Sovereign Finance

Rob Drummond
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Connect the dots between personal finance, global finance trends, and deep human history. Tune in every week to demystify the money puzzle, and protect your interests in a turbulent world. sovereignfinance.substack.com

  1. 2h ago

    False Flags Everywhere!

    Rob’s comments below are in italics.Derek’s comments below are in normal font. Another month’s worth of developments seems to have happened within seven days. Derek, as always, you’re my source of intel on what’s going on. So what’s happened that people need to know about? Right, okay. First, I’ll say a bit more about why it’s important to talk about these things. This series wasn’t really meant to be a current affairs programme… The ‘powers that ought not to be’ have got other ideas about that! Well, pretty much everything that’s going on has a fairly direct bearing on your prosperity and your likely quality of life for the foreseeable future. We’ll see how that ties in as we go through. First of all, I find it interesting how quickly things are unfolding now. Alternative media are developing, and really good quality people are getting into journalism and attracting enormous followings. The tools are there for anyone to be an independent journalist. I feel like the authorities are playing whack-a-mole with their censorship efforts. Yeah, I’m surprised they haven’t been more effective at closing channels down. It’s not for lack of desire. But there’s a growing awareness of various things that you and I have probably known about for many years. The most prominent example concerns Iran. Few people were aware that the hostility with Iran goes back to 1953. That was when the British and the Americans overthrew Iran’s elected Prime Minister, Mosaddegh. The Brits were at the root of a lot of these things, usually for short-term geopolitical reasons, trying to shore up influence in the Middle East. That’s how Israel came about, too, with the Balfour Declaration. If you go back far enough, you can find British fingerprints everywhere. Precisely. But that was completely off people’s radar. Many millions of people have now learned about that background, which puts the situation in a very different light. Another thing many people have probably been unaware of is how prevalent false flag operations are. If you brought this up, a lot of people would wave it aside and call it a conspiracy theory. Of course, the term “conspiracy theory” itself begs a lot of questions. Because the world’s richest people are conspiring with each other to cause these events. So yes, I’d say it’s a conspiracy in some sense. Well, the way I look at it is this. When they say that’s a conspiracy theory, my answer is: I know it’s a theory that something is a conspiracy. The question is not whether it’s a conspiracy theory. The question is whether it’s true! So, false flags. People are probably fairly ready to acknowledge that Hitler’s invasion of Poland was triggered by a false flag operation. Dead bodies were dressed in Polish uniforms. The story put out was that these men had been trying to invade Germany. That gave Hitler the excuse to invade Poland in retaliation, or in defence, or whatever. A significant event that escalated the Vietnam War was the Gulf of Tonkin incident. Allegedly, an American destroyer in international waters was fired on by the North Vietnamese. That gave the Americans an excuse for further aggression against North Vietnam. In World War I, Belgian neutrality was the reason given. Yet the Germans had offered Belgium pretty solid guarantees that, given safe passage to France, Belgian’s neutrality would have been respected. Yeah. So this week we’ve had two events that are bizarre and peculiar, to say the least. The first is the apparent terrorist attack on RAF Fairford, which of course is really a US Air Force base. The whole thing doesn’t even make sense as a plausible storyline. Three very conspicuous white vans full of oil drums, which turned out to be empty, drove round the area. They then parked in a lane and waited for a farmer’s wife to come along. She phoned the MOD police, who didn’t answer the phone. She then dialled 999 and the police came round. Meanwhile, the miscreants had run into a nearby wood and waited for the police to come and find them. The police then arrested them and released them on bail. For terrorist offences, they could easily have detained them for at least fourteen days. So there was obviously no attempt whatsoever. Then, a day or two later, our Prime Minister Andy Burnham was interviewed by the BBC. He said there was solid evidence of an Iran connection. That base has been used as the takeoff point for bombing sorties into Iran. Bearing that in mind, it would be entirely justifiable by any standards for Iran to attack the base. It would be a legitimate target. But if they did attack, it seems extremely unlikely they would do it by driving three white vans around. It sounds like a plot straight from the Netflix series ‘Prison Break’. So we’ll watch this space. Meanwhile, it seems to be producing more laughs than serious concern among onlookers. The other one, which raises more questions than it answers, is the flight from the UAE to Tel Aviv that sent out an emergency hijack signal. The initial story was that the co-pilot attacked the captain with a knife and stabbed him. He was supposedly intending to crash the aeroplane in a terrorist incident. This sounds like another false flag event from the past, doesn’t it? Like, haven’t we tried this plotline before, guys? A bunch of intrepid passengers apparently broke into the cabin. However, since 2001 it hasn’t been possible to open the flight deck door from the passenger side. It has to be opened from inside. So the story now is that the pilot, despite being stabbed, managed to get to the door and open it. That enabled some intrepid passengers to get in and overpower him. At least, according to Israel, it was intrepid passengers who overpowered him. According to the airline, it was the cabin crew who got in. Then it turned out that both pilots had been stabbed. So they apparently stabbed each other, which is not impossible. It’s a nice plot twist; I’ll give them that. We haven’t yet heard how badly either of them is injured, at least not to my knowledge. Apparently neither of them was capable of flying the plane at this point. Somehow they were neutralised. It just so happened that two qualified pilots were among the passengers. Not only that, they were familiar enough with this particular aircraft type to bring it in for an emergency landing in Saudi Arabia, en route to Israel. The passengers were fairly soon transferred back to Tel Aviv amid scenes of much rejoicing. I don’t know what anybody will make of this. The story has so many peculiarities that it definitely raises a question mark. Yeah, next time I’m bored on an EasyJet flight, I’ll count my lucky stars! Well, don’t fly to Tel Aviv. It’s pretty difficult, actually. Anyway, apart from that, we obviously have three main focuses of conflict now. First, there’s the US and Israel against Iran, the closure of the Strait of Hormuz and the ensuing blockade. Second, there’s the conflict between Saudi Arabia and Ansar Allah, universally referred to in the West as the Houthis. They appear to represent, and have the support of, the majority of Yemen’s population. Once again, the official government appears to be essentially a proxy appointed by the US Empire. Ansar Allah have been making all the running in this conflict. This week Saudi Arabia bombed a market in Yemen. I can’t remember which town, but they killed a large number of civilians, mostly women and children. Needless to say, this enraged the population at large. It also spurred Ansar Allah to step up their attacks. They’ve caused considerable damage to the pipeline running east to west across Saudi Arabia, which was the remaining route for Saudi oil. But they’ve now attacked the port of Yanbu, where this oil was loaded. This may have cut off the route south through the Bab el-Mandeb Strait. It may also have stopped any oil being loaded for the time being. Super. Meanwhile, the repercussions for the world economy are still accumulating. There are credible reports that Xi Jinping firmly told Trump to remove the blockade, such as it is. They’ve got fifteen ships in total. They have two aircraft carriers with accompanying protection ships, plus a handful of destroyers and cruisers. With these, they’re attempting to monitor at least a 200-mile strip of water where the Gulf of Aden opens into the Indian Ocean. How that many ships can successfully intercept anybody coming out is anybody’s guess. I’m not a naval warfare expert, but it doesn’t strike me as very plausible. Meanwhile, Iran is shipping significant amounts of oil to China. It’s also shipping significant amounts by rail over the border into Pakistan. Some of that is destined for Pakistan, and some no doubt goes on further. So the US attempts to impose its will on Iran don’t seem effective at all. Today it was announced that the Theodore Roosevelt carrier group is heading towards the region. So there will now be three carrier groups there. This is apparently accompanied by an amphibious assault group of sailors and Marines. I can’t imagine anybody’s projections of what a few thousand Marines or soldiers would do if they tried to land in Iran. It seems pretty obvious to me they’d come to a very sticky end extremely rapidly. Finally, there’s Ukraine, which is increasingly seen as another US proxy war against Russia. Some people may still follow the narrative that it was an unprovoked, illegal invasion by Russia of an otherwise peace-loving Ukraine that was… … A highly democratic state. Right. Every time Ukraine has tried to up the ante, Russia has responded in kind on a far larger scale. They’ve done this several times over the past two or three months. They started attacking Russia’s power distribution grids and oil refineries. So Russia responded with far more devastating attacks on the Ukrainian power grid. The scale, intensity and effectiveness

    False Flags Everywhere!

