We Need To Talk About China

Ah, China. And Chinese economics... I have been obsessed with China, and in particular its uniquely lunatic economy, for the past few years. Why? Because Chinese economic policy has been the biggest elephant in the global economic livingroom since 1989, lumbering around breaking things while the West says "Elephant? I don't see any elephant. Owch, my foot."

A charming and self-explanatory graph, courtesy of The Daily Reckoning, Australia

I’ve come up with, and abandoned, half a dozen plots for satirical stories about the Chinese economy, I’ve written draft after draft of a satirical BBC radio play about the Chinese economy, I’ve read and researched obsessively on the subject. And, every year or so, for the past five years, I have opened up a new file in Scrivener, and started, with furious energy, to write an over-long and over-complicated blog post about China, and how its mysteriously placid economic surface masks a series of catastrophic Communist Party decisions, over the past thirty years, which will lead at some point to China’s implosion, economically and socially… Each time, the post becomes book-length, and I abandon it… Well, here we go again.

Here’s my take on China, boiled down.

In 1989, the Berlin Wall fell; democratic protests swept China; and the Party panicked. They murdered unarmed protesters across the country (including the students in Tiananmen Square), arrested four million people across the country in the following weeks, and then tried to pretend nothing had happened.

Party leaders were determined that China would not collapse like Soviet Russia. So they abandoned Soviet-style economics, and built a gigantic new national financial system, modelled loosely on the Western financial system; but with the state performing every function. As Carl E. Walter and Fraser J. T. Howie put it (in their excellent book Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise), “The state is involved at every stage of the market as the regulator, the policymaker, the investor, the parent company, the listed company, the broker, the bank and the banker.”

And the state decided that 8% economic growth was the target; and the entire economy was configured to hit this target… Well, if you only look at the GDP figures, the Party succeeded. Western free-market economies go up and down like yo-yos, but China has not had a recession since 1976. Even more ridiculous, it's not had so much as a single year of low growth since 1990.

But those reassuring figures mask the roaring balls-up the Communist Party has made of the real economy, particularly in the past decade. Pre-2005, although growth was horribly lop-sided and manipulated, much of it was at least real: the cities that needed connecting were being connected by road and rail; ports and airports were being built in places that needed them; financial reforms were being pushed through; etc, etc.

In 2005, the financial reform program ended, when the leading reformers were ousted (like Zhu Rongji) or died (Vice Premier Huang Ju)– China’s GDP growth figures have been, increasingly, bullshit, driven by terrible lending by the state banks to state industries, massive malinvestment in ever-more-useless infrastructure, and a huge property bubble that has built entire cities and airports in the wrong places.

China’s banks have gone bust once every decade since the seventies, but each time the government managed to recapitalise them, or roll over the bad loans, without writing down the debts. It can’t write them down, because it owes itself the money; to cut the value of the non-performing loans is to say the state can’t pay its debts. It’s trapped. Every bank collapse is a sovereign debt default: and so there can be no bank collapses. But at this point, in my opinion, they’ve finally run out of road. Total debt in China has exploded to unprecedented levels in the past five years.

China, now, is essentially a multi-trillion dollar Lehman Brothers, circa 2007, but with a billion employees. It looks OK, but it is totally hollow; it’s massively leveraged, it’s out of capital, a shit-ton of the assets on its books are in fact worth nothing, and people are starting to believe it’s not good for its promises.

And so China isn’t going to collapse like Soviet Russia; it’s going to collapse like Lehman Brothers.

A giant, weird, slow-motion Lehmans, because it owes the money to itself. So, it will take some time for the collapse to take place. It can print money, roll over debt, do all the things it’s been doing for decades. But, in propping up the fake economy of 8% growth forever, they’ve broken the real economy.

When China finally gets its recession, it's going to be so godawful that it will almost certainly destroy the legitimacy of the Communist Party, which, after 70 years in power, is essentially an incompetent, wildly corrupt, third-generation mafia. Sure, there are some good people in there, but the system itself is totally corrupt, and corrupting, with no mechanism to reform it; and all the alternatives to the Communist Party have been annihilated. Plus, the concentration of power, wealth and influence at the top of the Party has made the leadership of China essentially hereditary, with all the incompetence that entails. (For western examples, think King George III and IV of England, or Presidents George W. Bush I and II, of the former colonies.)

