Sovereign Finance

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 of these attacks have increased rapidly over the last week. At the same time, Ukraine is still launching drone attacks deep into Russia. Russia’s success rate in intercepting them is increasing dramatically.

They’re now also taking out large numbers of Ukrainian railway locomotives. This is preventing supplies from coming in, mainly from the Polish border. So Ukraine is really on the ropes.

The US is definitely getting the worst of it in the Iranian conflict, and it looks set to get worse. Xi Jinping apparently told Trump very bluntly that they had to remove the blockade. He said Iran had already given them an off-ramp, and it would be in America’s best interest to take it. He apparently also said that if they took that route, China would support them. But as soon as the Chinese delegation boarded their plane home, Trump truculently rejected any return to the deal Iran had on the table.

The sources I hear from suggest China is extremely angry about that. It’s regarded as a gross personal insult. It also directly conflicts with China’s objectives. China is clearly the world’s growing dominant economy. What it wants is to lift its own population further out of poverty and move towards a more just, prosperous world. I don’t doubt that whatsoever. Clearly, the United States’ behaviour is in direct conflict with that.

The other thing I’d say concerns the speeches at the United Nations General Assembly. Russia, China, Iran and various other countries made supportive presentations. These were far more convincing, certainly in the eyes of the rest of the world that is not already part of the increasingly isolated US bloc.

The UN’s structure gives the US, Britain and France veto powers in the Security Council. Even if it’s impotent to actually implement things, it has still shown itself to be a global stage on which positions can be stated. Even if you look at it purely from a game-playing point of view, Russia, Iran and China have played the game far more effectively than any of the Western nations.

It’s some game.

Yeah. Believe it or not, it’s still distinctly possible we’ll get a very good outcome from all this. Of course, it’s hanging in the balance. It’s by no means a foregone conclusion, and we’ll have to see how it goes.

What it is doing, for the time being, is ratcheting up the uncertainty that people are feeling. So watch this space.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

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 you drop anything larger than a hand grenade into one.

With 1,600 drones launched towards Moscow, plus others over various parts of Russia, they caused fires at perhaps two oil refineries. They also hit a warehouse or two and an apartment building, causing two deaths and six injuries. All the rest were intercepted by Russian air defences, so it was really a non-event.

People I’ve seen reporting from Russia said they hadn’t noticed anything at all from that attack. In any case, trying to disrupt an election is really an admission of defeat. I don’t know whether you’ve got any theories. The most plausible theory I’ve heard about the thinking behind it was that if they managed to disrupt the Russian election by firing a lot of drones and missiles, it would support Zelensky’s claim that he can’t possibly hold an election in Ukraine during a war. Ukraine’s election is well overdue. If Russia can hold an election while a war is going on, that undermines his argument. Any thoughts?

It’s a huge irony, given the debunked allegations of Russian interference in previous US elections. Well, the shoe’s on the other foot, maybe.

Yes, quite. Anyway, Putin’s party got the expected fifty per cent or so. It might even have slightly increased from last time. I’m not sure, but it’s around the same. The breakdown among the different parties is very much as expected, given their level of support in the general population. So it counts as a success.

We will have to see whether Russia takes any action against Poland, Romania, Germany, England and France. All of them are manufacturing drones and missiles which are being sent to Ukraine to attack Russia. Now that Russia is hitting the western parts of Ukraine, there’s a good chance it will completely disrupt the import of missiles and components. That would end, or at least hamper, Ukraine’s ability to carry out these strikes.

It’s one of those things where it looks like Russia will win this war. It’s been fairly obvious for a long time. It’s been going on for well over three years, and it could have been put to bed straight away. It was extended by the powers that ought not to be. There were secret meetings, flights over and messages to Zelensky not to negotiate. It’s all very sad, and the human cost is tragic.

It is. It’s truly tragic, the number of human lives that have been lost and blighted by all these conflicts.

The only positive thing is that, in these days of cheap, effective defensive and deterrent weaponry, we could reach the point where the futility of war is undeniable. It only makes sense to attack another country or grouping if you think you stand a chance of an advantageous result. It increasingly looks like that is implausible.

Yeah, we’ve seen that in Iran as well, haven’t we? Defensive missiles are much more effective than offensive ones, and they’re faster and cheaper to produce. Not that it’s stopped the Western Empire from trying.

Right. Of course, the Western Empire is using up its munitions faster than it can manufacture them, particularly its anti-ballistic missiles. That will bring the current circumstances to an end. Anyway, it’s going to be a very rough ride between now and when we get some stability in the world.

It will be a particularly rough ride between now and the American elections in November. Of course, Netanyahu is up for election too. Is it later this month? It’s almost on us, isn’t it?

He needs to go to jail, doesn’t he?

Yes. Mind you, we’re not seeing any other leaders emerging in Israel who are likely to pursue more humane objectives. So there’s not much scope for comfort or enthusiasm there.

I’ll just end with the usual message: keep standing in the light. Don’t swallow too much of the black pill. There’s a better future we can co-create.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts and support my work.

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 severe crunch.

One thing that has had a certain amount of coverage is that the US Treasury is struggling more and more to persuade people to buy its new bond issues. The dynamics of this are quite interesting. They’ve already had to offer interest rates a good deal higher than before, and higher than they’re comfortable with. That was the only way to get the tranches of Treasury bills issued that they’ve managed so far.

Interestingly, they’re having real difficulty selling 30-year or even 20-year bills. So they’re having to replace expiring 20- and 30-year bonds with 10-year ones.

That’s understandable. It speaks for itself, and it’s only common sense. Investors are unwilling to tie themselves up for 30 years in something that may not have much purchasing power by then. Personally, I wouldn’t want to bet my shirt on the purchasing power of the dollar, the pound or the euro in 10 years, much less 30.

I was thinking 30 months at a push!

Getting back to the point, they’ve now passed 5%. They’re up to 5.3% or 5.4% on the most recent issues. For the next batch they have to place, they’ll need to push the interest rate higher still, to 5.7%, 5.8% or 6%. That would totally freak people out.

Of course, this also calibrates mortgages. Mortgage rates sit a certain amount above the interest rate on United States Treasury notes. The same goes for British government gilt-edged securities, as they’re called. That’s a bit of a hollow name for them these days.

When they issue the next lot of bonds, let’s say they have to offer 5.8% instead of 5.3%. Everyone who bought the previous issue at 5.3 per cent will immediately see the capital value of their bonds fall. So that their yield then matches the coupon on the new bonds. So it’s not only a poor investment in terms of its eventual buying power. It even looks like a poor investment to hold its price in the short term. We’ll have to see how that unfolds.

So the new system will support multiple currencies, with no single overall controller and few intermediaries. It will also be sanction-proof. It’s also interesting that the BRICS nations have now surpassed the gross domestic product of the G7 group of Western countries.

So we’re no longer economically dominant. Not only that, consider the total population of the BRICS nations, including their associates. Add in the SCO and the Eurasian Economic Community, which largely overlap with them. Between them, they have about 50% of the world’s population. The entire Western bloc has 12% at the most optimistic, and probably rather less. So this is clearly the way the tide is running.

The rapid emergence of the multipolar world.

Hence the move towards a multipolar world. The tragic irony is that the Western nations would all be very well placed if their elites had been prepared to accept reality.

We could take our place as one nation amongst many others in a just, prosperous, multipolar world. We could all be much better off. However, the elites can’t relinquish their commitment to the domination we’ve had for a couple of hundred years.

I don’t think they’re very well connected to reality.

No. One of Trump’s latest announcements claims that rising fuel prices in the United States and elsewhere are due to the Ukraine war. He blames Ukrainian attacks on Russian oil refineries.

Well, I’m sure that isn’t helping. It must be obvious to the most naive and casual observer that something else has a lot more to do with it. That is the closure of the Strait of Hormuz. Now the Bab el Mandeb Strait has closed too, and that had been giving Saudi exports a little relief.

