Beware a new wave of populism, born out of coronavirus-induced economic inequity

Big businesses and governments are fast making themselves inviolable. There could be a backlash


Nick Cohen Sat 18 Apr 2020 THE GUARDIAN 
 

Protesters ‘Rally Against Capital’ in London in February 2020. Photograph: Ollie Millington/Getty Images
SEE SOME PROTESTERS WERE ALREADY MASKED AGAINST COVID-19

Aglobal wave of injustice could follow the global pandemic. Pre-existing tendencies towards monopoly, Chinese dominance and predatory capitalism will explode unless governments take measures to contain them. I accept that it is hard to imagine public fury at a rigged economy when voters are rallying to their leaders and lockdowns are enjoying overwhelming support. Solidarity cannot last, however, as the crisis accentuates the division between insiders and outsiders.

You see them now. Employees with staff jobs, and the ability to work from home, are coping, for the moment. A few might experience lockdown as something close to a holiday and rhapsodise on the joys of home baking and box sets. As insiders stay inside, they save the money they would have spent in shops, restaurants, hotels and travel agents - the places where the insecure, the luckless nine out of 10 in the bottom half of earners who cannot work from home, once made their livings.


What applies to individuals applies to corporations and private equity funds that are strong enough to buy up distressed assets at a fraction of their pre-crisis value. I sat up and paid attention last week when I heard Sebastian Mallaby of the US Council on Foreign Relations warn that private equity is likely “to play both sides”: soaking up government largesse and profiting from market mayhem. It won’t, he concluded, “look great when we consider the political economy of the pandemic a year from now”.

You catch a glimpse of the future in the manoeuvres of the US private equity firms thinking of deploying hundreds of billions of dollars they hold in reserve as high-interest loans to struggling companies. The arguments this month about a Chinese state-owned investment firm buying up the British chip manufacturer Imagination Technologies are a further harbinger of a possible world to come. The Chinese Communist Party’s “2025 Made in China” strategy sees it leapfrogging the west by taking over companies and establishing a global lead in smart manufacturing, digitisation and emerging technologies. Covid-19 gives the party the opportunity it needs. Funds and states are operating in a market where the tendency towards monopoly was already established.

The 2008 crash, like recessions before it, concentrated economic power, as large firms used their resources and access to finance to ensure their survival. But, unlike in the last century, a multitude of rival businesses did not emerge once recession had passed, to provide competition and new employment opportunities for workers wanting to raise their wages by switching firms. In 2016, according to the Resolution Foundation, Britain’s 100 biggest firms accounted for 23% of total revenue across the economy, up by a quarter since 2004. As the economic crisis we are entering looks worse than 2008, worse indeed than anything anyone alive can remember, the rise of corporate giants seems assured. Big governments – and this crisis is making governments bigger than ever – will welcome them, because they want the convenience of dealing with big businesses, not with tens of thousands of small and medium-size firms.

Complaints about tax-exile billionaires wanting other people’s money are a warning

Do you begin to see how popular fury might build? Vulture capitalists swooping on undervalued assets. Chinese communists, who censored news of Covid-19 rather than alerting the world, benefiting rather than suffering. Big business trampling over all who might challenge it. It’s not a recipe for social peace.

Superficially, the crisis of 2020 does not appear anything like the financial crisis of 2007-08 and not only because it threatens to bring an incomparably greater level of impoverishment. Then there were human villains: bankers and captured regulators who broke the financial system, northern Europeans who congratulated themselves as they let southern Europe collapse. Now there’s just an invisible infectious agent that wants only to replicate itself. The similarities remain striking, for all that. Gordon Brown and Alistair Darling, like leaders across the west, weren’t interested in jailing bankers or making them pay back their bonuses. Their sole concern was to stop the collapse of the banking system. The morality of the bailout could wait – forever, as it turned out. Everywhere in the west, the public reaction was the same. Democracy was a racket. Taxpayers had to rescue the richest people in the world and then suffer years of stagnant wages and cut public services to meet the bill. If you need a one-line explanation for populism, this is the best there is.

Yet again, vast amounts of public money are being committed, but instead of stagnation we face catastrophe. Nervous commentators rererence how the Great Depression of the 1930s fuelled nazism and communism, as 2008 fuelled populism, and dread what awaits us. They should know there is no necessary link between economic and political failure. Far from enabling tyranny, the economic crisis of the 1970s, for instance, saw the end of the rightwing tyrannies in Spain, Portugal and Greece and the beginning of the decline and fall of the Soviet empire. Our future depends not only on the work of scientists but on the efforts of governments to stop democracy turning into a swindle.

The EU says countries must ensure that big business doesn’t use state funding to buy out rivals and adds that nation states should take stakes in companies threatened with Chinese takeovers. However the UK’s relationship with the EU ends, that’s good advice.

Governments should not forget natural justice as they did in 2008. Complaints about tax-exile billionaires in the Richard Branson mould wanting other people’s money are a warning, not a tabloid distraction. If, as seems likely, the government moves from subsidising wages to direct loans to big business, the first question must be what do taxpayers, employees and wider society gain in return.

Sociologists talk of the “Matthew effect”, an idea lifted from Saint Matthew’s account of the most unChristian words Jesus uttered: “For to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.” Our task is to make sure this miserable prophecy is not now vindicated.

• Nick Cohen is an Observer columnist

'No genocide': Tibet activists sidetrack Beijing Winter Olympics flame ceremony

 

Activists grabbed the spotlight at the flame-lighting ceremony for the 2022 Beijing Winter Olympics in Greece on Monday by unfurling a Tibetan flag and a banner that said "no genocide" at the Games. The demonstrators pulled out the flag and banner during the ceremony in Olympia attended by International Olympic Committee (IOC) president Thomas Bach and several dozen dignitaries including Chinese officials.

Activists urge IOC to postpone 'genocide' Beijing Games

Issued on: 19/10/2021 -

Activists have called for the 2022 Winter Olympics in Beijing to be postponed

 ARIS MESSINIS AFP

Athens (AFP)

Activists on Tuesday called for the postponement of the Beijing 2022 Winter Olympics as China prepared to receive the Olympic flame, a day after a protest disrupted the lighting ceremony in Olympia.

"This is sports-washing. There are no legitimate reasons to host the Games during a genocide," Zumretay Arkin, advocacy manager of the World Uighur Congress, told a news conference in the Greek capital.

"For sure there will be protests (in China) by Uighurs, Tibetans," said Arkin, who said she has had no contact with her family since 2017.

Lit on Monday in Ancient Olympia, the cradle of the ancient Games, the flame will be handed over to the delegation from Beijing 2022 at the Panathenaic Stadium in Athens, where the Olympics were revived in 1896, and will be flown to China.

During the ceremony in Olympia on Monday, the activists unfurled a Tibetan flag and a banner that said "no genocide" at the Games. A similar protest was held at the Acropolis in Athens.

Tibet has alternated over the centuries between independence and control by China, which says it "peacefully liberated" the rugged plateau in 1951 and brought infrastructure and education to the previously underdeveloped region.

But human rights campaigners and exiles say the Chinese central government practises religious repression, torture, forced sterilisation and cultural erosion through forced re-education.

Campaigners believe that at least one million Uighurs and other Turkic-speaking, mostly Muslim minorities are incarcerated in camps in Xinjiang.

After initially denying the existence of the Xinjiang camps, China later defended them as vocational training centres aimed at reducing the appeal of Islamic extremism.

"Who is going to guarantee that none of my relatives are actually now working in forced labour factories producing clothing and uniforms for the Olympic Games," Arkin said Tuesday.

"Can anyone tell me where my relatives are? I don't think so."

The activists on Tuesday said Hong Kong residents, Tibetans and Uighurs faced "Orwellian" surveillance in China, which they said was "emboldened" after hosting the Summer Games in 2008.