OK, a prediction isn’t a prediction if it isn’t specific. A vague “bad things will happen… somewhere… sometime…” doesn’t count. So here goes.

• The recession will come within the next three years, and will be extremely deep: the Chinese economy will shrink, for the first time in nearly 40 years (and that’ll feel horrendous, from 8% growth to negative growth).
• Many State Owned Enterprises will go bust; the Chinese banking system will collapse; the enormous shadow banking system will collapse; the Chinese stock market will collapse (well, that’s been happening while I wrote and edited this, over the past week or two, so no credit for that prediction).
• How this collapse of the financial system plays out is hard to predict, as it’s all the Chinese state owing itself money, and printing money to pay itself. But that pressure should break the renminbi, which is a joke currency anyway. And pretending to fix the banks won’t work, if nobody believes in them as a safe place to store assets any more.
• In the real world there will be massive unemployment across China (over 15% officially but far more in reality).
• Social unrest will get out of control, with huge street protests and riots in the cities and in the countryside; uncontrolled population movement (something the Party has always feared and tried to control through the hukou residency permit system, which will break down); and anger expressed through violence against anything associated with the Party. (You’ll see a lot of police stations on fire.)
• I believe the Party will lose legitimacy; will lose control of the country; and that, within the next decade, China will break up: Neither Tibet nor the Muslim, Turkic-speaking Uighur territories in Western China can be held without a functioning Party and Army to enforce their occupation.

That’ll do for now.

So why didn't I finish writing and editing all my previous China blog posts, and put them up? Well, the story was so big, and I kept trying to say everything in a single post. But you can't. (And there was always fresh information, new knowledge.) And it was always so much easier to just post a link, or make a sarcastic remark, on Twitter. Sigh. Twitter has ruined my ability to blog. And, five years ago, I felt that if I said "China will collapse", it was probably too soon. I figured China's leadership would be able put it off for another few years.

But now I don't think they can put it off much longer. They will try; but this time I think it's over. I suspect the shadow banking system has already begun to collapse (along with the housing market and the stock market), and with it the Party leadership's control over events.

Anyway, my greatest regret, as a (former) blogger, is in not posting my thoughts about China. (Every few weeks, for about three or four years now, I’ve woken in the night groaning, why didn’t I blog about China six months ago?) So, over the next few months, I'm going to try and put down a few years' worth of thoughts. It's too late for me to get credit for the prediction, but it's not too late to be part of the conversation. And we're going to be talking a lot about China over the next 5 years.

Extreme Metaphors: Selected Interviews with J.G. Ballard, 1967-2008

To celebrate the paperback release this week of Extreme Metaphors: Selected Interviews with J.G. Ballard, 1967-2008, I've reprinted my Irish Times review of the 2012 hardback, below. (That original review has now vanished into the Irish Times archive, behind the paywall.) For those too busy to read the whole review: basically,Extreme Metaphors was my book of the year. I read it with delight, frequently chortling. An extraordinary alternate history of the 20th century, packed with prescient ideas which help explain the 21st.

- Julian

A photo of my copy of Extreme Metaphors, taken five minutes ago. The image links to more information, from the website of one of the editors, Simon Sellars.

Extreme Metaphors: Selected Interviews with J.G. Ballard, 1967-2008

Edited by Simon Sellars and Dan O’Hara

Fourth Estate

503pp, price £stg25

J.G. Ballard might be the greatest English writer of the 20th century. He was certainly, for much of the second half of that century, the least understood, and most misread, when he was read at all. In 1970, when Nelson Doubleday Jr, a senior executive at Ballard’s American publishing house, finally got round to reading a finished copy of The Atrocity Exhibition, he was so horrified he ordered all copies pulped. In the UK, the reader’s report for Ballard’s 1972 novel Crash famously said “This writer is beyond psychiatric help. Do not publish.”