  2. 6d ago

    Is an economic dislocation now inevitable?

    Rob’s comments below are in italics.Derek’s comments below are in normal font. We’re taking another stab at current affairs today. We’ve done quite a few of these episodes recently because things are changing rapidly. So what has happened in the last week or so? Well, of course, the big event this week has been the UN General Assembly. I don’t know whether this is an annual gathering of those people, but it was a pretty big deal. Trump gave an address to the assembly, which was both embarrassing and rather scary. I don’t know how many people will have actually watched extracts from it. If it had been delivered anywhere, it would be pretty chilling. From the podium of the United Nations General Assembly, though, it was astounding to me that even Trump could say the things he did. Effectively, it was bullying, bravado and bragging. For instance, on the subject of Venezuela, he essentially said that they had subjugated them and were stealing all their oil. He actually said, “To the victor go the spoils.” But to actually assert that anywhere out loud is something else. It may be what your policy is in private. To be prepared to declare it, and apparently be proud of it, is another matter. Essentially saying we’re the toughest kids on the block and we can take whatever we want is pretty chilling. The Cuban delegation walked out almost as soon as he started, because he kicked off by describing Cuba as a failed state. To the extent that Cuba has failed, it’s because of the relentless embargoes. These have prevented it from carrying on any normal commerce with the rest of the world for what, the last fifty years or more? That sounds about right, I guess. Absolutely. Well, there you go. So there’s no sign of it letting up. What’s quite interesting to me is that Sergei Lavrov has said out loud that he’s concluded it’s a waste of time trying to talk to the Americans. It’s an even bigger waste of time talking to any of the Europeans. That’s a dire state for the world to be in. Also interesting is that a whole group of people from alternative internet media were in Moscow this week. Lavrov spent three hours with them. That included Larry Johnson, Alastair Crooke and various other people from alternative information channels on the internet. He has now decided it’s worth spending that much of his time with people like that. Meanwhile, he’s essentially given up talking to authorised government representatives. Then he went straight from there to the United Nations in New York. Iran’s President Pezeshkian gave an incredibly forthright speech. In summary, he said that Iran was the one being sanctioned. He said they weren’t the terrorists and that the Americans and the Israelis were the terrorists. Once again, the Western press has given all of this fairly light treatment. However, it’s there for the rest of the world to see, and it’s clearly authoritative. This in itself is pretty dramatic. Meanwhile, we now have three major conflicts going on. One of them is obviously Ukraine versus Russia. Another is the attack on Iran, principally by the United States, having been egged on by Israel, which then sits on the sidelines letting them get on with it. The third involves Ansar Allah. The Western media describes them as the Houthis, even though that is only one of several tribes involved in the movement. Once again, there’s a so-called recognised government of Yemen which is actually a Western puppet. In the same way, there’s an official government of Lebanon which is also a Western puppet. You could indeed say the same of the entire Zelensky regime. It was installed, again with public bragging, by Victoria Nuland, the Assistant Secretary of State at the time. She acknowledged that America manipulated the situation to install a government that would do its bidding. It was before Zelensky was in position, but the legitimate president of Ukraine had been driven out in an armed coup in 2014. That is what started this entire thing. The Saudis provoked Ansar Allah by bombing Sanaa airport when a flight of Yemeni mourners was returning from Iran. This was both reckless and obviously self-defeating, because it provoked Ansar Allah to respond. How could they have expected anything else? This has been simmering, but it had quieted down for several years. However, the Saudis have been trying to impose their will through the puppet government in Yemen, which has almost no support from the population at large. Ansar Allah, by contrast, does have that support. Not only that, the so-called legitimate government of Yemen has not managed to prevail against them. That is despite carrying on this so-called civil war with enormous support from the West, including the United Kingdom, it has to be said. Clearly, the Saudis haven’t got any serious military force of their own. They’re relying entirely on mercenaries. Of course, mercenaries who are just in it for the money run away as soon as they face a serious response. They have left behind, it has to be said, incredible amounts of modern military equipment, mostly American but generally Western. This has fallen into the hands of the so-called rebels, who have now taken control of a large stretch of the Red Sea coastline. That includes the Bab el Mandeb Strait. That’s quite significant, isn’t it? There was some oil coming out through there, and that’s no longer happening. Yes, exactly. Before the Strait of Hormuz was shut, in the very predictable response to the American attack on Iran, twenty million barrels a day of crude oil were coming out of the Gulf states. When the Strait of Hormuz was shut, that went down to maybe seven million, although some estimates put it closer to four million. That was being shipped across Saudi Arabia by pipeline to the port of Yanbu and out through the Red Sea. Of course, now that the Bab el Mandeb Strait has been closed, no oil is coming out of there. It certainly went down to zero when three pumping stations on the pipeline were hit, plus four or five other locations along it. They seem to have managed to get some through since then. Some estimates put it at about 1.6 million barrels a day. However, that can’t get out into the Indian Ocean through the bottom of the Red Sea. It’s having to be loaded onto smaller tankers that can get through the Suez Canal. For that oil to reach Asia, where the bulk of Saudi exports were going, it now has to go up through the Suez Canal. From there, it goes across the Mediterranean and around the Horn of Africa into the Indian Ocean. As a result, virtually all East Asian nations are now being hit very hard by petrol and diesel shortages. Three factors have prevented the rest of the world from being as hard hit so far by these shipping restrictions. One is that China has cut its own imports back enormously, from twelve million barrels a day to seven. It was relying on its own reserves to a degree. That is now coming to an end, because China is gradually increasing its oil imports again. This is taking a significant portion of what is managing to get out. Another factor has been the drawing down of strategic reserves. Current estimates suggest US strategic reserves have fallen to 285 million barrels. Apparently, 250 million is about as low as they can go. Below that, the salt caverns they’re stored in could collapse. So that buffer is now coming to an end. Once again, projections suggest this is bound to cause a global recession. It might even be a global depression. Some people are now describing it as an economic dislocation. That would mean not just that the numbers expressed in economic transactions are shrinking. It would mean that real economic activity around the world would be brought to a standstill in places. We’re all going to have to adjust to it. There doesn’t seem to be much recognition that this is coming. What do you say, Rob? Well, as we’ve discussed on the show before, any work requires energy. That’s why we’ve dedicated episodes to energy, its importance and its role in any finance system. I remember joking to someone during the COVID lockdowns that it would be energy lockdowns next. Well, watch that space. Right. The Iranians are under no illusion that the United States has finished its military onslaught on them. Apparently, it has moved a number of refuelling planes to what’s left of its air base in Qatar. Iran has said quite clearly that it’s not going to wait to respond to future attacks. At the first sign of any aggressive activity towards it, it will go on the offensive. It won’t respond one for one, but at a ratio of ten to one, or maybe twenty to one. So I would expect those refuelling planes to be wiped out in short order if there’s any sign of aggressive activity, which is quite likely. Meanwhile, consider even the very narrow, self-interested view of Trump wanting his party to succeed in the midterm elections in November. We’re seeing every sign that the American population is getting more and more agitated about rising petrol and diesel prices. Everything else is rising in price too, because of higher transport costs. There seems to be no way to alleviate this before the beginning of November. Even hardline Republican voters may be having second thoughts about supporting their party in the traditional way if they’re being hit severely in the pocket. Similarly, a lot of Western nations have become far too complacent about how long they can expect Russia to go without responding to the provocation. We’ve had the Russian elections, which went off entirely successfully despite severe attempts to disrupt them with record numbers of drones. Over 1,600 drones were aimed at Moscow. The Western media made a great deal of the handful that got through, particularly those that struck a couple of oil refineries around Moscow. Of course, these caused enormous fires. It’s not very difficult to cause a fire in an oil refinery if yo

    Is an economic dislocation now inevitable?