The IOC is legitimising "one of the worst violations of human rights in the entire 21st century" and defiling the spirit of the Games, said Pema Doma, campaigns director for Students for a Free Tibet.

"These Games cannot go ahead as planned, they must be postponed," she said.

IOC chairman Thomas Bach has batted off talk of a potential boycott, claiming the International Olympic Committee's political neutrality and saying it was up to governments to live up to their responsibilities.

A victim of the 1980 Moscow Games boycott, the former fencer has said such moves only punish athletes, and insists the IOC was addressing the rights issue "within our remit".

Around 2,900 athletes, representing approximately 85 National Olympic Committees, will compete in the Winter Games between 4 and 20 February 2022.

Arkin said the campaign "to train light on all the different abuses" was stronger than that of 2008, bringing together "Uighur communities, Hong Kong communities, Tibetan, Southern Mongolian, Chinese and Taiwanese communities".

"No one can stop us. Not the IOC, not governments, not sponsors, not athletes. We will not stop," she said.

Protesters Disrupt Torch Lighting For Beijing Winter Olympics


AP
Mon, October 18, 2021

ANCIENT OLYMPIA, Greece — Three activists protesting human rights abuses in China sneaked into the archaeological site where the flame lighting ceremony for the 2022 Beijing Winter Olympics was being held Monday and ran toward the newly lit torch holding a Tibetan flag and a banner that read “No genocide games.”

The protesters managed to enter the grounds and attempted to reach the Temple of Hera, where the ceremony was being held. They were thrown to the ground by police and detained.

A security officer tries to stop protesters holding a banner and a Tibetan flag as they crash the flame lighting ceremony for the Beijing 2022 Winter Olympics. 

(Photo: ARIS MESSINIS via Getty Images)

“How can Beijing be allowed to host the Olympics given that they are committing a genocide against the Uyghurs?” one protester said, referring to the treatment of Uyghur Muslims in China’s northwest region of Xinjiang.

The flame was lit at the birthplace of the ancient Olympics in southern Greece under heavy police security.

With the public excluded amid pandemic safety measures, and a cloudless sky over the verdant site of Ancient Olympia, the flame was ceremoniously kindled using the rays of the sun before being carried off on a mini torch relay.

Earlier, other protestors were detained by Greek police before they could reach the site. Pro-democracy protests also had broken out during the lighting ceremony for the 2008 Beijing Summer Games.

A police officer rushes to stop protesters holding a banner and the Tibetan flag (unseen) as they crash the start of the flame lighting ceremony for the Beijing 2022 Winter Olympics at the Ancient Olympia archeological site. 

(Photo: ARIS MESSINIS via Getty Images)

Despite widespread international criticism of China’s human rights record, the International Olympic Committee has shied away from the issue, saying it falls outside its remit.

In his speech in the ancient stadium of Olympia, where in antiquity male athletes competed naked during a special truce among their often-warring cities, IOC President Thomas Bach stressed that the modern Games must be “respected as politically neutral ground.”

Security officers stop three protesters holding a banner and a Tibetan flag as they crash the flame lighting ceremony for the Beijing 2022 Winter Olympics at the Ancient Olympia archeological site. (Photo: ARIS MESSINIS via Getty Images)

“Only this political neutrality ensures that the Olympic Games can stand above and beyond the political differences that exist in our times,” he said. “The Olympic Games cannot address all the challenges in our world. But they set an example for a world where everyone respects the same rules and one another.”

This article originally appeared on HuffPost and has been updated.

World at risk of second Great Depression due to coronavirus, says Chinese central bank

Zhu Jun from the People’s Bank of China says the risk is small, but the world must be alert to the threat

Economies around the world have been hit by the measures taken to stop the spread of Covid-19
Karen Yeung 5 Apr, 2020 SCMP

Measures to curb the spread of Covid-19 are likely to take

 a serious economic toll.  Photo: Xinhua

China’s central bank has warned the international community to be alert to the risk of a “Great Depression” in the wake of the Covid-19 outbreak, although it said the chances of this occurring was low.

“The possibility of a ‘Great Depression’ cannot be ruled out if the epidemic continues to run out of control, and the deterioration of the real economy is compounded by an eruption of financial risks,” Zhu Jun, director of the international department of the People's Bank of China, was quoted by local media as saying last week.

The difficult trade-off between the need to protect public health and the economic cost of shutting almost all face-to-face human activity has prompted warnings from many economists that the economic shock from Covid-19 may be more severe than the 2008 global financial crisis or even the Great Depression.

The latter, which began with the Wall Street Crash of 1929, saw credit markets freezing up, massive bankruptcies, US GDP falling by more than 10 per cent and unemployment rates that touched 25 per cent.


Professor Terence Chong Tai-leung from the department of economics at the Chinese University in Hong Kong, said he was optimistic the global contraction would not be as severe as the 1930s slump.

“Governments are likely to decide to ease off restrictions by July. They need to prevent disruptions that would cause food shortages, social unrest or greater damage to human lives and the economy than if the restrictions continued,” Chong said. “The economy will naturally rebound when restrictions are lifted.”

But there is evidence the major toll this crisis is already having a massive impact on the US employment situation. US initial jobless claims of 6.65 million last week, up from 3.3 million the week previous week, highlighted fears of mass unemployment.

Currently global markets are already down 35 per cent, credit markets have seized up to 2008 levels. Even mainstream financial firms such as Goldman Sachs, JP Morgan and Morgan Stanley expect US GDP to fall by an annualised rate of 6 per cent in the first quarter, and by 24 per cent to 30 per cent in the second.


Moody’s has warned that 30 per cent of US home loans may stop being serviced as a result of job losses and a lack of support for small businesses.

Zhu from the Chinese central bank said the biggest market uncertainty came from the fact that central banks’ swift and forceful actions could not directly help to control the epidemic but stopping its spread would help market confidence.

He said the policies of advanced economies had helped stabilise stock market sentiment but hidden risks continued to exist in the global financial system.

For example, stock markets in developed countries have been rising for many years so their valuations are under pressure.

If the market panics due to the intensifying impact of the epidemic, that could lead to tighter market liquidity, triggering market contagion across different asset classes.

The corporate sector, which has a relatively high level of debt, could also see an increase of defaults on banks’ non-performing assets and corporate bonds.


Nouriel Roubini, professor of economics at New York University's Stern School of Business, said the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic and so the risk of a “greater depression” was rising by the day.

He warned that if a series of virus-related negative supply shocks reduced potential growth, the fiscal response of many countries could hit a wall as they would not be able to borrow enough in their own currency.

“After the 2008 crash, a forceful (though delayed) response pulled the global economy back from the abyss. We may not be so lucky this time,” Roubini said. “Who will bail out governments, corporations, banks and households in emerging markets?”



Despite a US$349 billion government backstop, US banks are refusing to lend to struggling small businesses at 0.5 per cent, and choosing to make the loans at 1.0 per cent instead.

Michael Every, global strategist at Rabobank said, in reality these financial packages can be hard to access, and may not be really effective.

“That is a Great Depression happening in the blink of an eye,” Every said. “Who knows where the damage will spread to, and when, if we are going to see 25 per cent unemployment across much of the developed world for an extended period?”

---30---

Key Democrat fears only a market crash will resolve debt limit impasse

“I would tell the president, ‘You can negotiate ,  there’s a reason we don’t negotiate with hostage-takers, Because you’ll be doing it again real soon.”

BY MIKE LILLIS 

THE HILL

- 04/23/23 

A key Democrat is warning this week that only a stock market collapse will break the partisan stalemate over raising the debt ceiling and preventing a government default over the summer.