Once again, we’re now getting close. I don’t know whether I sound like a broken record, or Chicken Little, or the boy who cried wolf, or what, but...

Just because you’re a broken record doesn’t mean you’re wrong.

No. We really are a week or two away from being hit by shortages. That’s mostly diesel, but gasoline too. Apparently, in California they’re running out of digits on the petrol pumps. I don’t know whether I said this to you, but maybe the United States will have to switch to selling fuel in litres instead of gallons. That way, they can fit the prices on the pumps.

This is another thing that really amazes me. It’s one thing that Trump, or whoever is pulling his strings, can’t take a broad or long-term view. However, you’d have thought he’d take even a couple of months’ self-interested view. He should be looking at the country’s mood in two months’ time, at the beginning of November, when the midterm elections take place. The one thing everyone will notice is the price of fuel for their cars and the price of food in the shops. These are plainly spiralling out of control, and they’ll be even worse in two months’ time.

By the time people get to the polls, I’d have thought even the safe Republican seats up for election won’t look nearly so safe. You’d have thought that would motivate them to find some resolution of the Iranian conflict. Instead, they’ve simply been aggravating it. There had effectively been an uneasy truce between Saudi Arabia and Ansar Allah. That had held despite Saudi Arabia subjecting Yemen to absolutely vicious bombing campaigns. It had also imposed brutal economic sanctions, which caused extreme hardship in that country. In spite of that, Yemen has managed to build up a very sophisticated array of weaponry.

It also has a very vigorous militia, which is poorly equipped and very informal but has just proved effective. The whole conflict erupted because Saudi Arabia decided to attack Sanaa airport. A plane was bringing back mourners from the Iranian funeral a few weeks ago. That was what triggered the current conflict.

Saudi Arabia has had its ability to export oil and gas reduced literally to zero. It is going to be in serious financial trouble. Of course, this will also put even more pressure on the American bond market. A large part of Saudi Arabia’s wealth is held in American bonds, and it will want to sell some of those. That would cover its immediate financial needs. I don’t know whether it will be allowed to sell them off in large quantities. Even the attempt will put more pressure on the United States, though.

Yes, it’s the opposite of what the US wants, isn’t it?

Yes, exactly so. So their exports are down to zero. Another embarrassment has just come to light over the last day or two, although it was probably obvious to you and me. That is the extent of the damage the Iranians have inflicted on United States military bases and assets. Have you seen the photos that have come out over the last day or two?

No, no, this is all news to me.

They show astonishing carnage of aircraft, hangars and buildings of all sorts on the bases. These date from the early days of the conflict, immediately after it was launched at the end of February and the beginning of March.

They really have been effectively driven out of the region, and I can’t see any way back. It was a huge miscalculation, but you’d have thought it was blindingly obvious. I’m sure you or I could have made a more sensible decision.

It’s a huge miscalculation, isn’t it? I subscribe to Chris Hedges’ perspective on these people. He has a very dim view of their intelligence and the level of thinking that has gone on here.

Any reflections on what we’ve covered so far?

No, just to add that yes, you do sound like a broken record, but you’re on point. It’s a case of when, not if. I was saying to Lindsay last night that you can see fuel prices going up here now. Petrol is almost two pounds a litre fairly routinely now.

Right. Around here, it was £1.29 before this started.

Yes, Halcyon days.

The “Perfect Storm”

But I think it’s telling the way all of these events are really coming together. The cliched phrase is a “perfect storm”. The context for everything that is happening is the American Empire entering its final phase. The things that have worked for it for so long no longer work. Even so, the elites in charge of the empire seem incapable of thinking of alternative approaches.

The American Empire was perhaps really an extension of the British Empire as well, if you go back far enough.

Yes, you could look at it that way. Anyway, things are obviously coming to a head in Saudi Arabia. Kicking off the dispute with Ansar Allah was a serious case of shooting itself in the foot. It was compounded by sending in its mercenaries.

They were immediately and heavily defeated by the sandal-wearing Ansar Allah militia, who captured a lot of state-of-the-art American equipment into the bargain. Of course, this has brought Saudi exports of oil and gas down to zero.

My understanding is that Saudi Arabia relies very heavily on those.

Yes. So we’re about to get a preview of what it’s like to run out of oil. There’s plenty of it there, but we can’t get our hands on much of it. We’re likely to be in a very similar situation to 1973. That was when OPEC, led by Saudi Arabia at the time, cut off supplies to the West.

OPEC quadrupled the price it was charging, arguably in response to Western support for Israel. That’s ironic, considering Saudi Arabia is now partly creating problems for itself. At best, it has an ambivalent attitude towards the Israeli regime. Be that as it may, the world as a whole is far more dependent on oil than it was in 1973. That’s especially true of the United States and its dependence on imported oil.

So we can expect the repercussions of this to be far more extreme.

In addition, Trump is scheduled to meet Xi Jinping in a couple of months’ time. It’ll be interesting to see whether that meeting actually goes ahead. We’ll also see what meeting of minds, if any, we get there.

Amongst the devastation in Western Asia, the CENTCOM or Fifth Fleet base in Bahrain has been totally destroyed. That base would have resupplied the American Navy operating in the area.

Even if the base hadn’t been destroyed, it would be totally inaccessible as a resupply route. It sits inside the Strait of Hormuz, and they can’t get significant amounts of shipping in or out. That’s why they haven’t even been able to supply food or maintenance to the aircraft carriers. Of course, this has had a knock-on effect on the crews’ morale and operability.

We’re going to see the effectiveness of the American military collapse more and more. Part of the reason is growing questioning, some of which is now coming out into the open. People are asking what they’re fighting for and whether it’s what they signed up for. They’re also questioning the way they’re being treated.

Even if all this shipping were sorted out, it’s unclear what damage has been done to the region’s refinery capabilities. The same goes for its pumping and loading capabilities. We don’t know what rate they would operate at or how long it would take to normalise the situation. The safest assumption is that it isn’t going to return to the kind of normality we’ve taken for granted in the past.

Saudi Arabia appealed to Trump to help in its latest fighting, and he declined. On one level, that’s pretty outrageous. For the past fifty years, the Saudis have been paying the United States enormous amounts of money. They’ve also subsidised the American economy by reinvesting their revenues there. They did this on the basis that they would be protected. When push comes to shove, it isn’t happening.

We’ve also seen the relationship between Iran and China consolidated further. Araghchi visited China for further consultations with Wang Yi. Of course, China so far hasn’t engaged in any hostilities whatsoever.

That brings to mind one of Sun Tzu’s aphorisms in The Art of War, a classic written a couple of thousand years ago or more. He said the supreme warrior wins without fighting. China has plainly managed to avoid fighting so far. However, it’s obviously very well equipped and ready to fight should the need arise.

It’s holding a lot of cards.

Yes. There was also a notable meeting on the sidelines of BRICS. Sheikh Khaled, Crown Prince of Abu Dhabi in the UAE, met Pezeshkian, and it was obviously very cordial. This is highly significant.

The Saudis have tried to blame Iran for a drone that was apparently brought down near Mecca. Needless to say, Iran has denied having anything to do with it. It’s not at all plausible that it did.

Probably a false flag event, maybe.

Yes. That seems the most likely explanation to me.

It’s now something like seventy years since Eisenhower, in his farewell speech, warned us against the rise of the military-industrial complex. Obviously, that has proved absolutely prophetic. The military-industrial complex has instigated a great deal of the chaotic action the United States has taken over this entire time.

It has also lined its pockets very fully by supplying weapons. These are now being exhausted very rapidly. They’re also not nearly as effective as some of the things they’re coming up against.

If not the military-industrial complex, then certainly the financial-industrial complex seems to weigh in.

peer-to-peer

Yes. I’ve jotted down a few extracts from various speakers at the BRICS conference, which are worth running through in detail. I’m looking at whether this is just more political posturing or whether we could take some of it at face value. We’ve become so cynical in the West because of the flagrant lack of integrity of Western politicians.