  3. Sep 29

    Things Mainstream Media “Forgot” to Tell You in September

    Rob’s comments below are in italics.Derek’s comments below are in normal font. Editor’s note: the audio/video version contains two conversations held a day apart, but hopefully they flow together. Derek, you were just saying there’s a lot not being covered in the mainstream news. So what aren’t they telling us about? Right. Well, there are two main themes. One is the obvious thing: the conflicts in Ukraine and Iran, which have now boiled over into the conflict between Ansar Allah and Saudi Arabia. So there’s all that, but there’s also a great deal happening on the economic and trade front. This has been almost completely ignored. I can’t believe how little attention it’s had in the mainstream media, as far as I can tell. The last time we talked, we mentioned in passing that the Shanghai Cooperation Organisation (SCO) had met. We’d also had the Eurasian Economic Forum meeting. We were about to have the BRICS annual forum, which was held in India this year. A number of commentators widely expected it to be a bit of a damp squib. There was a feeling that India’s hosting it was a problem, given its rather ambivalent position. One issue is its possible subservience to the United States. Another is its apparent tolerance, or even tacit support, of the Zionists in Israel. That clearly put India out on a limb. I haven’t got the actual membership at my fingertips, but it’s far wider than the original five. Those five gave rise to the acronym BRICS: Brazil, Russia, India, China and South Africa. There are now five other full members as well. Iran is certainly one, and probably a very major one, for reasons I might allude to in a moment. So there are ten full members and ten associate members. There are also a great many other nations in the global south, or global majority, or whatever the polite term now is for what we used to call the third world. They’re actively watching this, broadly encouraging it and seeing how it goes. Despite people’s expectations, it was obviously an extremely popular and vibrant meeting. That applied not only to the official plenary sessions. As with any other international conference, what happens outside the main forum is at least as important. That means the bilateral meetings, the chats in the corridor and the meetings in the coffee lounge or the bar, according to taste. There were lots of those. There were candid pictures of the leaders, particularly of Russia, China, India and Iran. Conversations at the bar are where my deals get done. They all looked very chummy and cordial, chatting completely relaxed. Incidentally, I couldn’t help noticing a huge contrast in body language. To take probably one of the most controversial examples, look at Araghchi, the foreign minister of Iran, and Wang Yi, the foreign minister of China. They were having candid chats around the water cooler or the coffee table, or wherever it was. Their body language was plainly what I would call authentic and unforced. In my view, that contrasts with what we see every time the European “leaders” meet. Particularly when they meet Zelensky, they all give a frozen handshake while looking towards the camera. They embrace one another, but it doesn’t look like the kind of embrace I’d want to be held in. The BRICS meeting, by contrast, was plainly a lot more relaxed. These people are all clearly committed to what they say they’re committed to. That is a multipolar world of justice, prosperity and mutual benefit. More and more, the West is plainly on the way out. It had two hundred years of world dominance, between about 1750 and 1950. It’s still using the same techniques it always used, which are essentially brutality and military suppression. Suddenly, those no longer work, because the West is no longer dominant. I’ll say a bit more about that, but... If I can just add to that, I was telling you before the call that I’ve just started reading a book. It’s called Hidden History: The Secret Origins of the First World War. It starts with the shenanigans the British Empire got up to in South Africa. I’ve been reading it thinking, my word, this is how we’re still trying to behave today. Only it’s not working any more. Yes. Well, that is exactly it. The most extreme example is Ansar Allah, the group disparagingly referred to as the Houthis. That’s the name of one of the tribes, admittedly a dominant one. However, it isn’t what they call themselves or how they want to be referred to. Anyway, these are literally sandal-wearing militia dressed in rags. Most are armed with nothing larger than an assault rifle. Even so, they’ve totally driven out the essentially mercenary army employed and equipped by the Saudi Arabians. They’ve taken control of five thousand square kilometres of the country. Yemen is another of these countries with a so-called official government. In reality, that government is a tiny minority bankrolled one way or another by the Western elites. They’ve been utterly defeated. They ran away in disarray, leaving behind a huge amount of state-of-the-art American military equipment, which Ansar Allah has now taken over. Anyway, getting back to the BRICS summit, the closing statement condemned unilateral and secondary sanctions. It declared them illegal and invalid under international law, which is absolutely true. We’ve got so used to countries declaring that they’ve decided to sanction certain nations. It’s mainly America, but also Britain, France and Germany. We’ve come to take it for granted that this is somehow legitimate. In fact, there is no basis for it in international law. The only exceptions are sanctions imposed by agreement of the United Nations Security Council. Most of the sanctions imposed on Russia or Iran haven’t had United Nations approval, so they’re not valid. The same goes for those imposed on just about everybody else in the world by America’s scattershot approach. It’s very interesting that the Chinese have just said no, we’re not going to comply. Not only that, they’ve passed a law... That’s the way to treat bullies, isn’t it? Yes, absolutely. So that was one of the statements made jointly at the close of the BRICS conference. The other was to reveal more details of the evolving international financial arrangements. They’re setting these up as an alternative to the SWIFT interbank system. SWIFT is obviously dominated by the Americans. It has been roundly abused over the last few years to victimise countries the United States’ elites disapprove of for one reason or another. Yes, that’s what Visa and Mastercard run on, isn’t it? It’s what all financial transfers between one country and another rely on, including Visa and Mastercard, yes. In a way, the alternative that BRICS is setting up is the opposite. It’s a decentralised, peer-to-peer system. It doesn’t involve a common currency. The little comment there has been in the Western media about the BRICS forum included the claim that they’d decided against a common currency. Well, they decided that two or three years ago. They debated the idea, looked at it and decided it wasn’t really practical. Personally, though, the arrangement they’ve adopted will eventually result in a global common currency in the long term. So I’ll say a bit about how it works at the moment. As I say, it’s a peer-to-peer system. So the idea is that if, say, Indonesia wants to... With a blockchain involved? Well, it certainly has some form of cryptographic signature, obviously. Whether that’s blockchain technology as such, I’m not sure. I don’t know how much of the technical specification has been revealed. I don’t even know how far along they are in finalising the details. Decentralisation is the key, though, isn’t it? These are all the good things we have with Bitcoin. It’s peer-to-peer and decentralised. There’s no issuing body. Yes, decentralisation is the key. I’m agnostic about the future role of Bitcoin, but I wouldn’t be at all surprised if it’s the principles that hold true... Those principles are what we need: people dealing with people. I like the blockchain as a solution for that, because it’s all open source. You can’t hack it. Yes. So, to get back to the example, suppose Indonesia was selling some goods to Brazil. They would each set up a portal in this new system. It would be compatible with whatever banking and currency arrangements already exist in their respective countries. Then they would do the transaction. It wouldn’t be done in a common currency such as the United States dollar, which is how international finance works at the moment. It would be done in each of their native currencies. Those native currencies would then have their value calibrated in gold. So they would have a... Which is what the US dollar was meant to do... Well, that was what it did between 1944, when it was set up at the Bretton Woods Conference, and 1971. That was when Richard Nixon took the dollar off the gold standard. Since then, everybody has used dollars. For example, when I was buying printed circuit boards from manufacturers in China, I had to pay in United States dollars. The logical thing would have been to change my UK pounds into Chinese yuan. Instead, I had to change them into dollars, and then send the dollars to China. Of course, that was arguably part of a larger game. China was accumulating larger and larger dollar balances, which appeared to suit the United States very nicely for a while. However, that peaked a few years ago. China has since been steadily divesting itself of its dollar holdings and its United States Treasury bonds. We’re seeing this right across the world. Countries are quite rightly concerned about the possibility of being economically victimised by the United States. They’re also quite rightly having misgivings about the future purchasing power of the dollar. We’re about to see this come to a really s