Rep. Jim Himes (D-Conn.), a former Goldman Sachs executive and senior member of the Financial Services Committee, said the Republicans’ opposition to a debt limit hike without steep spending cuts is so entrenched that only an economy-rattling market tumble — like the crash that accompanied the financial crisis of 2008 — will shake GOP leaders to accept a bipartisan compromise.

“I fear that this ends the way the famous TARP, the Troubled Assets Relief Program, got passed in 2008. And that is when the markets finally say, ‘You guys have got to stop screwing around,’” Himes said Thursday during a wide-ranging interview in his Capitol Hill office.

TARP was Congress’s controversial response to the global financial crisis 15 years ago, providing $700 billion to stabilize teetering banks and restore faith in reeling credit markets. Championed by then-President George W. Bush and his treasury secretary — former Goldman CEO Hank Paulson, who warned of a global economic collapse if the funding was denied — the bill was killed in the House the first time it hit the floor in late September 2008.

The surprise vote sent the stock market into a freefall, pulling the Dow down 7 percent — the steepest decline since the attacks of 9/11 — and the Nasdaq down more than 9 percent. All told, the U.S. equity market lost $1.2 trillion in a day. Four days later, after making minor changes, spooked House lawmakers passed the bill and sent it to Bush’s desk.

Himes, who was first elected to Congress a month later, predicted it will require a similar scare to convince the Republicans who control the House to pass a debt ceiling increase that can also win President Biden’s signature.

“Sadly, I think it’s going to take that kind of market signal to wake my ideologically frenzied friends up and just say, ‘Let’s move on and do some real stuff,'” Himes said.

The debate surrounding the debt limit is growing more urgent as the government inches closer to the important moment when it exhausts the “extraordinary measures” it’s currently using to pay its debts — a mystery date Treasury officials say could come as early as June. Unless Congress raises that cap, the government would be unable to pay all of its existing obligations, marking the first default in U.S. history. Economists of all stripes have warned the effect on the global economy could be catastrophic.

Biden, from the start, has demanded a “clean” debt ceiling bill absent any other provisions — a stipulation Speaker Kevin McCarthy (R-Calif.), who’s leading the Republican negotiations, has refused.

Pressured by conservatives in his conference, McCarthy is insisting on steep spending cuts to accompany the borrowing hike. As an opening bid, he introduced legislation on Wednesday to cut federal spending by $4.5 trillion over the next decade, according to GOP estimates, while raising the debt limit by $1.5 trillion or through March 2024, whichever comes first.

Republican leaders are racing to secure the support to pass the bill early next week, but they have some work to do to overcome the reservations from some GOP lawmakers — conservatives and moderates alike — who are fighting for favored changes.

Leaders are voicing confidence heading into the vote — “The cup is half full, we can get there,” McCarthy said — and even some of the most conservative GOP lawmakers are signaling their intent to support the package.

“[Democrats] certainly have been floating the notion that they didn’t think we can get to 218,” said Rep. Dan Bishop (R-N.C.), who was among the conservatives who forced McCarthy to adopt a host of concessions — including a tougher line on deficit spending — in support for his Speakership bid in January. “I think they underestimate both where we’ve begun and what we accomplished in January to get ourselves better organized around clear ideas.”

Still, GOP leaders are reportedly short of 218 Republican votes, and Democratic leaders are warning McCarthy that he should expect no help from across the aisle.

“We’re at a point now where House Republicans are going to have to produce the votes for their extreme legislative proposal,” House Minority Leader Hakeem Jeffries (D-N.Y.) told reporters Thursday.

Even if the bill passes the House, it’s dead on arrival in the Democratic-controlled Senate, putting the sides closer to default without a resolution. The dilemma facing McCarthy is finding some compromise that can win bipartisan support, for the sake of avoiding a default, without angering conservatives to the extent that they attempt to topple him from power — a process he agreed to make easier as part of his deal with them in January.

Himes said the challenges facing McCarthy are much tougher than those that confronted former Speaker John Boehner (R-Ohio), who had a much larger majority to work with during the debt ceiling battle of 2011, when the U.S. credit rating was downgraded for the first time in history.

“It’s unquestionably much worse,” he said. “One hundred days of experience as Speaker, and he’s got a tiny majority. And that majority includes people who — let me be diplomatic and say are unpredictable.”

Himes, echoing a chorus of others in his party, was quick to point out that Democrats voted to raise the debt limit three times under former President Trump — and even Republican deficit hawks were largely silent when those votes occurred under a GOP president.

“Remember, three times during Donald Trump the debt ceiling got raised, and you didn’t even notice because Kevin McCarthy and all the Republicans were like, ‘Let’s not screw around here now, we’ve got a [Republican] president,’” he said. “Now all of a sudden they need to take the grenade out, pull the pin and put it on the table.”

Democrats, he added, are happy to debate the merits of federal programs and the funding provided to them. But that conversation should happen in the normal process of passing appropriations bills, he said, not with a federal default hanging in the balance. Durbin: Conversation about budget should be ‘separate’ from debt ceilingKlobuchar: Biden, McCarthy should negotiate on budget, not hold Americans’ mortgages ‘hostage’ over debt ceiling

“God bless you, if you want to cut food stamps to hungry children, if you want to make it harder to go to college, put that idea forward. But do it as part of the regular legislative process where we can debate it,” Himes said. “You don’t get to say, ‘We’re going to cut food stamps, and if you don’t do it, we’re blowing up the economy.’ Which is what the debt ceiling conversation is all about.”

Amid the debate, some moderate Democrats are quietly voicing frustrations that Biden has refused to negotiate with McCarthy. But a vast majority of the caucus is sticking with their ally in the White House, warning opening that door would set a dangerous precedent for debt ceiling debates in the future. Himes said his advice to Biden would be to hold his ground.

“I would tell the president, ‘You can negotiate. [But] there’s a reason we don’t negotiate with hostage-takers,’” Himes said. “Because you’ll be doing it again real soon.”

SILICON VALLEY BANK CRASH

Tech execs race to save startups from 'extinction' after SVB collapse
Reuters
March 12, 2023


By Jeffrey Dastin, Anna Tong and Krystal Hu

PALO ALTO, California (Reuters) - Technology executives, prominent venture capitalists and founders including OpenAI CEO Sam Altman raced this weekend to keep alive companies caught up in the collapse of Silicon Valley Bank.

Friday's dramatic failure of the bank, which focuses on tech startups, was the biggest since the 2008 financial crisis. It roiled global markets, walloped banking stocks and left California tech entrepreneurs worrying about how to make payroll.

Aiming to avoid what Garry Tan, the CEO of startup accelerator Y Combinator, called a potential "extinction level event" in the tech sector, industry executives moved quickly to do what they could to save small businesses.

Altman, who runs one of Silicon Valley's hottest companies, bailed out some entrepreneurs from his own pocket, according to a Twitter message by his brother and one beneficiary who spoke with Reuters.

"I was running out of options, and so I just emailed him," Doktor Gurson, CEO of Rad AI, said in an interview on Saturday. Within an hour or two, Altman responded, offering him six figures: enough to make payroll and no strings attached, just a request to return the funds once Gurson is able, he said.

Asked for comment, Altman told Reuters, "I remember the investors who helped me out when I was running a startup and I really needed it, and I always try to pay it forward."

Henrique Dubugras, co-CEO of fintech startup Brex, also spent the weekend working the phone after his company announced an emergency credit line on Friday to help startups get through their next payroll.

As of Saturday evening, he said Brex had received $1.5 billion in demand from nearly 1,000 companies. "We’re trying to sign up lenders by end of day tomorrow. Everybody is sprinting," he said.

Even small startups are getting in on the action to help others. Aleem Mawani, founder of Streak, a company with about 30 employees, tweeted Friday he would lend his personal cash free of any terms to other small startups worried about paying staff. He said he then had discussions with a few companies and was aiming to prioritize lending for those living paycheck to paycheck.