But live long enough, and respectability eventually covers you, like jungle vegetation claiming a wartime runway. In 1984, his most nakedly autobiographical novel, Empire of the Sun, was shortlisted for the Booker Prize. Martin Amis says on the back of this handsome hardback collection of interviews, “Ballard will be remembered as the most original English writer of the last century.” Will Self concurs; “Ballard issued a series of bulletins on the modern world of almost unerring prescience. Other writers describe; Ballard anticipated.”

Ballard most certainly did. The chapter of The Atrocity Exhibition which so disgusted Ballard's own publisher was titled “Why I Want To Fuck Ronald Reagan”. In it, Ballard portrayed the former Hollywood actor, who’d co-starred with a chimpanzee in Bedtime for Bonzo, as President of the United States. It would be over a decade before reality caught up with Ballard’s imagination.

Indeed, some of the interviews here are almost comically prescient; Ballard predicted Facebook before the internet even existed. In 1979, dismissing the BBC and ITV news as “that irrelevant mixture of information about a largely fictional external world”, he describes a future in which we video everything, and

“…the real news of course will be a computer-selected and computer-edited version of the day’s rushes. ‘My God, there’s Jenny having her first ice cream!’ or ‘There’s Candy coming home from school with her new friend.’ Now all that may seem madly mundane, but, as I said, it will be the real news of the day, and how it affects every individual.” (And yes, he goes on to predict Youporn…)

He predicts the future; but he also questions the present. And many of the questions he raises here have not yet been answered. The real issue, behind all the fake issues, in this year's American election [2012], was summed up succinctly by Ballard in 1984, talking to Thomas Frick:

“Marxism is a social philosophy for the poor, and what we need badly is a social philosophy for the rich.”

As with a number of the more interesting American SF writers of his era (Philip K. Dick, Thomas M. Disch, John Sladek), Ballard became a science fiction writer by default. The SF market was the only available outlet for fiction this odd. But he is not a science fiction writer. He is not, indeed, a writer, in the normal sense of the term. Ballard is a visual artist. He makes the point again and again here; the greatest influences on his works are not other literary works; they are the paintings of the surrealists. As he said in an interview with James Goddard and David Pringle in 1975,“They’re all paintings, really, my novels and stories.”

And it is true. You read his spare, functional prose, and the most astonishing images erect themselves in your mind. The beauty of the sentence itself didn’t interest him. (This makes him hard to quote: reading Ballard, you drift into a dreamstate which can’t be evoked in a couple of lines.) Certainly he set much of his work in the future. But there isn't a space ship to be found. (Well, OK, one, in an early story.) As mainstream SF explored outer space, J.G. Ballard explored what he came to call inner space. He wasn't similar to SF writers like Heinlein and Asimov and Arthur C. Clark, he was their opposite, a point he makes in an interview from 1975:

“You can’t have a Space Age until you’ve got a lot of people in space. This is where I disagree, and I’ve often argued the point when I’ve met him, with Arthur C. Clarke. He believes that the future of fiction is in space, that this is the only subject. But I’m certain you can’t have a serious fiction based on experience from which the vast body of readers and writers is excluded.”

I get the feeling J.G. Ballard passed Ireland by. He was seldom piled high on the front tables in Easons. Seen, perhaps, as too English for our tastes? But of course, he wasn’t English at all. His sensibility was formed in Shanghai, where he was born to English parents in 1930; and in particular in the vast civilian internment camp of Lunghua, where he was interned by the Japanese (at the age of 11), along with his family. In this book he frequently talks of never getting used to the England he first encountered aged 16, in 1946, as a traumatised child of the tropics.