    Things Mainstream Media “Forgot” to Tell You in September

  4. Sep 27

    Bond Market Insanity and the End of Empire

    Rob’s comments below are in italics.Derek’s comments below are in normal font. Editor’s note: the following conversation happened a few weeks back on Monday 7th September, however we fully stand by our analysis here! We’re going to talk about recent current affairs, in particular the things that influence interest rates. We think there are some changing developments with US bonds. So what do people need to know here, Derek? Well, okay. Previously, we discussed how interest rates in the various bond markets and money markets would work in a sane world. We said there were essentially three factors. These determine the rate of interest the market would be prepared to accept on any loans. Logically, the first of these three factors is the prevailing rate for using money for a period of time. Historically, that has been somewhere around 2.5%. Like any other market-driven phenomenon, it goes up and down a bit. This depends on the relative supply of people willing to lend money and people who want to borrow it. Hopefully, they borrow it to invest in something constructive. The entire history of banking has really been about connecting two groups. One is people with funds they’re not quite sure how to use effectively. The other is people with entrepreneurial ideas who need capital to develop them. That’s how many railways were built 150 years ago. Yes, indeed. Well, the railways were actually largely financed by equity shares, meaning part ownership of the railways, rather than by loans to the companies. Both factors came into play, though. We’ve touched on that from the perspective of a company’s proprietors. If you were starting up a railway line, you’d need to raise capital. You’d need to buy land or negotiate rights of way across it for the track. You’d need to build the stations at each end. You’d need to get a lot of navvies in to dig the cuttings, build up the embankments and lay the tracks. You’d also need to build the engines and the rolling stock and get them on there. Obviously, that took more money than most individuals had. Even those who had it wouldn’t be prepared to invest it all in a risky venture. Of course, you then have to share the profits out amongst all the owners. So if you can borrow part of the money at an interest rate below your expected profit, that leaves more to share among the owners. Of course, if you don’t make that much profit and you’re still committed to the interest payments, you’re worse off than if you hadn’t used loans. The same thing really applies to governments. Sensible borrowing would be to invest in something that makes the country more prosperous. Building railways might indeed be part of that. However, what most governments have been doing, particularly over the past few decades, is borrowing money simply to subsidise their monthly expenditure. The most useful context for what we’re seeing is a classic end-of-empire situation. Every empire has a beginning, a peak and an end. This happened to the Babylonians, the Romans and the Greeks. More recently, it happened to the Spanish, the Portuguese, the Dutch, and then the British. The American Empire really took over from all of those. It likes to pretend it’s not an empire, but to all intents and purposes it has the characteristics of one. Especially when viewed through a finance lens. Yes, exactly. The thing about the American Empire is that its trajectory has been more rapid than any of the others. It’s also far more in public view now. So, going back to the three factors for the interest rate, I got as far as the first one. That was the basic rental of money. The second factor is an insurance premium, if you like. It reflects how reliable you judge the debtor you’re lending the money to. If you have some doubt about whether they’ll keep up the interest payments, you want to add something to the interest rate. Worse still, they might default on the repayment at the end of the loan term. Of course, this makes very little sense for an individual loan if you think about it. You’ll either reach the end and find it’s been serviced properly and repaid, in which case you’ll be fine. Otherwise it will default, and you’ll lose the money. However, large financial institutions spread their loans over many different borrowers. You could regard these as independent of one another, and they’re not necessarily all going to go bust at the same time. So the risk premium you add should even out over all of them. Hopefully, that leaves you roughly on the right side. The third factor is whether the currency will hold its purchasing power. In other words, will you be able to buy as much with it as you could when you entered into the loan? Historically, that was a reasonably sound assumption. For almost 300 years, the value of the British pound was constant. In fact, its purchasing power increased as we went through the Industrial Revolution. Manufacturing became more and more efficient, and more goods could be made for a similar amount of money. So you’d actually get an appreciating currency. Right now, it’s difficult to believe how interest rates could rationally be held down to the level they’ve been at. This is particularly true since the global financial crisis of 2008. Nobody could seriously believe that the purchasing power of the dollar, the pound or the euro would bear any resemblance in 30 years’ time to what it does today. Even so, the financial markets were still prepared to buy government bonds paying 1% or 1.5%. In Japan, it was even less than that. This was despite central banks making no bones about their 2% inflation target. Even if that 2% figure were accurate, the currency’s purchasing power would almost halve over 30 years. Strictly, it would take 35 years to halve. Of course, the statistics on the real rate of inflation are always a bit rigged, or perhaps even a lot rigged. I heard someone say recently that if you want to know what’s actually happening with inflation, just look at how much steak costs. You can’t make the packaging bigger. You can’t do all the other things they do to hide it. You could try injecting it with water, I suppose, but it pretty much is what it is. Yes. The reason, of course, was that more and more money was being flooded into the market out of thin air. This came from the Federal Reserve System in the United States, the central banks in other countries and the banking system as a whole. Once a sum of money goes into a bank account anywhere because of a loan, it becomes part of that bank’s reserves. The bank can then issue further loans in proportion to that, according to whatever ratios it operates. So why would anybody be prepared to buy bonds at those rates and under those circumstances? The answer really comes down to financial markets being essentially short-term in their thinking. As a bond trader, I might know it makes no sense to buy a 30-year bond. This is especially so at the ridiculously low interest rates that were prevalent until very recently. However, my motivations as a trader aren’t fixated on a 30-year time span. It’s much more about how my trades will look next month, next week or even tomorrow. As John Maynard Keynes memorably said, the market can remain irrational longer than you can remain solvent. So a trader who took the long view would probably find his portfolio looking fairly bleak. However, as Bob Dylan quoted Abraham Lincoln as saying, you can fool all of the people some of the time and some of the people all of the time. You can’t fool all of the people all of the time, though. There’s a similar saying about rugby league referees: they can only please half the fans at any one time. Yes, I bet! So what we’re now seeing is the wheels finally coming off. The United States has kept the show on the road largely because the dollar is the world reserve currency. No convenient, viable alternative existed until now. That situation is changing rapidly, as I’ll come to in a moment. Part of the reason was that the United States effectively had a complete stranglehold over the world’s financial institutions. These include the International Monetary Fund, the World Bank and the SWIFT interbank transfer system. They began undermining their own foundations at the start of the Ukraine conflict. That was when they decided to freeze, confiscate or steal Russian funds. These included not only Russian government funds but also substantial funds belonging to wealthy Russian citizens. That was a wake-up call for everybody else in the world. Many had been comfortable keeping a large part of their wealth in United States investments of one kind or another. These included government bonds, stock market holdings, and other financial instruments. However, practical alternatives still didn’t exist. Part of this was the particular stranglehold over the oil market. Kissinger set up a system with Saudi Arabia in which they would not repatriate the dollars they spent with the US by demanding gold from the US Treasury. Instead, they would invest the proceeds from their oil sales mainly in American government bonds. There have been various attempts to break away from that. At the time of the invasions of Iraq, stories were going around that took me a while to recognise as valid. The real reason was that Saddam Hussein had expressed an interest in taking payment in other currencies. We know what happened to him. Yes, it’s apparently a fast way to get yourself hung from a lamppost. Yes. Similarly with Gaddafi, who was openly promoting the idea of a gold-based pan-African dinar. This would be set up as a rival international finance system, and he’d be prepared to sell Libyan oil for it. Once again, that was dealt with militarily. The entire structure of United States power in the world rested on projecting force. That meant all those military bases and all those enormous flotillas of aircraft carriers with the

    Bond Market Insanity and the End of Empire

  5. Aug 27

    Unravelling The Money Puzzle: How Rich Are You?