“I'm a founder and I know how awful it would be to not make payroll,” Mawani said in an interview.

'MALFEASANCE OR MISMANAGEMENT'

By late Saturday, more than 3,500 CEOs and founders representing some 220,000 workers had signed a petition started by Y Combinator appealing directly to U.S. Treasury Secretary Janet Yellen and others to backstop depositors, many of them small businesses who are at risk of failing to pay staff in the next 30 days.

The petition advocated "stronger regulatory oversight and capital requirements for regional banks" and an investigation into any "malfeasance or mismanagement" by SVB executives. More than 100,000 jobs could be at risk, the petition warned.

SVB did not reply to a request for comment, and Y Combinator did not elaborate on the petition.

Venture investors have advised startups to seek alternatives to gain short-term liquidity. Some, including Lowercarbon Capital, have offered loans to portfolio companies that have funds stuck at SVB.

Its partner Clay Dumas said Lowercarbon would provide payroll support for the next two weeks and was wiring funds out Monday.

Khosla Ventures told Reuters, “Given the rapidly evolving situation, we are talking to 100+ portfolio companies assessing their critical needs and plan to bridge where we are a lead or major investor."

'LIFELINE'

Rad AI's Gurson had not talked to Altman for years when he emailed the OpenAI chief Saturday morning, desperate for help. The startup relied on SVB, the sudden closure of which meant he lacked the money to pay some 65 employees on Monday, he said.

"People's livelihoods depend on us," said Gurson, whose San Francisco-based company helps radiologists work more efficiently and includes staff with wide-ranging roles and wherewithal. "They’ve got mortgages to pay; they’ve got bills."

Gurson's co-founder waited eight hours on a Federal Deposit Insurance Corporation hotline to no avail, he said. Multiple attempts to transfer funds out of SVB had failed.

But Gurson saw a Twitter post from Altman, whom he met as a founder participating in 2014 in Y Combinator, where Altman was president. The two men did not know each other very well, he said.

"It's like a lifeline," Gurson said of Altman's generosity.

Gurson estimated "conservatively" that Altman has given more than $1 million to support other startups in similar need.

"The crazy thing here is he's not an investor in our company," Gurson said. "He didn’t ask for anything."

Altman did not comment on how much he had given companies but said he did not view his contributions as risky.

"Even if SVB can't find a buyer or a loan over the weekend, a lot of the money startups have on deposit will be made available to them. But in the meantime, people are facing a real liquidity crunch through no fault of their own, and employees need to get paid," he said.

(Reporting by Jeffrey Dastin in Palo Alto, Anna Tong and Krystal Hu in San Francisco; Additional reporting by Tatiana Bautzer; Writing by Kenneth Li; Editing by William Mallard)

Silicon Valley Bank's demise began with downgrade threat



2023-03-11 
Peder B. Helland - Hope

In the middle of last week, Moody's Investors Service Inc delivered alarming news to SVB Financial Group (SIVB.O), the parent of Silicon Valley Bank: the ratings firm was preparing to downgrade the bank's credit.

That phone call, described by two people familiar with the situation, began the process toward Friday's spectacular collapse of the startup-focused lender, the biggest bank failure since the 2008 financial crisis.

Friday's collapse sent jitters through global markets and walloped banking stocks. Investors worry that the Federal Reserve's aggressive interest rate increases to fight inflation are exposing vulnerabilities in the financial system.

Details of SVB's failed response to the prospect of the downgrade, reported by Reuters for the first time, show how quickly confidence in financial institutions can erode. The failure also sent shock-waves through California's startup economy, with many companies unsure how much of their deposits they can recover and worrying about how to make payroll.

The Moody's call came after the value of the bonds where SVB had parked its money fell due to the higher interest rates.

Worried the downgrade could undermine the confidence of investors and clients in the bank's financial health, SVB Chief Executive Greg Becker's team called Goldman Sachs Group Inc (GS.N) bankers for advice and flew to New York for meetings with Moody's and other ratings firms, the sources said.

The sources asked not to be identified because they are bound by confidentiality agreements.

SVB then worked on a plan over the weekend to boost the value of its holdings. It would sell more than $20 billion worth of low-yielding bonds and reinvest the proceeds in assets that deliver higher returns.

The transaction would generate a loss, but if SVB could fill that funding hole by selling shares, it would avoid a multi-notch downgrade, the sources said.

REUTERS

Silicon Valley Bank staff offered 45 days of work at 1.5 times pay, FDIC email shows

LANANH NGUYEN AND PETE SCHROEDER
REUTERS

Employees of Silicon Valley Bank were offered 45 days of employment at one and a half times their salary by the Federal Deposit Insurance Corp, the U.S. regulator that took control of the collapsed lender on Friday, according to an email to staff seen by Reuters.

Workers will be enrolled and given information about benefits over the weekend by the FDIC, and healthcare details will be provided by the former parent company SVB Financial Group, the FDIC wrote in an email entitled “Employee Retention” late on Friday. SVB had a workforce of 8,528 at the end of last year.

Staff were told to continue working remotely, except for essential workers and branch employees.

The FDIC did not immediately respond to a request for comment.

Silicon Valley Bank imploded after depositors, concerned about the lender’s financial health, rushed to withdraw their deposits. The frenetic two-day run on the bank blindsided observers and stunned markets, wiping out more than $100 billion in market value for U.S. banks. SVB ranked as the 16th biggest bank in the United States at the end of last year, with about $209 billion in assets and $175.4 billion in deposits.

Members of California’s congressional delegation are set to be briefed by FDIC officials on Saturday, according to a report by Politico, which cited two people familiar with the situation.

The lender’s main office in Santa Clara, California, and all of its 17 branches in California and Massachusetts will reopen on Monday, the FDIC said in a statement on Friday.

ABC host slams regulation cuts 'under President Trump' after Silicon Valley Bank collapse

David Edwards
March 12, 2023

ABC/screen grab

ABC host Martha Raddatz noted that Trump-era regulation cuts may have contributed to the rapid collapse of Silicon Valley Bank last week.

While speaking to Sen. Mark Warner (D-VA), Raddatz wondered about the downfall of the go-to bank for tech startups.

"Senator, after the financial crisis in 2008, regulations were put into place to make sure banks could weather large losses," Raddatz told Warner on Sunday. "Under President Trump, some of those were rolled back, and in 2018, you were one of only 17 Democrats who voted for the bill that rolled back some banking rules, including for institutions the size of Silicon Valley Bank."

"Do you regret that vote?" the host asked.

Warner defended the vote: "I do think these mid-sized banks needed some regulatory relief."

"So, Senator, you don't regret that vote?" Raddatz pressed.

"I don't regret that vote," he insisted.

Watch the video below from ABC or at the link.

SILICON VALLEY BANK USED FORMER MCCARTHY STAFFERS TO WEAKEN REGULATIONS, LOBBY FDIC

Two senior aides to House Speaker Kevin McCarthy were among the top lobbyists for the bank at the center of a new financial crisis

Ken Klippenstein
March 11 2023

AFTER SUCCESSFULLY LOBBYING, for the rollback of new rules applied to Wall Street in the wake of the financial crisis, lobbyists for Silicon Valley Bank immediately began pressing their case further to the federal authority that insures bank deposits in the event of another crisis, according to lobbying disclosures reviewed by The Intercept. The lobbying effort managed to exempt banks the size of SVB from more stringent regulations, including stress tests aimed at uncovering the type of weaknesses that led to the bank’s implosion last week. Two of the bank’s top lobbyists previously served as senior staffers for House Speaker Kevin McCarthy, who himself pushed for the repeal of significant pieces of the landmark Wall Street reform legislation known as Dodd-Frank.