We simply assume that nobody in that game could possibly be authentic. By authentic, I mean having a base level of integrity: honouring your word, saying what you mean and meaning what you say.

It’s got to the point where I basically assume that whatever they say, the opposite is probably closer to the mark.

Yes. The question remains whether we can apply that to everyone everywhere. There may actually be people in other cultures who say what they mean and mean what they say. I’d say watch this space with an open mind and see how events unfold over the next year or two. Xi Jinping gave an incredibly powerful speech.

One of his points was about what the BRICS nations should be doing. They should stand firmly on the right side of history and strive to be pioneers of the time. They should steer the international order towards justice and equality. They should also work together to build a shared future for humanity.

Well, we should at least give things a chance. We’ll see whether there’s a genuine drive in that direction or whether these are just flowery phrases intended to pull the wool over our eyes. What’s your immediate response to that one, Rob?

Yes, you’ve got to judge what they do, not what they say. Thinking back to our conversation yesterday, I’m very interested to see how the decentralised peer-to-peer payment protocol works out. If you can solve the money problem and the way money works, a lot of the other things will fall into place.

Right. That, of course, brings it right back to the focus of this entire series. He also said we should embrace innovation-driven development and encourage open source development. I was very pleased to see that, because open source development is obviously one of my passions.

It’s plain to me that our current arrangement is absurd. People are secretive about how they develop technology, and there’s a massive duplication of effort. Just look at the washing machine or the dishwasher. The original design of each of these was obviously an enormous intellectual and team effort.

Once it’s been done, though, lots of other people duplicate minor variations on the same thing. They tool up and manufacture those variations in different companies and organisations. Sometimes it even happens in different divisions of the same company. It’s absurd, really. So it will be interesting to see whether they can implement that.

I was just trying to look up a book you recommended to me a long time ago called The Open Source Everything Manifesto, which shows how the open source movement isn’t just about software. We tend to think of Linux and things like that, but it could be anything.

Yes. Xi also said the BRICS nations should work to uphold peace and stability and facilitate mutual learning between civilisations. They should help build a fairer global order. He added that this is not against anybody, but for the entire population of the world.

Once again, we’ll have to see whether this is simply flowery phrasing or whether it represents a genuine vision and commitment. It’s worth at least keeping an open mind, keeping an eye on it and seeing how it unfolds. Pezeshkian, the president of Iran, said Iran was ready to be a strategic partner to the other BRICS nations in energy and transportation.

That’s rather interesting, considering the conflict between the United States and Iran is what has totally scuppered transportation and energy supplies. The South African president called for accountability regarding the ongoing genocide. Yet again, that’s glaringly obvious but needs to be said.

That’s what people want. That’s what every sane person wants. There aren’t many sane people on the news, so you won’t hear many sane opinions there. However, that’s what most people with a few brain cells want.

Yes. Lavrov mentioned the commitment to a multipolar world where small countries aren’t subjected to pressure, blackmail or threats. Such a world would really be to all of our liking. As I said yesterday, there were also references to the principles of the Charter of the United Nations and a commitment to honouring them.

There was also a great speech by Jeffrey Sachs. I haven’t watched it yet, but it will be well worth looking at in detail. Apparently, it was extremely well received.

That’s about all I wanted to say to round off the summary of what’s going on.

Yes. Regarding those quotations you just read out, humans thrive in decentralised societies that operate on the golden rule. The family is a good example of that. If we get back to that, we’ll be fine. Any centralised effort will ultimately fall apart and fail, or get hijacked by psychopaths.

Yes, absolutely. That’s a really key point about facilitating mutual learning between civilisations. We plainly aren’t committed to that at all in the West. On the contrary, the West is convinced it’s the only civilisation worth dealing with. It sees all the rest as invalid and not really worth a dialogue. It’s becoming more and more clear that there’s an active attempt to wreck alternative approaches to interaction between cultures.

Yes, and these are based on imperial root metaphors that go back a few hundred years. I’m just showing a screenshot of the book I mentioned, The Open Source Everything Manifesto.

Right. Yes, Open Source Everything. You could probably put a link to that in the notes.

Yes. I’d encourage people to go and have a read of it.

It has occurred to me that one thread in the obsolescence of warfare could be how little hiding is now possible. There’s constant, detailed satellite surveillance of everything on the planet. Combine that with the pinpoint accuracy of contemporary missiles, and a large part of what made warfare possible seems to be disappearing.

Yes, it would appear so. We hope.

We hope.

Good. We’ll leave this one here, so watch this space. Strap in, because things are probably going to get rough for a year or two. Hopefully, there’s a golden future on the other side of it.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

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 their support groups sailing round the world.

To the great surprise of many observers, that power projection has been dented, particularly by the Iran conflict. As I say, the context for seeing what’s happening today is the craziness that happens at the end of an empire. At that point, the elites seem incapable of stepping outside the lines of thought that have worked so well for them for so long. Doing the same things over and over again suddenly doesn’t work as convincingly. That is what we’re seeing.

In fact, I see both the Ukraine conflict and the war with Iran as imperial conflicts. Obviously, the United States has used Israel as a proxy to antagonise Iran for a long time, to a certain extent. Ukraine has arguably been acting as a proxy to weaken Russia. There have been enough public statements to give strong support to that view. Some people still cling to the view that this was an uncalled for, illegal invasion by the evil Russians. They see the Ukrainians as simply standing up for their freedom. That looks less plausible to me with every month that goes by.

This week, of course, we’ve had the latest attempts at diplomacy, which I’ll come back to in a moment. Getting back to interest rates and the market, this is now coming home to roost. Almost a quarter of the American federal government’s $40 trillion of debt is due to expire. It needs to be refinanced by issuing new debt.

They can’t do that, because no one trusts them.

Exactly. They’re finding it hard to get takers, even at much higher interest rates. Those rates will put even more pressure on the federal government. Even now, servicing the interest is the largest single item in the US federal budget. It’s even bigger than military expenditure, which is one trillion dollars and rising. This is another thing that happens during the decadent final years of an empire. The finances become increasingly stretched as insiders exploit them more and more. This shows up in the steady depletion of American missile stocks.

This particularly applies to the defensive missiles that try to intercept incoming attacks. These have been shuffled around from one ally to another to protect Israel and, until recently, Ukraine. Now Zelensky is demanding more and more Patriot interceptor missiles. They’re simply not available, because the stocks have been exhausted.

Yes, we’ve seen Chris Hedges and John Mearsheimer talk quite extensively about this. I might reference one of their interviews. They talk about how long it takes to make these missiles and how badly the US has done out of this war.

Yes. It’s really shown by the fact that Iran has managed to manufacture enough missiles to take them on. Apparently, Iran has a gross national product of 300 billion a year, which is less than a third of the American military budget. Even so, it has depleted the US military’s stocks while showing no signs of exhausting its own ability to continue the attacks.

It’s clear they’ve been preparing for a long time, and they seem to have the tactics right.

Yes, indeed. The other thing is that all their missile storage and launch facilities are hidden underground. Even the factories making them are underground. It must be an astounding operation. That means they can’t be subjected to American attacks. The American bases, of course, have all been fixed and static on the surface. They’ve been considerably damaged in the Iranian exchanges during the conflict since 28 February this year. They were also damaged during the twelve-day conflict last year.

In many cases, the American bases have been close to annihilation, as far as we can tell. Their surface warships also have to keep well out of range. That seriously dents the illusion of power projection that has underpinned the whole thing. Financially, it’s important to see what is going on. It has finally reached the point where large parts of the world are simply constructing alternatives. They’re doing it without reference to what the United States wants or can do.

Several different organisations have sprung up around the world, overlapping in various ways. There’s the Shanghai Cooperation Organisation, started 25 years ago by Russia, China and three or four of the Central Asian republics. Its initial brief was to take a stand against terrorism, separatism and religious extremism. It has since evolved. The most recent summit took place in the last couple of days of August in Kyrgyzstan. It was geared toward establishing systems for international finance and trade.