    Rob’s comments below are in italics.Derek’s comments below are in normal font. On last week’s show, we were talking about how to get rich. (If that sounds like a big statement and you missed last week’s episode, go back and see how we outlined what we mean by getting rich!) On this episode, we’re going to talk about how to measure how rich you are. In other words, what’s your dashboard? What do you monitor and pay attention to? So, where do we start with this one? Yes, I’ve cheekily entitled this “How Rich Are You?” because unless you can answer that question, you can’t tell whether you’re getting anywhere. What you’re not measuring, you can’t see, and what you can’t see, you can’t move. Funnily enough, I had a very vivid dream the other night, where I was flying a small plane, something I’ve never done. I’ve been in a small plane once, which was quite fun, and I found that they mostly fly themselves, as far as being fairly stable. Starting your own business does feel like flying a plane without prior guidance. Suddenly you go up into the sky and think, “S**t, how does this work??” Absolutely. Yes. So maybe we can cast a bit of light on that. In this dream I was flying the plane, and suddenly a big fog came down. An instructor, or a passenger, told me not to look out the window but to look at the instruments. That’s a pretty good analogy for what I’m going to talk about. Unless we have up-to-date summaries of where we stand with certain aspects of our finances, we don’t know what’s going on. We don’t know what our options are, and we don’t know which of our behaviours are working in harmony with the long-term objectives we’ve set for where we want to get to at a certain point in life. 1. Your Balance Sheet The first and most important of these display dials, if you like, is what’s called your balance sheet. All of these things we’re going to talk about in this episode are things that in a sane world you would have learned at school. They would have been part of the curriculum, part of what prepares you for life. But most of us either never learn these at all, or we just pick things up at random if we’re fortunate. Although this is very simple, and you might think it’s obvious, the question is: are you doing this? Are you paying attention to it? This first display, as I say, is your balance sheet, and it’s a very simple document. You have two columns in it. One column is your assets, and the other is your liabilities. You summarise these by putting a monetary value on them. That doesn’t mean money is the be-all and end-all, but it’s just the measure of it. It’s the same as if you were measuring wire, cable, or fabric: you’d measure it in metres or feet, or whatever units you choose. That doesn’t mean there’s significance to that thing divorced from the context in which you’re doing it. In your assets column, if you own a house, you’d put the house in. In the liabilities column, if you used a loan, like most people do, to buy the house, you’d put the current value of the remaining loan outstanding. You have to maintain it, of course. You have to do the repairs and pay whatever rates, community charge, or property tax, depending on which jurisdiction you’re in. There’s all that to factor in. But overall, that would be an asset. If you’re building up an investment account, whether it’s a pension plan or some other investment vehicle, that would also go in the assets column. If you’ve got a savings account at a bank or another institution, that would go in the assets column too. If you’ve got any overdrawn bank accounts, that would go in the liabilities column, and if you’ve got any credit card debts, which most people have, that would also go in the liabilities column too. At the end of the day, you add up all the assets, add up all the liabilities, and see the difference between the two. The difference between the two has various terms. It could personally be your “net worth”. If you’re talking specifically about the house, or some other property and the loan against that property, the difference between the two is generally referred to as the “equity”. That’s the same term used for a corporation, particularly one with publicly traded shares. These are often referred to as equity shares, because a share is a share in the equity of the company, which is the difference between its assets and its liabilities. As a shareholder, you’d hope equity grows, ideally by increasing assets over time. When we talk about assets in this context, we mean the capital: the tangible items the corporation uses to pursue its business. These are the factories, machine tools, vehicles, office equipment, and so on. Coming back to the personal account, if you have some system, which is pretty easy these days with personal computers and spreadsheets, you could easily keep a record of these figures. Update your numbers monthly, then look for openings for action or shifts in behaviour, based on whether your asset base is really growing. For a lot of people, it’s actually shrinking or going negative. If you’re flying the plane and the plane is about to crash into the ground, then you at least need to know about that. Absolutely, yes. Incidentally, these principles of reporting remain exactly the same whether it’s for you as an individual, for an enterprise you’re running, for an enterprise you might be considering investing in, or for a nation-state as a whole. The same principles and documents apply in all of these circumstances. But if we start from a personal level, you can then see how each dashboard relates to the bigger entities. So the balance sheet gives a static picture of your circumstances. The other two dials or displays are dynamic: they indicate the change over a period of time. If you’re doing this monthly, the look-back period would be what happened over the past month. If you’re doing it yearly, it’s what happened over the past year. Of course, you could do it daily if you wanted to. 2. Your Cash Flow Summary The first of these dynamic dashboards shows what happened to the cash flowing in and out of your control. Logically enough, this is called a cash flow summary. Over the course of a month, you might have had a certain income, typically your salary or wages if you’re working for somebody else, or the cash you’ve extracted from the business for your own expenditure. If you’ve got investments bringing in income, if you own property you’re renting out, or have an investment account paying dividends or interest, that would all be cash coming in. The cash going out is whatever you’re paying in various categories. You’d perhaps be paying rent or a mortgage repayment, paying off some or all of your credit card balances, and spending on food and household expenses. So it’s a very simple dashboard. You’ve got one column with all the cash coming in, and one column with all the cash going out. The difference between the two is the amount of cash you’ve either got left over, or you’ve dipped into savings, or gone into debt, to fund. Does that relate directly to your balance sheet? Well, it obviously affects it. For instance, if you paid out something to pay off the balance of a loan or a credit card debt, that would reduce your liabilities on the balance sheet. Similarly, if you put money into your investment account or savings account, that would increase those assets on the balance sheet. But a lot of the money that passes through doesn’t affect the balance sheet at all. It mostly gets spent all day on extortionate groceries, or extortionate petrol, etc. Exactly. If you buy food and your family eats it, that hasn’t affected your balance sheet at the end of the month. If you go out and have a slap-up meal to celebrate something, that doesn’t affect your balance sheet either. If you spend a thousand pounds on a holiday, that doesn’t mean you shouldn’t do these things, but there’s a distinction between those expenditures and the ones that do affect it. Similarly, in a business, if you’re paying for fuel and then driving around, that doesn’t affect the business’s balance sheet at the end of the month. Whereas if you purchase a new piece of equipment which you can use productively in running the business, that increases your balance sheet. Similarly, if you pay off some of the loans you have outstanding in the business, that reduces the business’s liabilities and has a positive effect on the balance sheet. To summarise: if you’re spending a lot of this money on consumables, that’s not really going to affect the balance sheet. Whereas, if you’re following the advice we talked about last week, where you’re paying yourself first, moving 10% of your salary into an investment, let’s say, that obviously is going to affect the balance sheet. The balance sheet is just a snapshot in time. Absolutely. For that reason, it’s constructive to have a separate display, which in personal circumstances I call the accumulation and dispersal summary. In a business, you’d call this the profit and loss account. This is actually much more important. 3. Your Profit & Loss Account The cash flow summary is the starting point for preparing the accumulation and dispersal summary. It distinguishes two categories: factors that have a positive effect on the balance sheet and factors that have a negative effect. In terms of an enterprise, income would be the revenues from sales, or any other types of transactions carried out in the course of running a business. You might hire out equipment, for instance, or rent out properties as part of the business. These would all come in on the revenue side. Then you’d subtract expenses you’ve got nothing to show for. You also have the direct costs of providing the goods or services the business runs. If you take out the direct costs of providing the

    Unravelling The Money Puzzle: How Rich Are You?

