billion a month into the Eurozone financial system and, to date, has purchased more than €2.4 trillion in financial assets, including stocks and corporate bonds as well as Eurozone treasury bonds. And yet economic growth in the Eurozone has not managed to climb above 2% during this entire period, with some countries, like Italy, remaining in almost perpetual recession. For the problem in Europe, as in most of the developed world, is not actually one of liquidity. As shown in the above example, the banking system, itself, is quite capable of producing the necessary finance if there is a requirement. It doesn’t need a central bank to print more base money to do this. What it needs is a demand for finance from the real economy. And this is what is lacking. For with stagnant real incomes, over-indebted consumers provide very little incentive for businesses to invest in increased production or improved productivity. And without growth in either of these areas, real incomes, in turn, remain suppressed. This is the vicious circle we are in. And printing money and pumping it into the financial system does nothing to solve this problem. 

In fact, in many ways, it makes it worse. For once the money has been pumped into the financial system, it has to be invested somewhere. And as it is not being invested in the real economy, it ends up being invested in either property or financial assets. As a result, property prices have risen once again, in many places to levels at which those living on suppressed median incomes simply cannot afford to buy a house or apartment of their own and are therefore forced to spend an even larger proportion of their income on rent, thereby depressing demand in other parts of the economy even more. 

Worse still is the state of our financial markets. For with central banks buying up so many financial assets, and so much money swirling around within the financial system itself, owners or managers of this money are desperate to find any financial asset in which they can profitably invest. The result is that just about all financial markets – whether they be for stocks, treasury bonds, corporate bonds or ever more exotic derivatives – are at peak highs. Nor is this helped by the fact that, unable to find profitable investments in the real economy, the only way for many businesses to secure increased shareholder value is through cash based mergers and acquisitions and share buybacks, the technical simplicity of the latter making them particularly attractive to beleaguered CEOs who have nothing better to do with all the cheap money that is available to them. 

To see why this is, suppose that one such CEO is the manager of a company making £1 million per year in pre-tax profits, which, at an admittedly rather low but numerically helpful price/earnings ratio of ten to one, would give it an overall value of £10 million. Suppose, too, that the company has one million issued shares which are therefore valued at £10 each. Now suppose that the CEO decides to buy back 20% of the shares. So he goes to his bank and borrows £2.2 million at a rate of interest significantly lower than he is currently paying out to his shareholders in annual dividends, and offers to buy 200,000 shares from his shareholders at £11 each, an offer which most of them jump at. The result is that the company now only has 800,000 shares but is still making £1 million per year in pre-tax profits, which, at a P/E of 10:1 still makes it worth £10 million. This means that each of the remaining shares is now worth £12.50, an increase of 25% which so delights the shareholders – who have already made a 10% gain on the shares they sold – that it earns the CEO a hefty bonus even though he has done nothing to improve the underlying value of the company or, indeed, the overall condition of the economy.

And the same thing occurs in the case of cash based mergers and acquisitions. Twenty years ago, most purchases of one company by another were made in shares. The acquiring company issued more of its own shares and exchanged them for shares in the acquired company. In this way the total equity in the new combined corporation was not reduced. Today, however, with money so cheap to borrow, most acquisitions are executed partly or entirely in cash, thereby wiping out some or all of the equity of the purchased company. When German pharmaceuticals giant, Bayer, bought Monsanto in June 2018, for instance, it paid $66 billion for the American GM specialist entirely in cash, increasing its own share price astronomically but saddling itself with an extra $66 billion in debt as a consequence. 

Nor was this exceptional. Mergers and acquisitions have been steadily increasing in both number and value over the last six or seven years. In 2018, there were more than 49,000 mergers and acquisitions worldwide, at a total value of $3.8 trillion, most of it paid in cash.

The problem is that this increased leverage makes companies vulnerable. For while costing more in annual dividends than the interest paid on bonds, equity never has to be redeemed. Moreover, unlike interest, dividends can be cut or cancelled if the company gets into financial difficulties. Thus while funding acquisitions through debt may look attractive today, with interest rates very low, it may seem rather different tomorrow if interest rates were to rise. Indeed, it is estimated that up to 25% of all listed corporations around the world would face some degree of difficulty if interest rates rose by any significant amount. Not only would they not be able service their debts, but in many cases they would not be able to refinance themselves when the debts fell due, thereby earning for themselves the soubriquet of ‘Zombie Corporations’, or corporations that are actually already dead but just don’t know it yet. 

Not only has very little of this ‘financial engineering’ therefore been to the benefit of the corporations, themselves, it has also done nothing for the wider economy. Indeed, for the most part it has no effect upon the wider economy at all. Its only benefit has been to the guardians of this vast financial machine who have made the ‘financialisation’ of the economy their business: the hedge fund managers and heads of investment banks who, along with their clients have made billions out of gaming the system in this way, while the real economy, along with the incomes of all those who labour within it, has remained more or less stagnant.

Indeed, it is as if the economy, itself, has been divided into two: the real economy, which produces the goods and services which we all need to live, but which is in slow decline; and the financial economy, where people are turned into billionaires overnight, and which seemingly continues to expand with endless ease. For creating money without having to create any extra real wealth is easy. All you have to do is press the ‘enter’ button on your keyboard and there it is: another million in someone’s bank account. The trouble is that creating money without creating any extra real wealth, as demonstrated by the Weimar Republic in the early 1920s and as the participants at the Bretton Woods Conference tried to teach us in 1944, is the ultimate recipe for disaster. 

In April this year, as if in reminder of this fact, the Institute of International Finance reported that in 2018, total global debt – sovereign, corporate and household – reached a staggering $243 trillion, about four times global GDP: an amount so vast it can never be repaid and must eventually bring down the world’s entire financial and monetary system. Indeed, so enormous has this problem now become that it is hard to understand how we could have got ourselves into such a position, especially as there must be those in power who saw this is happening and yet did nothing about it. It almost seems like a repeat of the years leading up to the 2008 crash when politicians turned a blind eye to all the excessive mortgage lending that was then taking place and which speaks, therefore, to a kind of moral corruption: one which is apparently not just confined to elected politicians desperate to keep their electorates sweet, but which also extends to the guardians of our new globalist order, who would seem to be just as determined to preserve the status quo as everyone else, even while it pushes the world ever closer to destruction.

And it is this, I believe, that people throughout the West are now beginning to sense: that our globalist masters – that small, unelected coterie of non-governmental technocrats, global financiers and heads of multinational corporations, whom we watch descend upon Davos each year in their private jets – are not only not in control of what is happening but are either in denial – still believing us to be on course for that the brave new world envisioned at Bretton Woods – or are cynically content to oversee an End of Days they know they cannot prevent but from which they are nevertheless determined to squeeze the very last drops of power and prestige. And it is this fecklessness, I believe, combined with an air of entitlement and a total lack of care or concern for those they have betrayed and on whom they have turned their backs, against which populist movements all across Europe are now beginning to rebel.

The only question that remains, therefore, is whether it’s too late. And it is this question, along with how we allowed it to happen, that I shall therefore be attempting to answer in the final chapter of this essay: ‘The End of an Era (Part III)’.