In addition to the scripted sessions, participants held many bilateral meetings. They built relationships and finished with a declaration establishing an SCO Development Bank. They’re also arranging an internal energy exchange market. Russia and many of those Central Asian republics are major producers of oil and natural gas. That creates the potential for growing prosperity amongst the other members over the coming years and decades.

In addition, of course, the Eastern Economic Forum met immediately afterwards in Vladivostok. There’s considerable overlap between the groups there. We’re going to have the BRICS summit in India later this September. Obviously, that is yet another overlapping group with an emphasis on trade. There’s also ASEAN, the Southeast Asian cooperative group, which again has considerable overlap. So there are all these different structures for setting up finance. Many of these countries are moving towards conducting bilateral trade in their own native currencies.

Which is really how it should be, isn’t it? It just makes sense.

Yes, indeed. It does make sense. My own view remains that this is a stepping stone towards a single world currency calibrated in gold. It’s no accident that central banks everywhere are holding more and more of their reserves in gold, even as they downplay its significance.

Moving their gold back home, too.

Yes. The whole point is this. Say you have Indonesia trading with South Africa. The South African side obviously prices its goods in South African currency, and the Indonesian side will price in theirs. They need to agree on an exchange rate to do that. That will increasingly be defined by calibrating each currency in gold.

On the face of it, using the dollar system simplifies the process, because everything is priced in dollars and everyone knows that. However, in that example, the South Africans would still have to deal with how their currency fluctuates against the dollar. The Indonesians would also have to deal with how their currency fluctuates against the dollar. Take the dollar out of the equation, and they only have each other to deal with. They’d have some kind of reference, which would increasingly be defined in gold.

As I say, I see this as a move that may take several decades. Eventually, people will forget individual currencies and define value in milligrams of gold or something similar. Over time, we’ll see a move toward transparent, sound banking arrangements. Finally, of course, the Chinese have set up the CIPS payment system. I definitely see it supplanting the dollar-based SWIFT system over the coming years. I could see this happening much faster than many people expect.

It sounds to me like things might get worse before they get better, though.

There’s every chance of that. In the meantime, we’ve had flare-ups of open hostilities between the US and Iran. The US bombed Kharg Island, and Iran responded by striking American-based tankers and merchant vessels. The Americans then attacked three Iranian vessels: two tankers and a freighter. This is likely to carry on. Meanwhile, there’s no sign of normal traffic returning through the Strait of Hormuz.

Shortages of petroleum products, fertiliser, sulphur and helium will become increasingly pressing, probably within as little as the next month. It’s difficult to see how this can reach any useful conclusion ahead of the American elections in November. It’s also hard to see how Trump will survive if the Democrats take control of both the House and the Senate. At the moment, that seems likely. Of course, the Democrats are in many ways just as bad as the Republicans. Much of the pressure they bring to bear will be political manoeuvring rather than moves towards a more workable world. Either way, it’s yet more instability.

Finally, we’ve had yet another attempted round of negotiations with Witkoff and Kushner. First they went to Moscow and met Putin. The details haven’t been published, but it’s fairly common opinion that Putin laid out an ultimatum. Peace can only be negotiated immediately if Ukraine pulls back from the remaining parts of the Donbas where it still operates. Witkoff and Kushner then travelled from there to Kyiv to put this to the Ukrainian side. It looks very much as though it has been entirely rejected.

So we’ll see the fighting continue, and events will once again be decided on the battlefield. At least, that’s how it looks as we record this on 7 September.

Okay. I guess it’s a case of watch this space.

That will do for a summary this week. It will be interesting to see how it stands the test of time.

Yes, but we’re consistently talking about themes that reinforce themselves over time. I don’t think we’ve been too far off the mark so far.

Yes. Everybody realises that the United States dollar’s central place in the global financial system has its days numbered. I personally think it could all unravel far more rapidly than many people project. That’s because the interlocking and self-reinforcing feedback loops are intensifying.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts and support my work.

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 goods or services you’re supplying, that gives you what’s called the gross profit. Then you take out the overheads or expenses, and that leaves you with a net profit, hopefully.

The way these all tie together: in the case of the profit and loss account, the gross profit is what you’re left with. You could distribute that to the owners of the business, or to yourself if you’re running it alone, as extra income. If you’re spreading it among shareholders or co-owners of the business, it’s called a dividend, because the total is divided up between the shareholders in proportion to the share of the business they own.

What’s left is what has affected the balance sheet, which, if it’s a healthy business, will be steadily increasing. At the very minimum, it will replace what needs to be replaced due to repairs, or be written off as it wears out and is replaced by newer equipment.

When we look at this from the point of view of an entire nation, the measure we’re always asked to look at is the gross national product. We’ve highlighted several reasons in the past why this isn’t necessarily the best measure of human wellbeing. This includes the fact that things which aren’t cash transactions don’t really appear in it. Some of the most important things in life might not involve a cash transaction at all.

Like childcare, for instance.

Also, spending to clean up the mess made in the course of whatever else you’ve been doing is treated as a positive rather than a negative.

The most important thing is that it’s not actually a measure of wealth, because it’s really a cash flow statement, a cash flow statement for the nation as a whole. Therefore, churning faster and faster by replacing things with shorter and shorter lifespans increases GDP.

But it doesn’t increase wellbeing. It’s blindingly obvious once you say it, but it’s almost impossible to engage in the public debate without GDP being taken for granted as an all-encompassing measure of wellbeing.

This is particularly important right now. There’s chaos going on in the Middle East, or Western Asia, as we’re now slowly learning to call it. Around the Gulf of Hormuz, the main fossil fuel and gas supplies are being restricted in their shipments to the rest of the world. Not to mention various other things like fertiliser, helium, and sulphur, used to make sulphuric acid, which is important in a huge number of industrial processes.

Where this is being restricted, we’re still in a slightly unreal situation. The full effects of this haven’t hit us yet, at least not in Europe, the US, and Britain, but any moment now they will. A lot of commentators are saying this is going to cause a recession, or maybe it should be called a depression, and they argue about the definitions of these terms.

Nearly all the definitions they come up with for what a depression or a recession is, or the difference between the two, talk about reductions in GDP. They’re talking about actual reductions in cash flow. They’re not actually talking about reductions in anybody’s balance sheet.

Or reductions in wellbeing.

That’s worth bearing in mind. It’s also worth bearing in mind as we make our plans for dealing with the likely events over the next weeks and months, as we record this on 21st August 2026.

Do any thoughts come up for you out of this conversation, Rob?

I’ve come to believe that GDP, gross domestic product, is really just a measure of how much of the natural world has been appropriated by the industrial system; how good a job it’s doing of converting common goods into private goods. We all know that the beneficiaries of private goods tend to be just a small subset of humanity, the so-called “elites”. Yes, GDP is used as the single primary metric, but for our discussions we want to look much more widely and consider true wealth, not just how much plastic has been manufactured today.

The other thought I had, as you were talking, was that we tend to think about things like balance sheets, profit and loss, and cash flow statements as relating to a business. If you’ve done a business degree or anything like that, that’s how it gets taught: in the context of a business.

What we’re saying is that these principles hold at an individual level too. They’re actually simpler at an individual level, because you’re not going to have the same range of complexities in your personal life. It’s simpler to measure these things; it’s more a case of actually doing the measurement. It’s maybe more important at a personal level, because surely the point of business is to take money off the table and into your personal estate or domain. It’s not to leave it in the business forever. The business is just a means of trading. So I’d maybe pay more attention to the personal level, of the different levels we’ve discussed.

Yes, there’s just one other thing I wanted to say today. It relates to this.

Build and Support Genuine Enterprises

How do you tell the difference between a genuine enterprise and a Ponzi scheme? A Ponzi scheme is something which pretends to be a business and isn’t. There are various forms, but in essence they’re all the same. The money taken in from investors, promising them a big return, is actually used to pay out previous investors. This gives them the impression that they have a healthy business.