  6. Aug 21

    Unravelling The Money Puzzle: How To Get Rich

    Rob’s comments below are in italics.Derek’s comments below are in normal font. Our topic today is “How to get rich!” Where do we need to start with this one? Well, as we’ve said before, wealth in the narrow sense of bean counting doesn’t cover most of the important things in life. But what I wanted to talk about is the more banal fact that some people go through life and end up far wealthier, in terms of cash and assets, than they started with, while most people paddle to stay in the same place throughout life. Many people these days are steadily getting deeper into debt, which is much easier to do than it was in the recent past. So, what’s the difference between those two groups of people? I’m not talking about windfall wealth - Most billionaires inherit their wealth… There is that. But if you’ve inherited great wealth, this discussion is probably irrelevant to you and you’re probably not listening to it. I’m not talking about vast plutocratic degrees of wealth. I’m talking about getting to the position some people call being ‘financially independent’. Becoming financially independent is where you can cover everything you need and want to do, and no longer need to be beholden to a work structure. It doesn’t mean you necessarily stop working and spend your life playing golf, or sitting with your feet up watching TV. It’s where it becomes optional whether you do any income-earning activities. Most people assume they’ll get to that point. It’s called retiring, or having a pension. Some people aim to do that a lot earlier than the sixty-five or seventy that might be regarded as a normal retiring age. Some do retire in their forties, or even earlier. So what’s the mechanism by which you can get to that point? This is so simple it’s almost embarrassing to spell out. The simple, systematic method is to spend less than you earn and put the difference to work for you. It’s also about knowing how much is enough, depending on what you want to do. That would be all part of the planning process. But that basic mechanism, simple as it is, is something we haven’t been taught in school. We probably weren’t taught it by our parents, and if we were, we probably didn’t take any notice. Some people pick up on it early, some too late, and some not at all. The path of least resistance, certainly for me and for most people without any external framework or discipline, is to spend your income as it comes in until there’s none left. Then you wait for the next instalment. That doesn’t leave you any cushion for unexpected misfortune, whether that’s an interruption to your income or an emergency expense. If you were wise and enlightened in this respect, you would at least build up a cushion. That’s the distinction between savings and investment. Savings are liquid funds: cash, bank accounts, or something a little more inflation-resistant these days. But still fairly liquid, like gold or silver coins, which at least maintain their value as currency depreciates, and which you can use for emergencies. Systematic, long-term investment is distinct from that. Assuming you want to reach a certain point and then be financially independent, that involves systematically putting away a percentage of what’s coming in. The rule of thumb used to be around ten or twelve per cent, which can seem like a big dent in your earnings if you’re used to living hand to mouth. A lot of people think they could do that once they’re earning a bit more, but that’s an illusion. There are always people earning ten or twenty per cent more than you, and always people earning ten or twenty per cent less, and somehow they manage to survive. So you could survive on ninety per cent of your income and systematically put the rest away. I’ve heard that termed as “paying yourself first”. Yes. Although paying yourself first is a misleading term. It doesn’t mean indulging yourself before paying your creditors. It means paying your future self before your present self, which is the healthy way to look at it. It’s disastrously easy to spend slightly more than you earn each month. We’re all surrounded by easy credit we’re enticed to take. Whenever we’re a bit short, or struggling to meet an extra expense, it’s the path of least resistance to dig into that. Then compound interest works against you rather than in your favour. Coming back to putting the money to work: if you’ve put, say, ten per cent of your income aside into a fund that’s getting a return, the important thing is to plough that return back into the fund. Most people do this through a pension plan or an investment scheme, where it’s handled behind the scenes and treated as a magic process. But even if you’re going to hand it over to the professionals and take no part in it, understanding the principles is very empowering. At least you understand what options and decisions they might be taking, and take an interest in that. It might give you leverage in choosing which investment vehicles or advisers you use. I’ll underline again that I’m not offering anybody financial advice here. I’m offering an understanding of the underlying principles so you can make informed decisions yourself. Make it your business to know your business, and understand how your money is being invested. A pension fund, for instance, is probably going to invest quite heavily in bonds and things like that? Yes. Which perhaps aren’t really worth the paper they’re written on any more. I was about to go into that. If you were investing directly, you’d broadly have a choice of three things. You’d have equity shares, that is part ownership of an enterprise. Or you’d have bonds, which are effectively loans to a government, part of a government, a foreign government, or possibly a corporation. To get the capital to run their business, a company might raise part of it from shareholders, the owners of the business, or they might borrow it. We’ll look at that in a separate segment, when we talk about how an enterprise covers its capital requirements. By capital, I’m not referring to the abstract sense, in terms of the investment vehicles that have a claim on it. I’m referring to the actual tangible objects you need to run the business. If you’re a plumber, you need your van, your tools, and your stock of pipes and fittings. Those are recurrent outgoings, and that’s the business’s capital. You might have that yourself, or you might borrow it from somebody. If you’re a small independent entrepreneur, probably the only place you can borrow it is from the bank. But if you’re a large corporation, you can offer bonds to investors who want something more predictable than shares. If you own shares, there are two ways this can provide a return. One is when the company declares a dividend at the end of each year or quarter and gives shareholders a share of the profits. If you’re building up a retirement fund, each time you get a dividend you use it to buy more shares, either in that enterprise or a different one. Similarly, with government bonds, part of taxation goes towards paying the interest on what’s outstanding. Most countries in the world have taken the path of least resistance: issuing more and more bonds so they can spend on government outlays without asking taxpayers for income that covers it in real time. They’re kicking the can down the road. The system is set up for short-term thinking in that regard. Absolutely. It wouldn’t necessarily be so. The considerations for whether to borrow money are exactly the same under responsible stewardship, whether for a country as a whole or for a business enterprise. If somebody’s running a successful business and could sell more than they’re currently producing, opening an extra factory or buying more machine tools could increase production, sales and income. In those circumstances it might be entirely responsible to issue bonds to fund that extra manufacturing capacity. That borrowing would be repaid over time, with the interest funded from the extra sales. If the projections are accurate and the sums are right, that should leave even more to be distributed among the shareholders. The other way equity shares can benefit you is if their value rises over time. Take a situation with sound, stable money and a lack of inflation, as in England throughout the nineteenth century and into the early twentieth. Any business that reinvested a portion of its earnings would experience the same compounding effects. It would be entirely valid for the company’s valuation to increase, because a sound investment would increase its capacity to make more sales and profits. That would leave more available to reinvest or distribute. But we’re living in peculiar times, where the stock market is rising, and everybody is excited about it. This is all part of the monetary expansion we’ve seen. If banks are creating more and more money out of thin air, that money has to go somewhere. A lot of it goes into funding ever-increasing government debt, or into the stock market, farmland or housing, simply driving up paper valuations without any real substance behind them. So there’s no substance behind it. Exactly, you’ve got it. There are two key figures for looking at the value of an equity share. One is the dividend yield, which is fairly obvious. If shares selling for a hundred pounds pay out five pounds a year, the dividend yield is five per cent. The other is the price-to-earnings ratio, the ratio between the share price and the profits being made. The real profit a company makes is probably more important than how much it distributes as a dividend. If it’s making ten per cent profit, it could distribute all of that as dividends. Its capital stock would then remain constant, apart from steady depreciation. There’s no long-term benefit to them in doing that, though, is there? Exactly. If, instead of

    Unravelling The Money Puzzle: How To Get Rich

  7. Aug 19

    Unravelling The Money Puzzle: How is Wealth Lost?