The meltdown of Silicon Valley Bank on Friday represents the second largest bank collapse in American history and the first since the 2008 financial crisis. Over 90 percent of SVB’s deposits exceed the amount federally guaranteed by the FDIC, meaning those people may never see their money again, or may lose substantial amounts.

SVB’s president, Greg Becker, himself pushed for weaker banking regulations, telling congress to lift “enhanced prudential standards…given the low risk profile of our activities,” as The Lever reported.

A chief culprit, economists say, is legislation signed into law by President Trump in 2018, which rolled back key parts of the Dodd-Frank banking regulations passed in the wake of the 2008 financial crisis. That 2018 legislation, called the Economic Growth, Regulatory Relief, and Consumer Protection Act, passed with strong support from the Republican Party and critical support from some Democrats. Among those leading the charge was then-House Majority Leader Kevin McCarthy, who is now House Speaker.

“We’re going to move this Senate bill directly to the president’s desk to ensure these reforms help the economy to grow further by making community banks stronger,” McCarthy said of the legislation in 2018. “This is going to free up a great deal of capital and this will help a lot.”

Two former staffers for House Speaker Kevin McCarthy are registered lobbyists for Silicon Valley Bank, with one specifically lobbying on the 2018 Dodd-Frank repeal law that experts say made this crisis more likely, according to federal lobbying disclosures reviewed by The Intercept.

Other SVB lobbyists worked for political figures cutting across both parties including President Bill Clinton, former Sen. Mike Enzi, R-Wy., former Sen. Tom Coburn, R-Okla., Rep. Joe Courtney, D-Conn., former Sen. Arlen Specter D/R-Pa., and former Rep. Jay Inslee, now governor of Washington.

Brian Worth served as coalitions director for McCarthy from January 2011 to May 2014, when he was House Republican Whip. Since March of 2017 he’s been a partner at Franklin Square Group, where he’s worked as a lobbyist for SVB. Wes McClelland served as a policy advisor and senior policy advisor for McCarthy from April 2011 to September of 2015 and joined Franklin Square in January of last year, where he has also lobbied on SVB’s behalf.

Franklin Square is the only lobby group that SVB has used in over a decade, having lobbied on its behalf every year from 2009 to 2023. The only other lobby shops SVB has employed were DLA Piper from 2009-2010 and McGuireWoods consulting from 2010-2011.

A spokesperson for McCarthy did not immediately respond to a request for comment.

Worth lobbied on the repeal law beginning on October 1, 2017, right up to its passage on May 24, 2018. Then, starting on July 1, 2018, SVB began lobbying the FDIC — the very same federal agency responsible for insuring bank deposits, which was tasked with implementing critical portions of Dodd-Frank.

Though Franklin Square has lobbied on behalf of SBV since 2009, the 2018 filing represents the first time it had ever lobbied the FDIC.

Beginning on April 20, 2022, McClelland also began lobbying the FDIC on SBV’s behalf, which both he and Worth continued doing right up until SBV’s last lobbying filing this year.

The lobbying disclosures do not provide any more detail about the work. Neither Worth nor McClelland immediately responded to requests for comment.

“This was a 100 percent avoidable problem,” economist Dean Baker told The Intercept in an email, pointing to the Dodd-Frank repeal bill. “That bill raised the asset threshold above which banks have to undergo stress tests from $50 billion to $250 billion. SVB would have been required to undergo regular stress tests before the revision; among the stresses you look at are sharp rises in interest rates, which is apparently what did in SVB. Presumably, if its books had been subject to this test, the risk would have been detected and they would have been required to raise more capital and/or shed deposits.”

Twitter slams 'moron' Charlie Kirk for suggesting Silicon Valley Bank crashed because of 'DEI' efforts

Maya Boddie, Alternet
March 12, 2023

Charlie Kirk speaking with attendees at the 2021 Southwest Regional Conference hosted by Turning Point USA at the Arizona Biltmore in Phoenix, Arizona. (Photo credit: Gage Skidmore)

Turning Point USA founder and conservative, Charlie Kirk, suggested Silicon Valley Bank collapsed due to the lender's diversity, equity and inclusion commitment statement on its website.

Kirk tweeted, "It is a mystery why Silicon Valley Bank collapsed," along with a screenshot of the banks Diversity, Equity and Inclusion statement.

NBC reporter Ben Collins responded to Kirk's tweet, writing, "On the right-wing internet, SVB collapsed because of DEI and ESG, which is just SBF's version of CRT. This is the kind of sentence you're gonna start hearing from presidential candidates, and they're going to wonder why nobody cares. It's meaningless acronyms all the way down."

Other Twitter users chimed in to criticize the right-wing activist's theory, calling it "embarrassing, even for you."

@williamlegate: "to suggest that this is the reason is absurd, but it was also very predictable. I called it yesterday that you all would blame this on DEI"

@holman: "it's okay to admit you don't understand banking!"

@Cassizzi: "Frankly it would be a bigger mystery if a community college dropout like yourself knew anything about liquidity risk management in a financial institution. But nice try, Charlie."

@buccocapital: "you are a true moron"

READ MORE: 'War on white people': Charlie Kirk's train derailment conspiracy theory

David Burrows: "Hilarious. Now tell us why CPAC collapsed"

@MikieAndTheVibe: "im not sure if this post just makes 0 sense or if you’re saying that the company failed because they attempt to include gay and black people"

Andy Brining: "Yeah, everything with you is a mystery for some reason. I wish we could discover the common factor."

READ MORE: Silicon Valley Bank becomes 'largest bank' to collapse 'since 2008' financial catastrophe: report

@e_michael1: "In case people were wondering, this is *not* why SVB failed."

@RagingGinge: "c'mon Charlie this is embarrassing even for you."

READ MORE: Silicon Valley Bank's collapse triggers concern over potential 'bloodbath' and risk to broader markets

Inside the Silicon Valley Bank failure: A tech industry in shock as it awaits a government response

People stand outside of an entrance to Silicon Valley Bank in Santa Clara, California, 10 March 2023 - Copyright AP Photo/Jeff Chiu

By Aleksandar Brezar • Updated: 11/03/2023 -

The news out of California that authorities shut down Silicon Valley Bank (SVB) on Friday shocked the tech start-up and venture capitalist world, with its sudden collapse over the course of two days roiling the market by Saturday.

SVB - the 16th largest bank in the US but a crucial one for the startup community - was closed down by regulators on Friday after a bank run dealt it a lethal blow following attempts to recover deposit losses and the sale of treasury bonds and securities.

"SVB was obviously the beacon of the start-up venture community for four decades. Almost, you know, one of those institutions that everyone viewed as too big and too strong to fail," Samir Kaji, a former banker who spent more than 20 years in the industry, told Euronews Next.

Silicon Valley Bank collapse: Fears of financial crisis after bank used by US tech sector fails

Yet SVB was hit hard by funding drying up over the past year in the tech and startup sector as well as the Federal Reserve's plan to aggressively increase interest rates to combat inflation.

The bank was backed by billions of dollars worth of bonds, but in having to sell them at a time when interest rates were high, they sold them at a significant loss.

But SVB’s customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year.

A Brinks truck is parked outside of Silicon Valley Bank in Santa Clara, 10 March 2023

AP Photo/Jeff Chiu

"When they had the announcement of the capital reshuffling [on Wednesday]," he recalled, "what ended up happening there was a 'town hall' call with their clients which are mainly these VC firms".

And it actually incited more panic than it did to reassure, Kaji explained.

"There were torrents of emails, voicemails, calls, Slacks, text messages, where all of the VCs were imploring their companies to move capital out of SVB, which created that $42 billion leaving the bank".

SVB's 'specific' problems to result in only pockets of instability?

SVB is expected to re-open Monday with the FDIC in charge. It said all insured depositors would have full access to insured deposits no later than Monday morning.