Exiled from Shanghai, an alien in England, Ballard nonetheless had a spiritual home. No matter where his books were ostensibly set, Ballard always wrote about America; not as a place, but as a state of mind. America as a condition. America as a psychological disorder… He loved America. Though Crash is set in England, on the motorways connecting his quiet home in Shepperton to London, the cars in Crash are American cars. His Shanghai childhood — in an Americanized Asia — was a century ahead of its time. He grew up in the future. As a result, these interviews have aged well. It helps that Simon Sellars and Dan O’Hara have edited this 500 page book with such love, intelligence, and deep knowledge of the material and its context. Extreme Metaphors presents, in chronological order, 44 interviews from the many hundreds he gave. (The editors estimate the total wordage of the novels as 1,100,000; short stories, 500,000 words; non-fiction, 300,000… and interviews, 650,000.) The interviews they’ve chosen have a very low fluff content. Many of the best originally appeared in long-vanished, never-digitised, photocopied fanzines, and are genuine, deeply engaged and engaging conversations about important subjects. Nobody is trying to sell you anything (it’s often impossible to tell what book Ballard is supposed to be promoting).

The wide range of interviewers adds to the pleasure of the book. Ballard attracted intense, usually male, interviewers, who had a deep engagement with his work. There is a pleasantly kaleidoscopic effect, as each sees Ballard through the lens of their obsession. Fellow novelists Toby Litt, Will Self and Hari Kunzru take a literary approach. John Gray is philosophical. The Russian Zinovy Zinik gets Ballard to talk about Soviet utopias and dystopias. With Iain Sinclair, Ballard discusses the design of 1970s multi-story carparks in Watford. (Ballard; “They covered them in strange trellises. It was a bizarre time.”)

And he is very open. When Joan Bakewell says of Crash, “Now, this is a deeply disturbing book. Were you very disturbed when you wrote it?” he replies “I think I was. I think in a way the novel is the record of a sort of mental crash that I had in the mid-sixties after the death of my wife…”

Ah, death. Yes, it’s everywhere in his work. Ballard’s fiction is largely set in the dead spaces of the modern world. Underpasses, flyovers; abandoned and disintegrating runways; nuclear test sites; blockhouses; drained swimmingpools. The tide of humanity has gone out. What is left is returning to the natural world. The atmosphere is that of Max Ernst’s Europe After The Rain. The organic and the inorganic are inextricably linked. Things grow, and things crumble. The work of man is absorbed by the jungle.

It’s hard, reading this book, not to think of contemporary, Americanised Ireland, with its motorways and drive-thru McDonalds. Of Dublin, with its low corporate tax rate, reckless financial zone, and Euro-HQs of American corporations; with its expat communities of British, German and US workers in gated dockside settlements, surrounded by grinding native poverty; an open city, in a state too weak to defend itself. Dublin was, for a decade there, the closest thing Europe had to the booming, buckaneering Shanghai of the 1930s.

Now, in neglected Dublin back gardens, the outdoor hot tubs fill with dead leaves. Beyond the M50, the ghost estates are reclaimed by the whitethorn bushes. Ireland has become a Ballardian landscape. Given the extraordinary relevance of his work to Ireland’s psychological condition, it might be time for more Irish people to start reading J.G. Ballard. And this lovingly curated book of interviews is a fine place to start.

I will be very surprised if any novel this year gives me as much pleasure as this book. And I can guarantee (now that Ballard is dead) that no novel will contain so many provocative, intriguing, and visionary ideas.

Julian Gough is an Irish writer, living in Berlin, whose work was shortlisted this year for both the Bollinger Everyman Wodehouse Prize and the BBC International Short Story Award. His latest novel, Jude in London, is out now in paperback from Old Street Publishing.

ENDS.

Ireland After The Bailout - A Few Thoughts

My mum voting in the recent referenda, in our local national school, in Nenagh, Co.Tipperary

Ireland is about to emerge from the bailout process that she was forced to enter when her banking system and economy collapsed in 2008. Will Ireland emerge like a butterfly from a chrysalis, or poop from a butt? We shall see...

Anyway, that fine and thoughtful journalist Conor Pope of the Irish Times asked me a few questions last week for a long piece he was writing on the subject.

I haven't read the article yet (I'll link to it here when and if it goes online), but I'm familiar with the way that quotes in an article can become unmoored from what you actually said (no matter how good the journalist, or the paper). That's just the nature of a daily newspaper's high-pressure, high-speed editorial process. Qualifiers get left out; the first half of a balanced argument makes the cut because you said it in a sexy way, the second half doesn't 'cause you didn't; a subeditor in a hurry can accidentally trim the punchline from a joke, or, in tightening up a saggy sentence, accidentally flip its meaning on its head. (Yes, all these things have happened to me. No, I'm not looking at you, New York Times, or Prospect, or Financial Times, or GREY Magazine, or The Times, or The Believer, or any of the little literary magazines. YES, I'M LOOKING AT YOU, GUARDIAN.)