    Rob’s comments below are in italics.Derek’s comments below are in normal font. Today’s topic is how wealth is lost. Both of us probably have plenty of first-hand personal examples of this, but ignoring my jokes, what do people need to understand? Right. So far, we’ve covered how wealth is created by people doing productive work. We also discovered the role of energy in that process. The work might be physical work done by human beings or draft animals, by harnessing natural energy as we discussed, or by consuming fossil fuels. Either way, energy goes into a process that leaves you with something more useful to some group of people than you had at the start. As history goes on, it’s fair to say that the general trend over human history has been an increase in wealth in the world. But it’s not a smooth process. Sometimes it gets retrenched, and the wealth created is offset by wealth lost in some way. There are two ways of looking at that question. One is the individual amount of wealth you have and how you might lose some of it. You could lose it by squandering it, wasting it, or having it stolen from you. Regardless of that, there is going to be a general erosion with the passage of time. The background to that process is something we touched on when discussing energy. We talked about the second law and the inexorable rise of entropy, that is, disorganisation and the unavailability of energy that passes through a process without a hundred per cent efficiency. Some of it converts into energy that’s unavailable for producing useful work. That is low-level heat in the environment generally, which we can no longer harness. Physically, there’s also a similar process at work. It’s a process of decay, corrosion, or wear. You have a brand new car or washing machine, and as you use it, the bearings slowly wear away and become less efficient. Eventually they have to be replaced, or if they can’t be, the whole thing gets scrapped. That’s one of the processes by which wealth is lost. The same thing can also be enacted deliberately by human agency, through vandalism or destructiveness. The most extreme example of this, which is happening all around us at the moment, is warfare. War is the ultimate destruction of wealth. You only need to see the effects of bombs. At one moment you have a human structure that a lot of wealth and work has gone into creating - that gets reduced to rubble in an instant when something explodes. There’s an irony there, because that bomb itself represented a lot of energy. A lot of energy went into the chemistry to make the explosives, and into manufacturing the device, the delivery system, and the control systems. All of that energy, instead of being harnessed to create wealth and push against the rise of entropy, instead of producing a locally reduced entropy representing some useful artefact, has been harnessed to accelerate enormously the increase in entropy and randomness, the annihilation of whatever it was that was created. It’s great for GDP (Gross Domestic Product) though, isn’t it? It takes a lot of money and resources to build the things in the first place. It takes energy to blow the things up, and then it takes resources to rebuild everything afterwards! So it’s a triple win for GDP. You’ve put your finger on an almost allegorical illustration of the failure of GDP to be what it’s always assumed to be, a reliable proxy for human wellbeing. It’s obviously about as extreme an example as you could get of GDP being not only misaligned with human wellbeing, but actually contrary to it. Yes, tell that to all the people under the rubble in Gaza or somewhere. Exactly, quite so. Allegedly, we’ve had steady economic growth, as measured by increases in GDP, over the last fifty years. It must be becoming more and more obvious that this hasn’t produced any tangible benefit for the majority of the population. That’s true even to the extent that the growth is real, and even to the extent that it hasn’t been distorted by underestimating the effects of inflation. Whatever increase in wealth there has been has clearly gone to a tiny sliver of the wealthiest people. Yeah, it’s a wealth pump. That’s what Jeremy Lent describes it as in Ecocivilization. It is, absolutely. It’s a continuous transfer from the population at large to that tiny elite. These wealth pumps have been going on for thousands of years, but never quite on this scale and level of sophistication. That’s about the size of it. Anything more before we sign off for today? A few thoughts came up as you were talking. We were talking about one of the roles of money being a store of value. At some point you have to use it or lose it, though. You can’t take it with you at the end. It’s going to be subject to entropy, either wasting away of its own accord or through an external shock from outside. Referring back to Jeremy Lent’s book, Ecocivilization, he reckons there were big changes in the way we viewed wealth when humans moved from being hunter-gatherers to living in agricultural societies. He says that if you find indigenous tribespeople who still live at least partly in the old way, they don’t store wealth in the same way. They share things more. There’s a famous example of a tribesman who says he stores his meat in the belly of his brother. Our culture fosters this mercantilist hoarding of things, and maybe there’s an element of flow, where things go out and come back in. There’s almost a tidal element to the flow of wealth. It goes out and comes back in. Going out isn’t necessarily a bad thing, because the tide will come back in. Yes, indeed. Comments on Current Events (31st July 2026) Well, in current events, there is no sign in the conflicts going on in the world of any rational strategy on the part of the Western actors involved. We’re still in a perilous situation. It’s worse than ever. It’s almost like they’re trying to frame Russia and Iran as the same enemy now. There does seem to be a merging of the two conflicts, which is very interesting, because they were regarded as entirely distinct until this week. History doesn’t matter to people who work in the news! Yeah. Since the apparently suicidal entry of Saudi Arabia into the conflict, they aggravated Ansar Allah, the Yemeni group described in the mainstream media as the Houthis, by bombing Sanaa airport as a plane was about to land there. Ansar Allah responded, entirely predictably, by closing the Bab-el-Mandeb strait at the base of the Red Sea, to prevent Saudi shipping getting in or out. They also attacked the oil terminal and the refinery on that coast. Then, to make matters worse, Saudi Arabia, in conjunction with the United States, attacked the militia in Iran. Saudi Arabia is now going to have a severe cash flow problem, being unable to export any more oil. This is going to aggravate the problem that was already coming to the boil with Iran’s blockade of the Strait of Hormuz. Japan, South Korea, and various parts of Asia are already feeling the pain from this. We seem to have been effectively insulated from it in Britain, Europe, and the United States for the moment. But the effects of this are going to hit hard over the coming weeks, and the knock-on effect is very unpredictable. All of this is aggravated by the fact that the United States has really run down its stockpiles of munitions, which is a good thing from the point of view of the conflict having some sort of end in sight. Because of their bloated, profit-oriented weapons manufacturing system, they cannot possibly replenish them at anything like the rate they’ve been using them up. This is another factor that’s going to affect how things unfold, and it doesn’t seem to have been taken into account in the decision-making process. In addition, the financial underpinning of the United States, both the petrodollar system and the enormous indebtedness, is under pressure. There’s also the need to roll over expiring treasury bonds at higher interest rates, which is going to impact the financial foundations of the way the United States has operated in the world over the last seventy-five years. It seems to be operating on a bubble that’s mostly made of hot air. Absolutely. Then there are the midterm elections coming up. Unless the electoral process is actually derailed in a serious way, it doesn’t look to me as though the existing Trump administration can gloss things over enough to avoid an electoral disaster. So that’s obviously a factor. Trump is obviously being pulled in various directions, or whoever is actually taking the decisions, whatever combination of people that is. There seems to be no coherent way out of the corner they’ve painted themselves into. As usual, it doesn’t massively matter, because someone else will come in and just continue the same policies. Yeah. These people serve their purpose for the empire for a period, and then their shelf life expires, and someone else comes in. As we’re seeing in the UK, Keir Starmer’s usefulness to the empire clearly expired, so they brought in a different puppet. Yeah. One of the first things Burnham has done is agree with Zelensky to set up a drone manufacturing factory in England. Again, this is working on the blithe assumption that Russia is going to be increasingly provoked without actually taking any action. We shall see. I guess to round things off, you don’t have to look very far in the world to see examples of wealth being lost or squandered. Exactly. Thanks for reading Sovereign Finance! Subscribe for free to receive new posts. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit sovereignfinance.substack.com

    Unravelling The Money Puzzle: How is Wealth Lost?