"While there are no guarantees, it is very likely that the FDIC - which is the institution created in the New Deal to deal with bank runs and prevent bankruptcy - will likely resolve the situation," Armand Domalewski, a data analyst with a background in economic policy told Euronews Next.

There were torrents of emails, voicemails, calls, Slacks, text messages, where all of the VCs were imploring their companies to move capital out of SVB, which created that $42 billion leaving the bank.

Samir Kaji

Former banker

"People in the US think that their deposits are only insured up to $250,000 [€234,000], which is legally true. But in general what the FDIC tries to do since 2008 is arrange sales to other banks so that the customers are transitioned overnight. They don't lose their deposits".

The people who invested directly in SVB are going to get wiped out, but depositors have reasons to be hopeful, Domalewski explained.

The Silicon Valley Bank failure is the largest since Washington Mutual’s demise in 2008 - a watershed moment that triggered a major financial crisis and crippled the world’s markets since.

Yet SVB’s failure is expected to result only in pockets of instability, mostly due to its nature as a "boutique" bank and specific portfolio favoured by US tech startups and venture capital, servicing nearly half of the market.

Additionally, US and international regulators have introduced more stringent rules since the last financial crisis, aimed at ensuring that one bank’s failure would not trigger a cascade event, harming the broader economic system.

An FDIC sign is posted on a window at a Silicon Valley Bank branch in Wellesley, Massachusetts, 11 March 2023

AP Photo/Peter Morgan

The problems encountered by the bank "are very specific" and are not likely "to affect the entire banking sector, let alone the major banks," Ken Leon, an analyst with the firm CFRA, told AFP.

Morgan Stanley's analysts echoed this view, insisting in a statement: "We want to be very clear... We do not believe that the banking sector is facing a liquidity crunch".

Authorities in the US have also expressed their confidence in the country’s banking sector, which is far more diversified across multiple industries, customer bases, and geographies.

US Treasury Secretary Janet Yellen said on Friday that the banking sector remained "resilient,” while White House economic adviser Cecilia Rouse said the sector was "fundamentally different from what it was 10 years ago".

Silicon Valley Bank collapse: Here's how and why it happened

'Businesses should not fail because their choice of bank failed'

Some high-tech companies were hit hard by the news of SVB’s failure, however. On Friday, streaming device maker Roku said they had "around $487 million" (€456.9 million), or 26 per cent of its cash reserves, deposited at SVB.

Roku’s shares have gone down 10 per cent in extended trading, but the company said that "it continues to believe that its existing cash and cash equivalents balance and cash flow from operations will be sufficient […] for the next twelve months and beyond".

Requiring every individual business to do constant due diligence wherever they put their money creates a huge amount of stability.

Armand Domalewski

Data analyst

But smaller companies spent Saturday in heightened panic, as some of the startups depending on SVB became concerned over their ability to pay their employees post-shutdown.

Others scrambled to look for a bank to replace SVB even before markets reopen on Monday.

This is understandable, according to Domalewski, as fairly small businesses feeding a hundred employees feel "they’ll run out of money very very fast".

"Businesses should not fail because their choice of bank failed," Domalewski said.

"Requiring every individual business to do constant due diligence wherever they put their money creates a huge amount of stability".

"But I do think also, they should just wait to see what happens till Monday".
'Irrational' premise still led to 'rational' movement of cash

Yet the freakout persisted throughout Saturday, with emails from various firms said to have been circulating imploring companies to move their cash from other specialised banks to a top four bank as soon as possible.

"What this really cascaded into then is all of the regional banks being reviewed and many of the VCs have now looked at all this and said, 'Okay, well my distrust is not only with SVP, but it's actually with the broader read of the banking sector outside of the top four,'" Kaji explained.

Santa Clara Police officers exit Silicon Valley Bank in Santa Clara, 10 March 2023

AP Photo/Jeff Chiu

"And so everyone right now is looking at their company's funds and saying we simply just can't take a chance".

"When you have mass hysteria, the cat's already out the bag... the premise based on which people moved money was probably irrational, but once it started the movement of the cash it became rational".

"Because you never want to be the last one out. No one wants to be stuck in that same position with another bank" that is failing in the same way, Kaji concluded.
Protections in place to make all the difference?

In Europe, German and UK regulators are said to be monitoring the fallout of the SVB Group, although expectations of its overseas future were mostly optimistic on Saturday.

The group has offices in both European countries, as well as Ireland, Denmark, and Sweden, but its international arm is thought to represent a minor part of its overall business, with just 3 per cent of its total client funds coming from abroad.

On Friday afternoon CET, SVB’s UK branch said in a statement that it "has been an independent subsidiary since August 2022 with a separate balance sheet to the SVB Financial Group and an independent UK Board of directors".

And Domalewski believes that the protections in place since 2008 will make all the difference come Monday.

"There's a reason that we did all this since 2008 — passed a lot of new financial regulations formally and informally to make our banking systems a little more boring, a little more arduous, but to like prevent things like this from causing a full-scale crisis," he explained.

"It's been a long time since we've had a bank failure,” Domalewski said, “and people have forgotten what that's like".


Additional sources • AFP

Are We Headed for Another Great Depression?

By Gail Tverberg - Aug 23, 2024

• The current economic landscape shares striking similarities with the late 1920s,
• 
  
• marked by high debt, wealth inequality, and low energy consumption growth.
• 
  
• Historical data suggests a strong correlation between energy supply growth, economic growth, and income equality.
• 
  
• The world economy may be transitioning from growth to shrinkage due to declining energy resources, potentially leading to financial instability and political conflict.

Today, there is great wage and wealth disparity, just as there was in the late 1920s. Recent energy consumption growth has been low, just as it was in the 1920s. A significant difference today is that the debt level of the US government is already at an extraordinarily high level. Adding more debt now is fraught with peril.

Figure 1. US Gross Federal Debt as a percentage of GDP, based on data of the Federal Reserve of St. Louis. Unsafe level above 90% of GDP is based on an analysis by Reinhart and Rogoff.

Where could the economy go from here? In this post, I look at some historical relationships to understand better where the economy has been and where it could be headed. While debt levels and interest rates are important to the economy, a growing supply of suitable inexpensive energy products is just as important.

At the end, I speculate a little regarding where the US, Canada, and Europe could be headed. Division of current economies into parts could be ahead. While the problems of the late 1920s eventually led to World War II, it may be possible for the parts that are better supplied with energy resources to avoid getting into another major war, at least for a while.

[1] Government regulators have been using interest rates and debt availability for a very long time to try to regulate how the economy operates.

I have chosen to analyze US data because the US is the world’s largest economy. The US is also the holder of the world’s “reserve currency,” allowing demand for the US dollar (really US debt) to stay high because of its demand for use in international trade.

Figure 2. Secondary market interest rates on 3-month US Treasury Bills and 10-year US Treasury Securities, based on data accessed through the Federal Reserve of St. Louis. Amounts for 1940 through 2023 are annual averages. Amount for 2024 YTD is average of January to July 2024 amounts.

Comparing Figure 1 and Figure 2, it is clear that there is a close relationship between the charts. In particular, the highest interest rate in 1981 on Figure 2 corresponds to the lowest ratio of US government debt to GDP on Figure 1.

Up until 1981, the changes in interest rates were either imposed by market forces (“You can’t borrow that much without paying a higher rate”) or else as part of an attempt by the US Federal Reserve to slow an economy that was growing too fast for the available labor supply. After 1981, the same market dynamics no doubt took place, but the overall attempt at intervention by the US Federal Reserve seems to have been in the direction of speeding up an economy that wasn’t growing as fast as desired.

In Figure 2, the 3-month interest rates correspond fairly closely to government target interest rates. The 10-year interest rates tend to move on their own, perhaps somewhat influenced by Quantitative Easing (QE), in which the US government buys back some of its own debt to try to hold down longer-term interest rates. These longer-term interest rates influence US long-term mortgage interest rates.