Also, I miss the good old days, pre-Twitter, when I frequently blogged about economics from a novelist's perspective; I thought posting this might jolt me back into that habit. Plus, I gave myself a headache thinking about all this, and I know that, at best, only a couple of lines will make the finished article. (Conor has talked to a lot of people.) So, if anyone is interested, here's what he asked me, and here are my answers in full...

How would you explain the madness that gripped Ireland during the boom and why did so few people see the calamity coming down the tracks in 2006? 

I wouldn't give us a hard time over this. We were part of something much bigger than Ireland; the structural problems with the Euro blew up all the peripheral economies. Greece, Ireland, Portugal, Spain; the way the Euro was set up almost forced them into classic, credit-driven bubbles, in their national flavour. The bubble just came down the easiest credit channel. In Greece, it expressed itself through state patronage; in Ireland, it expressed itself through property & mortgages, etc. If the founders of the Euro refused to see the coming problem, even thought they were warned by several grumpy economists at the time, then we can hardly be blamed for not spotting it.

Also, we were drunk at the time. And high. Not all of us, but a startling number. I’m going to guess that our consumption of alcohol, cocaine and credit all mapped onto each other fairly exactly in the bubble years. Again, I don’t blame us. We were coming out of centuries of relentless, grinding national poverty. And when you’re poor, you don't need to cultivate a habit of restraint. You spend till you run out of money; you drink till you run out of drink. Poverty stops you killing yourself drinking, and lack of credit stops you killing yourself with debt. But give a poor society unlimited drink, or unlimited credit, and it's likely to end badly. I stopped going out in those years, because my friends were putting three or four €70 bottles of champagne on their credit cards and saying, sure we’ll split the bill at the end of the night. And I’d be nursing a single glass of fizzy water for five hours. Socialising became impossible; being frugal was seen as being disapproving, or difficult. We were drunk on credit, and everything looked more and more beautiful the drunker we got. Until we ran out of drink, and had to deal with the hangover. Countries that have been wealthy for a long time have to develop internal habits of control. You won't see the Swiss drinking their wages, because that would kill them.

What impact did the scale of the banking crisis have on Irish people? 

What about the bailout? What impact did that have? 

 ((Yeah, I'm in Ireland a lot, but I live in Berlin now. I didn't feel qualified to answer these two questions, so I skipped them.))

Repeated studies have shown that in spite of the horror show, Irish people have remained happier than in previous recessions - why do you think that is? 

The recession removed the unpleasant, highly competitive status anxiety that was the least attractive aspect of the bubble years. We are much more respectful of our friends’ feelings now, of their situation. Much more sensitive to the fact that they might not be able to afford to keep up. I was so pleased when I started to see party invitations that say, no presents. Strip away the material things from a relationship, and, if the relationship survives, it strengthens the relationship, it doesn’t weaken it. We see each other to see each other, now, not to show off. Also, this is a recession, not a famine. It's only a recession relative to the boom. It's a very painful adjustment, but we still have colour TV and the internet. And the suffering has been spread relatively evenly, across the classes, which gives a sense of solidarity. We’re in the shit, but we’re in the shit together.

We seem to have accepted all the austerity - imposed first by our own masters and subsequently by the Troika without so much as a murmur. What, do you think, does that say about us as a nation. 

I know there’s a lot of bemoaning this, but I think it reflects well on us as a nation. It’s only money; it’s only stuff. Fuckit, we still have each other, and nobody died. That’s a good attitude. If we took to the streets and had a revolution because our investments went badly… No, that’s not us. What’s tragic is that some people have been destroyed psychologically by their losses. But what is marvellous is that most people have not been. Their identity was not tied up with their property, their self esteem did not collapse along with their bank balance.