That’s obviously entirely different, and relates back to what we said in a recent episode about the role of energy in producing wealth. Wealth is something people want, and we suggested energy is always involved, in some way or another, in creating that wealth, whatever form it takes. Creating wealth always involves a reduction in entropy.

In the case of a carpenter taking some lumber and turning it into a table, the table is obviously more ordered, so it has reduced the entropy. If you put iron ore, limestone, and coke into a blast furnace, and iron comes out of it, the iron is a lower-entropy form, a more ordered form, than the iron ore that went in.

The question to ask, when looking at any activity or operation, is: what wealth is being created? Where is the reduction in entropy, and is that reduction correlated with any useful, desirable results? The more we look around through that particular filter, the more we see that a lot of activity in the world, even if it’s not quite as blatantly fraudulent as the classic Ponzi scheme, may well be entirely unproductive in terms of increasing our affluence and well-being.

The enterprises and work that truly matter will stand the test of time. Things that are just moving money around a pyramid scheme ultimately implode.

Yes, indeed.

Thanks for reading Sovereign Finance! Subscribe for free to receive new post.

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 declaring a ten per cent dividend, they declared a five per cent dividend, they’d have another five per cent to reinvest in expanding the business. Either way, as a part owner, you’d get the benefit of that profit, whether distributed to you or ploughed back into the business.

Alternatively, they could invest all ten per cent in expansion. Tech start-ups often have massive room for expansion and scope for increasing turnover, so they’re happy to reinvest everything and pay no dividend at all. People are content to hold those shares in expectation of steady appreciation over time.

This has become completely out of proportion. The historical price-to-earnings ratio in a stable environment has typically been twelve or fourteen times the profits an enterprise makes over a year, assuming those profits stay reasonably steady or rise modestly.

If you think a company will do fantastically well next year, you’d be prepared to pay a higher price on the expectation of those earnings. But many companies at the moment, especially tech companies, are trading at ridiculous multiples of their current profit. Unless those future profits realise that expectation, there will be a price correction. This particularly applies to what may be the latest overhyped bubble: the artificial intelligence enterprises.

This also happened in the dot-com crash….

Exactly that. People expected that simply operating a business on the internet, when that was a novelty, would automatically bring stratospheric returns. In a very small number of cases they did, but in the great majority they didn’t. That was so extreme that a lot of those valuations went to nothing.

Just on the price-to-earnings ratio, it probably doesn’t help that a lot of the financial trades happening every day are speculative. That also drives the price higher if people are speculating it will go up.

All that speculation will reverse if expectations change. The other thing I’d like to say about bonds is that typically there isn’t the same expectation of capital appreciation. In a period of high interest rates, that depresses the price of bonds already in the market, so they trade at a lower rate.

There was a really extreme example when I was doing investment analysis for a stockbroking firm, around 1969 to 1971. This was a time of really high inflation. There were significant undated British bonds, issued in the heyday of the British Empire, when people were happy to purchase government debt with no redemption date at all.

These were regarded as the safest of all safe investments, because it was considered that the British Empire would go on forever, and the value of the British currency would remain stable forever. Neither of those came about. These undated British bonds typically carried an interest rate of either two and a half or three and a half per cent.

If the government was trying to raise funds from a new issue in 1970, they’d have had to offer about fifteen per cent interest to attract buyers. That meant if you were holding historic bonds paying two and a half per cent, you could only sell them for about £16 per £100 block.

For the money you invested, you’d still be getting roughly the fifteen per cent prevailing rate needed to cover the expected loss in the value of the pound by the time you sold those bonds.

So you’d need more bonds to create the same outcome.

Yes, you’d need six times as many in that case. The people who were buying them in 1970, at £16 per hundred nominal, did much better than the people who were selling them, because they’d been getting fifteen per cent on their money ever since. That continued right up until about ten years ago. Then the British government, in another piece of classic short-sightedness, thought: why are we paying 2.5% on all these undated British bonds? They sold them and reissued new bonds at 2%, or 1.75%; whatever the going rate was during the quantitative easing period.

That was when central banks were creating money out of thin air to paper over the cracks of the global financial meltdown. Now we’re back up to probably twice that rate, and it would have been far more sensible to hang on to those undated bonds.

What I wanted to illustrate is the reverse calculation between bond valuation and the prevailing interest rate. Those 2.5% per cent bonds, at a time when the prevailing rate is five per cent, are only worth £50 per £100 block nominal.

It goes the other way too. If the prevailing interest rate falls to 2%, that’s only possible when new money is flooding into the system, as happened between 2008 and 2010. In that case, the 2.5% bonds would rise to a £120 per £100 block. That’s the inverse relation.

These days, with interest rates fluctuating wildly, bonds are no longer the safe, predictable, uncontroversial investment they once were. That pretty much covers what I wanted to say on this episode. Anything arising out of that for you, Rob?

Just a question. Obviously a lot of money has been “printed”, or created, since the Covid pandemic. We had all the furlough payments, all the bounce-back loans. That was money magicked up from nowhere, so a lot of money has been added to the system. Has that made this situation with bonds worse?

This is why we’re now running into the perfect storm, particularly with the highly leveraged government economies in the United States, in Britain, and in most European countries. Government indebtedness there is well over 100% of the country’s current gross domestic product.

Which is mad when you think about it.

Utterly mad. Bonds that are expiring at lower rates of interest can only be refinanced at far higher ones now. That’s one of the factors feeding into a destructive feedback loop, which is going to bring a bigger financial cataclysm for the Western world than has ever happened so far in history.

It’s like the game of musical chairs, isn’t it? You have to keep the music playing, keep the money-creation machine going. Otherwise there’s nowhere to sit.

Yes, indeed. And the music could stop any day now.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

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.

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 at the beginning. There’s a certain amount of energy by virtue of the glass’s height above the floor in the gravitational field. When it’s knocked off, it falls, moving faster and faster, converting what’s called potential energy into kinetic energy, the energy of motion.

When it hits the floor, it shatters, the pieces skitter around, and come to a standstill. So what happened to that kinetic energy? Initially it was converted into the work of breaking apart the solid structure of the glass — it took energy to wrench apart the bonding between the molecules holding it into shape. Some was converted into the energy of the pieces skittering across the floor, which came to a standstill through friction, heating them up. By the time the fragments had stopped moving, most of that energy had become heat.

The energy represented by the glass’s height and weight could have done some useful work. In a grandfather clock, for instance, you wind the weights up so they’re at the top of the column, and throughout the next day they gradually fall and operate the clock’s mechanism. In that example, the process didn’t do anything useful; it just accelerated the glass, which then came to an abrupt halt and was turned into heat. We all intuitively know that.

The other thing is that we all remember the past, and have no capacity to remember the future. That’s actually part of the same process, because in order to store information — we don’t know exactly how; it’s still a mystery. No neuroscientist alive really knows the mechanism of memory in human beings. But we do have a reasonable idea how memory is stored in a computer. It takes electrical energy to organise the structure of electrons, or the magnetic domains, which represent the storage of memory on your computer.

Because that’s an energetic process, it involves a conversion of energy, and some heat. We all know, to a greater or lesser extent, that our computers use up electricity and give out heat. That heat represents the offsetting of the decrease in entropy achieved by ordering the bytes of information in your computer’s memory or disk drive.

That comes back to what you were saying about living organisms apparently flowing against this flow of gradual disorganisation. Look at an egg going through its propagation process, a chick evolving inside the shell. The initial structure of the white and yolk was pretty amorphous, and the chick is a highly structured object with clear functionality and intentionality.

That appears to go against the flow, which is one of the reasons it was suggested in the past that there’s some kind of vital force, because it seems to contradict that obvious process we’re all aware of. In fact, all living organisms need the energy that comes in from their food — in this instance, already encapsulated in the egg. That food, as we illustrated earlier, ultimately comes from the input of sunshine.

The energy in the food is consumed in the metabolic processes which build and maintain the structures of living organisms. A certain proportion goes to that useful work, and a certain amount is dissipated as low-grade heat. Low-grade heat is the ultimate sink of energy, and so we have this flow.