Recent monthly data show that 10-year interest rates started rising very quickly after reaching a minimum following the Covid response in early 2020. The lowest 10-year average rates took place in July 2020, and rates started moving up in August 2020.

Figure 3. Monthly average secondary market interest rates on 3-month US Treasury Bills and 10-year US Treasury Securities, based on data accessed through the Federal Reserve of St. Louis.

This suggests to me that market forces play a significant role in 10-year interest rates. As soon as people started borrowing money to remodel or to move to a new suburban location, 10-year interest rates, and likely the related mortgage rates, started to drift upward again. If this observation is correct, the Federal Reserve has some control over interest rates, but it cannot adjust the 10-year interest rates underlying mortgages and other long-term debt by as much as it might like.

Related: UK Electricity Bills to Jump 10%

The apparent inability of the Federal Reserve to adjust longer-term interest rates to as low a level as it would like is concerning because the US government debt level is very high now (Figure 1). Being forced to pay 4% (or more) on long-term debt that rolls over could create a huge cash flow issue for the US government. More debt could be required simply to pay interest on existing debt!

[2] An analysis of actual growth in US GDP over time shows how successful the changing strategies in Figures 1 and 2 have been.

Figure 4. Three-year average US inflation-adjusted GDP growth rates based on data of the US Bureau of Economic Analysis.

In the 1930s, the US and much of the rest of the world were in the Great Depression. Interest rates were close to 0% (not shown on Figure 2, but available from the same data). Various versions of the New Deal under President Roosevelt were started in 1933 to 1945. Social Security was added in 1935. Figure 4 shows that these programs temporarily increased GDP, but they did not entirely solve the problem that had been caused by defaulting debt and failing banks.

Entering World War II was a huge success for increasing US GDP (Figure 4). Many more women were added to the workforce, making munitions and taking over jobs that men had held before they were drafted into the army.

After the war was over, the total number of jobs available dropped greatly. Somehow, private sector growth needed to be ramped, using debt of some kind, to provide jobs for the returning soldiers and others left without work. An abundant supply of fossil fuels was available, if debt-based demand could be put into place to pull the economy along. Programs were put into place to get factories running again making goods for the civilian economy. Additional jobs and energy demand were created by upgrading the electrical grid, increasing pipeline infrastructure, and (in 1956) starting work on an interstate highway system.

During the period between 1950 to 2023, the average growth rate of the US economy gradually stepped downward, despite all of the debt-based stimulus that was being added after 1981, as shown in Figure 5.

Figure 5. Average annual US GDP growth rates based on data of the US Bureau of Economic Activity.

[3] While growing debt is important for pulling an economy forward, a growing supply of energy is essential to actually produce physical goods and services.

Economic growth involves producing physical goods and services. The laws of physics tell us that energy supplies of the right types, in the right quantities, are necessary to make the goods and services that the physical economy depends upon.

The rate of growth of world energy supply has been stepping down over the years, as the easiest (and cheapest) to extract fossil fuels tend to get extracted first. The average rate of increase of all energy supply (not just fossil fuels) is shown in Figure 6:

Figure 6. Annual rate of increase in energy consumption growth for the earliest grouping is based on data provided by Vaclav Smil in the Appendix to Energy Transitions. Average rates of increase for later periods are calculated from data of the 2024 Statistical Review of World Energy, by the Energy Institute.

Comparing Figures 5 and 6, we can see that average annual US GDP growth approximately matched growth in world energy supplies in the first two periods: 1950-1970 and 1971-1980.

In the period 1981-2007, average US GDP growth (of 3.2%) soared above world energy consumption growth (of 2.1%). I would attribute this primarily to outsourcing a significant share of the US’s industrial production as the economy shifted to becoming more of a service economy. There were multiple advantages to moving to a service economy. US oil supply had become restricted, and a service economy would use less oil. Also, the costs of imported goods would be much lower than those made in the US for several reasons, including more efficient newly built factories, lower-wage workers, and the use of inexpensive coal as a fuel instead of oil.

The encouragement of increased use of “leverage” under Ronald Reagan in the US and Margaret Thatcher in the UK no doubt added to the effect of using more debt shown in Figure 1. The US government started borrowing more money, rather than increasing taxes. Businesses became larger and more complex. International trade started playing a larger role.

Related: Oil Prices Remain Vulnerable to Demand Fluctuations

Recent low growth in energy supplies has created an economic problem that added debt has only partially been able to hide. (In the latest period (2008-2023), both US average GDP growth (at 1.8%) and world energy consumption growth (at 1.5%) were very low.) Figure 1 shows that the US added huge amounts of debt, both after the 2008 financial crisis, and at the time of the Covid response in 2020. If it weren’t for these huge debt infusions, US GDP growth would no doubt have been much lower. GDP counts the quantity of goods and services produced, not whether added debt has been used to manufacture these goods, or whether customers have used debt to purchase these goods.

[4] In some ways, the world economy today is like the economy of the 1920s.

The 1920s were characterized by both the rising use of debt (especially consumer credit), and wide wage and wealth disparities. This was a time of innovation. Some farmers had modern new equipment that greatly enhanced efficiency, while most farmers could not afford this equipment.

Figure 7 shows a pattern of wage disparity that operates in precisely the opposite direction from the interest rate pattern shown in Figure 2. The lower the interest rates, the more the concentration of wealth among a very small portion of the population. The higher the interest rates, the more evenly wage and wealth is divided.

Figure 7. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.

A comparison of Figure 7 with Figure 6 and Figure 5 shows that (at least for the years since 1950), faster energy consumption growth seems to lead to faster economic growth. With faster economic growth, the economy can support higher interest rates and higher wages for lower-paid workers. There is less push for “complexity” to try to replace workers with machines.

When energy consumption growth is low, the economy tends to grow more slowly. The interest rates that corporations and individuals can afford to pay are relatively low. With low interest rates, asset prices of all kinds soar because monthly payments to buy these assets fall. The prices of stocks, bonds, homes, and farms tend to soar. The already rich become richer and richer, as the poor are increasingly squeezed out of the economy.

Physicist Francois Roddier has said that physics dictates the outcome of widely diverging incomes when energy supply is low. It takes much less energy to supply an economy of a few rich people and many poor people than it takes to support an economy with relatively equal incomes. The vast majority of the supposed wealth of the rich exists as promises that can only be fulfilled in the future if there is enough energy of the right kinds to fulfill these promises. Their promised future wealth does not affect today’s energy use. While the energy use of rich people is somewhat higher than that of poor people, much of the difference disappears when a person considers the fact that much of their wealth is essentially “paper wealth” that may or may not actually be present as the future actually unfolds.

Both the 1920s and the latest period (2008-2023) are very low energy-growth periods. The fact that (2008-2023) is a low energy growth period (at 1.5% per year) can be seen on Figure 6. Energy supply was growing even slightly more slowly in the 1920s (based on data from Vaclav Smil’s Energy Transitions). Population was growing by 1.1% per year in both the 1920s and in the latest period (2008-2023.) Net energy consumption per capita growth was slightly negative (-0.1%) in the 1920s and only a very small positive percentage (0.4%) in the 2008-2023 period. Per capita consumption had been growing much more quickly between 1950 and 1980.

[5] The economy becomes very fragile when the growth of energy supply is low, compared to the growth of the world’s population.

Hidden beneath the surface is the problem that there is not enough energy to go around. This problem doesn’t manifest itself in high prices; it manifests itself in unusually large wage disparities. Very rich individuals (such as Bill Gates and Elon Musk) gain excessive influence. Special interests and their drive for profits also become important. At times, this drive for profits can come ahead of the well-being of citizens.