  8. Aug 17

    Unravelling The Money Puzzle: How is Wealth Created

    Rob’s comments below are in italics.Derek’s comments below are in normal font. We are continuing our discussion this week about the topics for our forthcoming book, Unravelling the Money Puzzle. Today we’re talking about how wealth is created, which by our definition is quite distinct from how money is created and requires energy. So where do we begin with this one, Derek? Well, you remember in the last episode I put forward the suggestion that we define wealth as things people want. You might want a table, a house, a car, or a meal in a restaurant. You definitely want food on a regular basis. If anybody else has any other suggestions, we’d love to hear from you. We talked last time about Maslow’s hierarchy of needs, which is a good place to categorise the things that people want. That might be useful to reflect on in all kinds of ways. You might like to look at that hierarchy and see how many of those things you’ve got that you’re happy with, and how many you’ve still got work to do on. Having said that, if you’re running a business, you might want to look at which things on that list your potential customers want, and how many of those you could deliver to them. That’s probably a useful way of looking at it. So whatever these items are that constitute wealth, we could safely say that wealth comes into existence through something that, in the broadest possible terms, we could call “work”. W-O-R-K: The dreaded four-letter word we all taught to fear… Yes, although there’s no reason why we should fear it. When we were talking about money, we suggested it was a system of tokens which facilitated the exchange of time spent — and obviously that means time spent productively. In the world we live in, there are a lot of things that pass for work which are highly dubious as to whether they deliver anything useful. Let’s assume the time we trade with one another using money is time spent doing productive work, producing something that somebody else wants. It’s quite easy to see this in the case of a craftsman. He might take a whole bunch of timber and turn it into a table, a useful object which somebody might desire, on our definition of things that people want. That table would be a form of wealth, and that person would be prepared to trade something for it — either directly, something they’ve worked on themselves that the carpenter wants, or, more usually and conveniently, money tokens which the carpenter can then exchange for things he wants. I’d like to look at the concept of work in a bit more detail and see how this ties in with energy. For anybody who’s an engineer or a working scientist in any of the physical sciences, what I’m going to say here will be second nature. But for the great majority of people who weren’t particularly interested in physics at school, or didn’t do the subject at all, or forgot whatever it was that — Or remember it being taught badly. That was my memory of it. Right. In the original definition, work consists of applying a force and moving it through a distance. The simplest example would be picking up a heavy object and moving it to a higher location. Or pushing a wheelbarrow, for instance. Pushing a wheelbarrow, anytime you’re applying a force and moving it along. Work is the product of those two things: the force applied, and the distance moved. Energy is the capacity to do work. For most of human history, most work has been done by muscular energy — either human beings, or domesticated animals such as horses, mules or oxen, harnessed to a cart, or to a windlass to hoist things up. If you trace that back, where does the energy come from? It comes from the food they eat. Where does the energy in the food come from? That comes from sunshine absorbed in the leaves of plants, which they either ate directly or were eaten by animals whose meat they then ate. In the larger picture, that’s the result of a flow of energy from the sun. Prior to the fossil fuel age we’ve been living in for the last three hundred years, there were also water mills and windmills as sources of energy. Once again, these are derived from sunlight hitting the earth. Wind comes from the sun differentially heating air in different parts of the country, creating currents from one place to another. The streams driving water wheels ultimately come from sunlight shining on the oceans, evaporating into clouds, precipitating as rain, gathering into rivers and running downhill under gravity. That was the way it was. Now energy is a hot topic because of current events in the world — the hysteria we’re seeing over the supplies of oil, who controls them, and all these kinds of things. Compared to having a watermill or an ox in your garden, we’ve become quite reliant on energy sources from far-away places. Exactly so. This energy also comes from the sun — just sun that shone on the earth three hundred million years ago or so, absorbed in the leaves of plants which then fell, decayed, were buried in the earth and turned to coal, or, through one or two other organic processes, into oil and natural gas. We’re now burning through these at a tremendous rate, and on some timescale within the lifetimes of the youngest people alive today, they’ll become exhausted, and we’ll have to deal with that. Buckminster Fuller had a metaphor of energy slaves. He said everybody in the modern world has the equivalent of a few hundred energy slaves, in the energy we consume by putting petrol in our cars, fuel in our heating systems, and drawing electricity from sockets. The total amount used is, for most European nations, something like 125 kilowatt hours per person per day. We could probably get everything we actually want with considerably less than that, if we applied ourselves to doing things as efficiently as possible. But what I want to look at is why we need this continuous flow of energy. It comes down to two laws of what I’d call energy conversion — conventionally, the two laws of thermodynamics. That makes it sound obscure and complicated, but thermodynamics is just a fancy way of saying heat and movement. It was called that because heat and movement are what people were interested in when these laws were investigated in the nineteenth century. If you’re developing steam engines, you want to know how heat and movement work. Yes. Steam engines were just coming to the forefront, and how efficient an engine could be made was a red-hot topic, no pun intended. Most of us immediately think of James Watt in connection with steam engines. He wasn’t the original inventor, but his main contribution was to make engines — developed by two predecessors of his — considerably more efficient, in terms of the physical work you got out relative to the coal you put into the boiler. Two Laws of Thermodynamics So what are these two laws? The first, which probably almost everybody remembers, is that energy is neither created nor destroyed, but converted from one form to another. You might think, well, if energy is neither created nor destroyed, why all the fuss? Why are we fighting each other over access to oil? The answer is the second law, which, funnily enough, is almost never taught at school level — even if you specialise in science right up to A level, there’s barely a mention of it. The second law has various ways of being stated, but the simplest is this: when you convert energy from one form to another — for example, chemical energy in coal to heat when you burn it in a boiler, or heat to movement when that boiler generates steam and drives a piston to turn a wheel and drive machinery, a proportion of it is lost for useful purposes every time. We all intuitively know this. There’s a certain amount of energy in the petrol we fill our car tank with, and that energy gets the car moving. As we drive around, the tank gets emptier. The same amount of total energy still exists in the world, but by the end of our journey it has been turned into heat, passed from the engine to the radiator and out into the atmosphere. It’s turned into heat by the turbulence of the car driving through the air, by the friction of the tyres on the road, and by the brake discs warming up as we apply the brakes to stop, again diffused into the air. All of this energy, although it still exists, is not in any form we can use. Or in my case, the kids put the windows right down on long car journeys, and the energy is converted into a combination of noise and drag on the car. That’s right, all of these things. There’s another interesting aspect — this is probably one of the few scientific laws we all know intuitively, even though we’re not taught it. Yeah. It’s the law of entropy, isn’t it? Something complicated or complex will always even out. It will always move to something simpler when it’s able to. If you build a sandcastle and leave it on the beach, you’ll see small grains of sand falling off it constantly until it’s all gone. It’s the same process. Yes. The reason we all know this intuitively is that it gives an arrow to time. Time is the direction in which entropy is increasing towards the future. Entropy is a measure of disorder, of randomness, of the unavailability of energy to do useful work. The second law, stated another way, says entropy always increases in any closed system. Entropy is all around us too, pretty much everywhere. Living organisms create order out of entropy for a period. Yes, and that’s an interesting point. I want to make a couple of observations first, and I’ll come back to that. One is that the arrow of time makes it obvious, if you watch a film, whether it’s running forwards or has been spooled backwards, because if it’s running backwards things look absurd. If you knock a glass off a table, it falls to the floor, smashes, and the pieces scatter and come to a standstill. The energy at the end of that process is exactly the same as a

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  • Creator
    Rob Drummond
  • Years Active
    2024 - 2026
  • Episodes
    96
  • Rating
    Clean
  • Copyright
    © Rob Drummond
  • Show Website
    Sovereign Finance