According to the second law of thermodynamics, entropy always increases within any closed system. Living organisms are not closed systems because they take in energy and matter from their food. The Earth is not a closed system either; it continually receives high-quality energy from the sun’s radiation, and loses the same amount every day, dissipating low-frequency radiation into deep space from the dark side each night.

If it wasn’t losing energy at the same rate it was receiving it, the Earth would be getting hotter and hotter. That’s one of the challenges we’re facing at the moment, and one of the things there’s a big debate about, despite the core facts being pretty unassailable. Whatever the mix of reasons, the composition of the atmosphere has been changing over recent decades and centuries, and we’re not losing heat quite as rapidly as we’re receiving it. So the atmosphere is warming up, with consequences, many of which aren’t too healthy for us.

The final thing I’ll say is this: I’d like you to contemplate the suggestion that in all creation of wealth, there is actually a reduction of entropy. Some kind of order is always created. Take the example of the carpenter making a table. The carpenter does his physical work, or his work with power tools, to shape the wood, fix it together, and assemble it into something which clearly has more order, more structure, than the timber he started with.

Or even just creating this podcast episode, and then creating the book we’ll produce from this series of episodes. That’s the same process at work.

Exactly so. If you write a poem, a novel, or a computer program, it takes energy for your fingers to operate the keyboard, energy for the computer to turn the keystrokes into whatever encoding of characters that is, and energy to store those characters in the computer’s memory and transfer them to more permanent storage on your disk. All of that energy is consumed, reducing the entropy, going against the essential flow of the second law, and creating waste heat to offset that so the total entropy of the entire process is increasing and the second law isn’t violated. But without a source of high-quality energy flowing into the system one way or another, none of this could happen.

You can’t do good work without good energy. Empty sacks don’t stand up, as my Dad says!

Absolutely.

Just to tie this back to what we were saying at the start about what wealth creation is — all wealth creation will, in some capacity, create order out of chaos. Adding zeros to a bank account is not real wealth creation: that’s just stealing everyone’s value. As you were talking I was also thinking about Nassim Nicholas Taleb’s book, Antifragile, where he says that, in comparison to the glass you might drop from a height that shatters on the floor, living things, which are open systems to a degree, can bounce, can learn, and can become stronger.

Yes, and can take action to land less destructively.

So I guess actions for people to think about are in the work, because we’re all doing work all day. It doesn’t have to be dirty work, as I alluded to at the start; it can provide value and service. It’s about being a bit more conscious of it, and figuring out how we can do the best, most useful work possible in our time here.

Absolutely.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

Rob’s comments below are in italics.Derek’s comments below are in normal font.

Wealth is one of those terms we all think we know. When you dig into it, it’s quite hard to pin down, isn’t it? Or we just equate it to “money in the bank”. Maybe there’s a slightly wider perspective on it as well.

Yes, I thought we’d start by examining that question, because it’s something we take for granted.

When we were talking about what is money, one of the main aspects we discussed was that money is a claim on wealth. So right away, that indicates that money and wealth are two distinct things. If money is a claim on wealth, it can’t actually be wealth itself.

We tend to think of wealthy people as having lots of money. When we talk about the statistics of Bill Gates or Jeff Bezos or Warren Buffett, their wealth is actually stated in terms of an amount of money, and very often they probably haven’t got any actual money at all; it’s all in other assets. Interestingly, most of the expenditure that the ultra-rich have is not done by cashing in their other forms of wealth, because that would dilute what they own. That’s the real bedrock of it.

What they do instead is borrow against that wealth at extremely low interest rates, compared with what’s available to the rest of us. They spend that, and eventually, when they die and their estate is settled, some of those assets will be realised and it will repay the loans. It’s partly one of the reasons why they very often pay almost no tax at all, because on the face of it their income is close to zero. The income that derives from their wealth, usually in the form of shareholdings in their enterprises, or real estate or land, along with all the rents from that, goes into trust funds rather than being paid to them directly. That would have been the straightforward way of doing it, which would have incurred enormous income tax bills.

Wealth is Things People Want

So if money is a claim on wealth, wealth is the actual thing itself. I’ve just mentioned two or three examples of the kind of things we think of once we step back a bit: shareholdings, large holdings of treasury bonds, houses, apartment blocks or farms. But I’d like to look at it in the broadest, simplest terms possible. I’d like to make this suggestion: wealth is things people want. How does that seem to you, Rob?

Yes, because the value is only in the eye of the beholder, surely?

Exactly. Which of course raises the question, what sort of things do people want? It also flags up the fact that wealth doesn’t actually need to be anything permanent. It could be something semi-permanent like furniture and appliances. It could be something pretty permanent like farmland or houses. Or it could be something entirely transient, like a holiday or a meal out at a restaurant.

I’ve been thinking it could be something personal. As this is the Sovereign Finance show, if you don’t have the time and space to be sovereign, you aren’t really wealthy. If you never have time to do school run, or have time for a nice homemade meal with your spouse, are you wealthy? So there’s a lifestyle element to it as well.

Yes, and that is indicated really by the etymology of the word. Wealth comes from the same root as whole, heal and hail, from which we get words like health and well-being. Wealth in a way is the abstract noun from the word well, just as health is the abstract word from the verb heal. They’ve clearly got very similar roots in language. Wealth, as it’s generally used in everyday language, has drifted a long way from that.

A good starting point for answering the question of what people want is to look at Maslow’s hierarchy of human needs. In the original version he created in the 1950s, at the base level we have our physiological needs: our need for air, water, food, clothing and shelter. At the base level you have non-negotiable physiological needs, things you’re not going to survive without.

Image credit: User:Factoryjoe, CC BY-SA 3.0, via Wikimedia Commons

Once they’re taken care of, the next level is the need for safety and security. It’s pretty compelling if you’re living in fear of what other people are going to do to you, or whether wild animals are going to break in and eat you in the night.

Above that are the social needs: the need for love, affinity and companionship. Above that, he suggested there’s a need for esteem, both the need for self-esteem and the need for respect from others. At the top of his original formulation, he put self-actualisation. In its broadest terms, that’s what we eventually settle on and decide for ourselves are the things that matter. It might be creativity, travel and new experiences, or artistic expression.

It’s making your life the fullest expression of you, and doing that from a position of strong self-understanding.

Yes. There’s another element he added in a later revision a decade or two on, where he put something called transcendence at the top.

Image credit: U3199117, CC BY-SA 4.0, via Wikimedia Commons

The way he characterised that is the very highest and most exclusive levels of human consciousness: behaving and relating as ends rather than means, to oneself, to significant others, to human beings in general, to other species, to nature and the cosmos. You might regard that as the focus of what’s generally regarded as religious or spiritual.

That’s an important point, because it’s something that’s been in abeyance over the most recent modern period, when people have generally become more atheistic and materialistic. Even where they’ve been overtly religious, they probably haven’t had that empathy with other people, or, in a lot of cases, the sense of awe at the cosmos and the wonder of the whole thing. If we’re ever going to make our way through the chaos of the current era, a renaissance of recognition of that aspect of human life is going to be important.

Yes, it’s having a sense of wonder as well, isn’t it? A sense that we don’t actually have all the answers. Although I wonder if the pendulum is swinging back in that regard.

I have no doubt about it. The only question is whether it’s going to swing back fast enough and comprehensively enough to avert the obvious disasters we appear to be facing at the moment. All we’ve got is this moment now, and there’s no point getting unduly depressed about things which haven’t happened yet.

But one point that’s been made to me by various people, particularly some with Buddhist backgrounds or other spiritual perspectives, is that maybe I’ve got that upside down, and maybe transcendence comes first. I’ve thought about that, and there’s quite a lot in it. But what I’d say is that it can’t come quite first. We still need to address the physiological needs, because if you haven’t got food, water or air, you won’t be reaching enlightenment.

You need bread on the table first and foremost. It’s back to the aeroplane analogy: you put your own mask on first, and then you put someone else’s mask on. You don’t go around putting everyone else’s mask on.