Citizens become more quarrelsome. Differences between and within political parties become greater. Political candidates no longer treat other candidates with the respect we would have expected in the past. The problem is, in some sense, the problem of a game of musical chairs.

Figure 8. Chairs arranged for Musical Chairs Source: Fund Raising Auctioneer

Initially, the game has as many players as chairs. The players walk around the outside of the group of chairs as the music plays. In each round, one chair is removed and the players must scramble for the remaining chairs. The person who does not get a chair is eliminated from the game.

[6] It seems to me that major parts of the world economy are transitioning from a growth mode to a mode of shrinkage.

Figure 9 gives a representation of how the world’s growing economy can be visualized, and how it may change in the future.

Figure 9. Representation of an economy that is growing up until not long after 2020, and shrinking thereafter, by Gail Tverberg.

The fact that growth in the consumption of fossil fuel energy supplies has been retreating to lower levels should be of concern (Figure 6). At some point, the world economy will be in a situation in which the amount of fossil fuels we can extract is falling. While we have some add-ons to the fossil fuel system (including hydroelectric, nuclear, wind, and solar), they are all manufactured using the fossil fuel system and repaired using the fossil fuel system. These add-ons would stop producing not long after the fossil fuel system stops producing. They need fossil fuels to make replacement parts, among other problems.

The amount of growth in energy supply determines the growth in physical goods and services that can be produced. In periods of rapid growth, borrowing from the future, even at a high interest rate, makes sense. In periods of low growth, only loans with a very low interest rate are feasible. When the economy is shrinking, very few investments can repay loans requiring interest.

Needless to say, repaying debt with interest becomes much more difficult in a shrinking economy. In the US, our underlying problem is that since 1981, the US’s financial policy has been “throw every tool in the tool box” at stimulating the economy. We are now running out of tools to stimulate the economy to grow faster. Adding more debt isn’t likely to work very well, or for very long.

At this point, the many government-funded investments aimed at providing green energy and offering transportation by electricity are not paying back well. Citizens are repeatedly being told that there is a need to move away from fossil fuels to prevent climate change. But world CO2 emissions continue to rise. They simply moved to a different part of the world.

Figure 10. Carbon dioxide emissions for Advanced Economies (members of the Organization for Economic Co-Operation and Development) versus all others, based on data of the 2024 Statistical Review of World Energy published by the Energy Institute.

[7] What does history since 1920 say may be ahead?

It is hard to see that things will turn out well, but we do know that historical civilizations have collapsed over a period of many years. We can hope that if we are facing the collapse of at least part of the world’s economy, this collapse will also be slow. Some intermediate steps along the line likely include the following:

(a) Stock market collapses. After excessive speculation in the stock market in the late 1920s, the stock market collapsed on October 29, 1929, starting the Great Depression. Another major crash occurred in 2008, during the Great Recession. Both of these speculative bubbles seem to have been fueled by low short-term interest rates.

(b) Drops in the prices of homes, farms, and other assets. The Great Depression is noted for major drops in the prices of farms. The Great Recession is known for major drops in the prices of homes. We are now facing a situation with far too much Commercial Real Estate. Its price logically should fall. Farmers are also having difficulty because wholesale food prices are too low relative to the various costs involved, including interest payments relating to equipment purchases and mortgages. The problem is especially acute if farm property has been purchased at currently inflated prices. The prices of farms logically should fall, also.

(c) Debt defaults, related to asset price drops. Banks, insurance companies, pension plans and many individuals owning bonds will be badly affected if defaults on loans or bonds start increasing. (In fact, even if the market interest rates simply rise, the carrying value on financial statements is likely to fall.) If commercial real estate or a farm is sold and the sales price is less than the outstanding debt, the bank issuing the loan will be left with a loss. This debt is often resold, with credit rating agencies falling short in indicating how risky the debt really is.

(d) Failing banks, failing insurance companies, and failing pension plans. Even bankrupt governments defaulting on their loans.

With failing banks, there is less money in circulation. The tendency is for commodity prices to fall very low, putting farmers in worse financial shape than before. They cut back on production. Food production and transport use considerable amounts of oil. Reduced food production leads to less need for oil consumption and thus, falling oil prices. With low oil prices, production tends to fall.

(e) If a government survives, it may try to issue much more debt-based money to try to raise prices. This might work if the country is able to produce all goods locally. But the huge amount of new money (and debt) will not be honored by other countries. The result is likely to be hyperinflation, and still no goods to buy.

(f) Persecution of the wealthier people blamed for society’s problems. If people are poor, and there aren’t enough goods to go around, there is a tendency to find someone to blame for the problem. In Europe, prior to World War II, the Nazis persecuted the Jews. The Jews were often rich and worked in finance or the jewelry business.

(g) War. War gives the possibility of obtaining resources elsewhere. Figure 4 shows that going to war can greatly ramp up GDP. It is a way of putting laid-off workers back to work. It is an age-old solution to not-enough-resources-to-go-around.

[8] Can any political approach put off the bad impacts suggested in Section [7] above?

A country that can provide complete supply chains based on its own resources, completely within its own borders can be somewhat insulated from these problems, as long as its resources are adequate for its population. I don’t think that any of the Advanced Countries (members of the OECD, which is similar to the US and its allies) can do that today. The US is closer to this ideal than Europe, but it is still a long way away. The central and southern part of the US, which is where Donald Trump’s support is strong, is closer to this ideal than elsewhere.

Trump is advocating adding tariffs on imported goods. Such tariffs would work in the direction of independence from China, India, and other industrialized nations. Trump also seems to advocate staying out of wars, wherever possible. If an area is doing well in terms of energy supply (including food supply), this would be a good strategy.

Kamala Harris is advocating capping today’s food prices. This would please city-dwellers, but it would encourage farmers to quit farming. Capping today’s food prices would also discourage the importation of food from elsewhere, leaving many empty shelves in grocery stores. Indirectly, it would also have an adverse impact on the world’s oil production and the quantity of food grown elsewhere.

Giving more money to poor people would almost certainly lead to more government debt. If countries in Europe were to do this, it would almost certainly devalue their currencies. They would find it harder to import goods from anywhere else in the world.

In fact, the US would likely also encounter difficulty in importing as many goods from elsewhere, if it chooses to give more money to poor people (and fund this generosity through more debt). China and Russia would have even more motivation to abandon the US dollar for trading purposes than they do today. The US, Europe, and other Advanced Economies would increasingly find imported goods unavailable.

Wind, solar, and electric vehicles are not fixing the economy now. Adding more debt to subsidize these efforts would likely have the same bad effects as adding more debt to subsidize poor people.

[9] A guess as to what could be ahead for the US, Canada, and Europe.

Donald Trump is suggesting tariffs and other policies that might be helpful for the parts of the US, Canada, and Mexico that think they might have enough resources to more or less get along on their own in the near future. This includes much of the central and southern part of the US. Central Canada would fit into this pattern, as well. Mexico is connected by pipeline to this area, too. At least in the US, Trump is favored in these areas.

In the highly populated areas along both US coasts, the debt-based policies of Kamala Harris will seem more reasonable because these sections have limited resources to rely on, but lots of population. The only solution they can imagine is more debt. I expect that Europe and the coasts of Canada will follow Kamala Harris’s strategies, but with their own leaders.

I can imagine a scenario in which after the US election, the US will break apart into two sections: a Trump section in the center of the US, and a Harris portion consisting mostly of the two coasts, and perhaps a few northern states. The Trump section will band together with Central Canada and Mexico and try to keep operating for some years longer. The Harris portion will join together with the coasts of Canada and most of Europe to get into war with Russia and China. The Harris portion will issue lots more debt. The Harris group will forget that their areas cannot really make many armaments without a huge amount of international trade. As a result, the Harris group will have great difficulty in being successful at war.

By Gail Tverberg via Our Finite World