Absolutely. So it’s a useful thing to reflect on. Suppose we had our physiological needs and our needs for safety and security taken care of. Suppose we had, as a next priority, the drive for transcendence. Then possibly all of the other things further up the pyramid would come much more easily and naturally.

Another thing worth contemplating, if we look at wealth this way, is that unless you’re in a position where you can entirely grow your own food, you do need some money for the transactions to get your food, a roof over your head and your clothes. You may or may not personally need money to buy yourself safety, given that there are bad actors around and we need police services of some sort, which have to be paid for. In the society we live in, that’s managed through the distribution of money.

But if you look at those other levels, the social needs, the needs for love and affinity, the needs to express yourself creatively, you could go a long way with many of those without money coming into the picture at all. This is something we build on as we look at alternative lifestyles, at creating a life on your own terms.

We covered this a bit last time as well, where if you’re dealing more with people at a community level, you maybe don’t need as much money, because you can barter more.

Or you can just do it out of reciprocity.

You can do it out of reciprocity. You can put it into the network and then take it out of the network when you need to as well.

Yes, and I don’t want to be a boring old fart about it, but I’d say that over the course of my lifetime there’s been a distinct decline in that. For instance, I was a diving coach for fourteen years, and I did that entirely as an amateur. I didn’t even expect to have expenses paid by anybody else for travelling around and getting whatever kit I needed. That was fairly common. These days, more and more, even with children’s sports, it’s increasingly expected that somebody who coaches will be financially reimbursed, and that the sports people or their parents will hand over money for it. Whereas in the past, it was taken for granted that people would do that as a form of self-expression, if you like, and as a form of contribution.

People do want to do it though. You do it for a love of the activity or for a love of the people involved. But if things are so tight that you don’t have the space to do that, sometimes people simply can’t.

I was thinking as well, as you were talking, about the schools my kids go to and the PTA groups, the parent-teacher associations. They’re all staffed by volunteers, all people volunteering just for the love of their kids. So there are plenty of examples.

Yes, I’m not saying it’s gone entirely. I’m just saying there’s been a drift away from people being prepared to help out on a voluntary level.

I wonder if it’s come back a little bit since all the lockdowns?

It may well have. Let’s hope so. Let’s hope it’s one or two things came out of that time.

Capital

Finally, there’s this term capital, and I’d like to reflect on what it means. Once again, as the word is generally used, one thinks of it as more or less synonymous with money. Whereas if you’ve got money purely as money, it’s not doing anything until you actually exchange it for something of value. If you exchange your money for capital, what is that? I’d say capital is a specific type of wealth. Capital is wealth which has the capacity to create more wealth.

Farmland would be the historic example of that. If you have farmland, you can grow crops on it and graze animals on it, and from that you create wealth in the form of food. In ancient cultures, you’d have things like windmills or water mills, facilities where people bring grain and turn it into flour, which is more useful, so that’s an increase in wealth. You might have a blacksmith’s forge, where horseshoes, tools and implements can be made.

Work is going into all of these things to increase that wealth as well.

That’s something we’ll be discussing in more detail. In all of those, you’ll note that energy is involved. In every case, you’re going to have some form of human labour involved, some form of human activity. That’s a performance of work. It requires energy. Energy is the capacity to do work, and in the case of wind or water mills, you’re harnessing wind, which ultimately derives from the sun. The wind blows because the sun heats parts of the atmosphere differentially, which creates pressure differences and air movements. If we were remote from a star and not receiving that radiation, there would be no wind.

Similarly, there’d be no evaporation from the oceans into the air to form clouds, which then precipitate as rain, gather into streams and rivers, and run downhill to turn the water wheels. All of that derives from the sun. It’s worth reflecting on that, and on what it is about the energy coming into the equation that results in wealth being created. But we also need, in a lot of cases, some kind of tool to do it at all, or a tool to make it more efficient.

So there’s a certain amount of work done in any creation of wealth. As I say, we’ll look in more detail into the role that energy plays in the creation of wealth. That obviously opens up a whole lot of issues which are entirely typical at the moment, bearing in mind that the major sources of energy we’ve been accustomed to using for the last three centuries are now becoming a lot more contentious, to say the least.

Any loose ends you see that we should tidy up?

Yes, I’ve been thinking that wealth, to me, feels like a capacity for future value creation, where value is in the eye of the beholder, not in your eye. I also think wealth is transient. We come into the world with nothing, and we leave the world with nothing. That’s true for you and me, and it’s true for the billionaires and trillionaires. So maybe we overstate the importance of the cash in the bank, whatever it is right now. We should view it as a transient thing, one with a flow element to it. It’s like the tide: wealth comes in, wealth goes out. That’s almost like a natural state of the universe, maybe.

Good. Okay, thanks for that. We’ll leave this one here.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

Rob’s comments below are in italics.Derek’s comments below are in normal font.

As we said last time, over the next series of episodes, we’ll discuss chapters from our forthcoming book, Unravelling the Money Puzzle. The first chapter is “What’s in it for you?” So why would you bother?

What’s In It For You?

Why would you bother with this? Essentially, we’re all pitched into life in the society we live in. Money is pretty much essential. Robert Anton Wilson once described it as bio survival tickets. Clearly, if you want a roof over your head and food on the table, you need to have money to do that in the society we live in.

I like that. I’ve learned since I’ve got older that there isn’t actually that much difference between monopoly money and real money.

Well, this is one of the things we’ll cover in the next section, where we look at the issue of what money is. Essentially, we’re not given any formal education on it at all. Whatever we learned, we learned from our parents, and for most of us, we didn’t have any formal lessons from them about it. We picked it up in between, out of the implications of what was going on around us.

Or, in my case, I ignored everything my dad tried to pass on to me and had to learn it all the hard way instead.

That’s a pretty common experience. Certainly, I don’t remember any lessons on it in school. The only time I can remember it being discussed at all was when one of our teachers remarked in passing that the pound note, as we had it in those days before they went over to pound coins, actually still said, “I promise to pay the bearer on demand the sum of one pound in gold,” over the signature of the Governor of the Bank of England. The teacher said, well, actually, that’s not true these days. The reason it wasn’t true is that they suspended the convertibility of pound notes into gold in 1933, when they finally threw in the sponge on pretending that the First World War hadn’t destroyed a lot of value in the country. A pound was no longer worth what it had been. But that’s another story.

Anyway, one of the boys asked, well, in that case, why is it worth a pound? Which was a very sensible question. The teacher replied, “Well, if you’re not sure about that, you can always give me any that you’ve got.”

Which was typical of that particular teacher, totally missed the chance for what could have been a very constructive and informative discussion around that. At the time, I just thought it was a preposterous brush-off. I suppose you could take the view that he was subtly getting the point across that it’s because we all believe it’s worth a pound, and that somebody’s going to give us a pound’s worth of goods, whatever that might be.

It’s a shared story that if we stop believing it, it collapses tomorrow.

So we come out into life, and most people’s experience is that it’s a constant juggling act. We feel we’ve done all right if we get through the month without having got worse off. Of course, a lot of people in the present day, in pretty much all of the developed economies, are actually finding that they’re not getting wealthier; they’re getting less wealthy.

Just to go back a few steps, why was gold used in the first place? Gold has been used across the ages. Is it just because it’s a scarce, finite resource?

Well, it’s a scarce, finite resource. It’s incorruptible in the sense that it doesn’t corrode, rust or tarnish. That’s what makes it attractive. It’s been known since antiquity how to ascertain its purity, and it’s what they call fungible, meaning that one lump of gold is exactly like any other.

We tokenise it because it’s quite inconvenient to carry lumps of gold around.

Well, this is getting on to the topic of the next chapter. At the moment, we’re just saying why this is important to you. It’s basically important to you because, plainly, some people have a flair or expertise for accumulating it, and most of us don’t. This makes me feel that it probably suits the people who have that flair, that expertise and possibly that obsession, that the rest of us are not so well informed. It makes it easier for them to take advantage of us. I don’t think I’m being paranoid when I say that, or even if I am, it doesn’t necessarily mean I’m mistaken.

Just because you’re paranoid doesn’t mean they’re not out to get you.

Exactly. I’m just running through the notes I made about the points. We’re covering them pretty rapidly.

Another impression most of us have is that it’s very difficult and complicated. In the course of the investigations we’re going to be sharing, it will come across that it’s almost embarrassingly simple in a lot of ways. The things you really need to know don’t require much sophistication or exceptional mental powers to grasp. When they’re brought out into the open and examined, they’re very easy to grasp, and once you’ve grasped and internalised them, that will empower you going forward. So that’s what we’re up to with this educational project. What you’ll get from following this through to the end is that you’ll become confident, relaxed and effective in dealing with your finances, which very few people would say, in all honesty, that they are at the moment. You’ll get the clarity to avoid being taken advantage of, and you’ll probably be quite angry when you see some of the ways you have been being taken advantage of. You’ll get clarity on how to build prosperity over the course of a lifetime. So that’s what’s in it for you from following it.

What Money Actually Is

Now I’ll go on to the next section, taking a look at what money actually is. Before I do that, are there any other points you want to raise, or any other questions you want to ask, Rob?

No, just to say that I think there was a hole in my education. I think we have to unlearn certain mental habits around it as well. It’s not just about learning; it’s about unlearning some unhelpful thought patterns around this too.

So the next section will address the question: what is money? It used to be a bit more obvious what the answer to this question might be than it is now. At the time I was growing up, which seems increasingly like ancient history, money for the most part was something completely tangible. It was coins and notes. There were one-pound notes, ten-shilling notes and five-pound notes. The ten-shilling note is worth fifty pence in today’s currency.

Slowly, we picked up on the fact that money could be balances in a bank. We thought of the bank as a big storeroom where the money was kept in a safe place. There were lots of banks up and down every main street in every town, and people were going in all day long, either depositing money or withdrawing it. So it was quite easy to look at it just as though it was a kind of storeroom.

Like a big piggy bank.

Yeah, whereas now increasingly it’s something entirely abstract, it’s figures on a screen. There’s been this huge push over the last five or six years, particularly to steer us all away from tangible forms of money and toward intangible ones, on the grounds that they’re more convenient. Of course, it’s convenient until it isn’t - when the system breaks down or when you become a victim. This has been happening quite a lot, in terms of people who felt to be troublesome to the ruling elites in some way or another being debanked. There’s absolutely nothing they can do about it, because it’s an extra-legal procedure. A number of people are grappling with court cases over this, and in the meantime, it’s almost impossible to function normally in the society we have.

I think Nigel Farage had one of his accounts closed, didn’t he? Although he’s clearly back in line with the establishment narrative because he’s back in the fold now.

He did. I don’t have a great deal of sympathy for him, but I don’t think it should happen to anybody.

The Canadian truckers’ protest was the other thing that came to mind.

Exactly.

Anyway, what is money, in essence? I’ll start with the classic definitions, and then we’ll see how this works out.

1. A Medium of Exchange

First and foremost, money is regarded as a medium of exchange. Now, what does that mean? The typical way it’s explained is that, in primitive societies, people operated by barter. Somebody would take goods they had produced or otherwise acquired and swap them for other goods, which is obviously very cumbersome.

There’s considerable doubt over that narrative as a literal historical sequence. Part of the confusion comes from the degree of obsession we have these days with money, and the degree of obsession we have with looking after our own individual interests over and above others. In very primitive societies, much of what went on was much more like a gift economy.

It was the local community as well. It’s not like you were buying from someone in a different country.

Yeah, or someone you’d never met before and never expected to meet again. But people were much less rigorous about making sure they covered their own interests. They were much more prepared to just be generous, providing something to their neighbours and fellow villagers, and expecting that when the boot was on the other foot, they’d be taken care of. It was very common throughout the world, in all sorts of cultures.

All the Scottish clans used to do that, didn’t they? This principle of hospitality.

Yes indeed. So, what does it mean, a “medium of exchange?”

Suppose a farmer wants a table, and the carpenter thinks the table is worth three bags of wheat. If they were operating on a strict barter system, they’d do a straight swap, and chances are the carpenter doesn’t want three bags of wheat. So a convention arises in the village, in which some system of tokens is brought into play. It could be anything - let’s say they agree to use seashells to keep track of things. They all agree that ten seashells are worth a bag of wheat. The farmer could find three people who each want a bag of wheat, give them a bag of wheat, get ten seashells from them, and then take his thirty seashells to the carpenter. The carpenter gives him the table, and then he’s got the thirty seashells and can swap them for whatever he wants. He could take five of them to the butcher and get a joint of meat for his Sunday lunch. He could take one seashell to the candlemaker and get a box of candles, and so on.

The interesting thing about looking at the story that way is that you see, where there’s a transaction, contrary to the assumption widely made these days that the seller is the winner because they’ve got the money, when you look at it from the perspective of this story, clearly it’s the farmer who’s the winner, because he wanted a table and now he’s got the table. The carpenter’s only got his thirty seashells, which, until he actually exchanges them for something he wants, leaves him down in terms of tangible assets.

2. A Store of Value

This brings us to the second traditional use of money, which is as a store of value. This means the farmer doesn’t have to cash in his seashells immediately. He can keep some of them as a buffer for a rainy day, so he can purchase something later.

Humans have been doing this ever since we switched from hunter-gatherer societies to agricultural societies.

3. A Unit of Account

And the third use of money, according to the traditional definition, is that it’s a unit of account. Now what does that mean?

Let’s say it’s May, and the farmer wants some horseshoes, and four horseshoes are worth a bag of wheat. But he hasn’t got a bag of wheat, because the harvest isn’t until August, and he’ll have the bag of wheat after he’s carried out the harvest. So he can say to the blacksmith, okay, we can make a note of the fact that I owe you one bag of wheat, and I will pay you that in August. That’s obviously related to the store of value, but it’s, if you like, a time shift from the future to the present.

It’s a consistent measure, isn’t it?

Yeah, and incidentally, having got to this point, I’d say the most common form of currency over the past 5,000 years has in fact been grain of one sort or another - wheat, corn or rice. That’s why all the Lords of the Manor had tithe barns, and the peasant farmers brought in their yearly taxes or rent - however you want to describe it, it comes to the same thing - and they paid those taxes or rents in the form of grain. That was not because the Lord of the Manor wanted to eat all the grain himself - plainly he couldn’t do that - but he would obviously consume some of it, and he used some of it for paying his retainers and his suppliers. That was the primary form of money for most of the time. The interesting thing about that is that it loses its value over time. The intention is that it will last you round till the next harvest, but you don’t expect it to -

So as a store of value, it fails.

In Summary

Yeah. So in summary, money is a system of tokens which represent a claim on wealth, which raises the question: what is wealth? Perhaps we can all think about that until we get to the next section next week, and then we can examine it in more detail and go on from there.

So, just to recap on some of the things we talked about. Seashells, for instance, are a good medium of exchange, a poor store of value, and not a great unit of measure - because, do you find a bigger seashell than another one? There’s no standardisation there. So that’s probably a good thing to remember.

One shell might not be the same as another. Yeah, and so - although for day-to-day transactions in a lot of village societies over the past few millennia, grain would have been used - obviously for larger purchases people would have used precious metals. Of course, the metals known to antiquity were gold, silver and copper, which is why our entire token money today is split up into those denominations. Gold was rarer and less subject to corrosion - in fact, to all intents and purposes not subject to it at all - than silver and copper, which were more common and more ready to tarnish.

Yeah, and it sounds like some of these earlier forms were more decentralised, in terms of not having a single central provider. It sounds to me like rulers throughout the ages have sought to control the money supply because, if you control the money supply, you control the people.

Yeah. These are all topics which will become clearer as we look at different aspects of this investigation as time goes on.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.