What impact - both psychologically and practically - do you think the bailout exit will have?

Not a lot. It’s a shaky exit. The Eurozone still has enormous problems, we haven’t really fixed a lot of what went wrong. The European financial system is still under horrendous strain. I don’t think the story of the Eurozone crisis is over yet, and through no fault of our own we may yet be dragged back into it.

And do you think we have learned from our mistakes? Property prices are rising in Dublin - and to a lesser degree in other urban centres - could we possibly allow another bubble to inflate or have we learned our lesson?

Well, if you don’t fix the fundamental problems; and the ECB and Germany and France have not fixed those problems, just stuck some enormous band-aids over them; then yes, another bubble could well inflate. But that’s not because WE haven’t learned from our mistakes. That’s because Germany, the country on the other side of all these imbalances, and the cause so much of Europe’s structural internal imbalance, still doesn’t believe it has made any mistakes. We've acknowledged our errors. Germany has not. Let’s not give ourselves such a hard time… I think Ireland's behaved well, and with remarkable restraint, under very difficult circumstances.  We've held together as a nation, unlike Greece say, which has been massively divided and embittered by their crisis; and at an individual level I think we've, by and large, looked after each other.

Why I Love Twitter (and will for at least another month)

Photo by iJustine, via flickr: http://www.flickr.com/photos/ijustine/

OK, after a couple of weeks playing with it, I love Twitter. I find it much more yummy than I ever found Myspace, or Facebook (which should be odd, because Twitter is very, very limited in comparison.)

But Twitter gives me a very pure form of that thing I liked most about Facebook (with their status updates): A sense of low-level telepathy. I have a vague idea of what a lot of my friends, and other people I like, are feeling. How their life is going. People who really like Twitter tweet far more often than they update their Facebook status, so the knowledge of how they are doing is more granular, more finegrained. With Facebook I know they're happier, or sadder, this week than last week. With Twitter, I know they're happier, or sadder, this evening than they were this morning.

And the blurring of the line between friend and famous person is democratic and interesting.

Plus, I've never seen a social/internet thingy evolve so fast. It's fascinating.

Does this mean Twitter will change the world/hit a billion users/be around in a year's time? Not necessarily. It's evolving fast in an ecosystem which is also evolving fast. Spam risks ruining it. And every other tech company wants to buy it/kill it/replace it. Anything could happen.  But it's the closest thing yet to the simple, non-technical, magic app that will bring the internet right into our head, so that we can talk to anyone about anything in any language, to solve any problem at any time, so that we will never be lonely again.

This version of Twitter is going to look primitive as fuck within a year. But you, me, it, and the world will be very different in a year. Right now, it's the place to play. (Which has distracted me terribly from my blog, sorry. I've posted something like 89 tweets in the past fortnight, and one blog post.)

Anyway, if you are Twittering, or thinking you might try it, call round and see me sometime.

Election Day USA 2008

At last, it's election day in the USA. Who will win? Well, I think Obama won the election six weeks ago, on Monday 15th of September 2008 when Lehman Brothers , the hundred-and-fifty-year-old American investment bank, collapsed and filed for bankruptcy protection. (And, somewhat addicted to the high-wire of public prediction by now, I'm typing this before the votes have been counted. I haven't even looked at an exit poll, if any are out yet. There's hours of voting left to go in parts of the US.) That was the event that made the collapse of not just banks but the whole deregulated financial system unstoppable.

Check out the graphs in the second half of this excellent video from John Authers of the Financial Times. (You can skip the stuff on the dollar at the start.) In the crucial states Obama needs, Obama trailed McCain until the day of the Lehman's collapse, and then bam, his line shoots up and McCain's plummets, and McCain has trailed Obama in all of them ever since.

Almost everything written about this election has been fluff. The economy will always drive politics in a democracy. Only when things are going fairly well will people bother to vote on any other issue. When the economy implodes, so do the hopes of the incumbent party. McCain actually ran a very good campaign under incredibly difficult circumstances: he stayed in the race until the entire American banking system collapsed. His problem was that he had to run as two mutually conflicting things. To get the Republican party to vote for him, campaign for him, and finance him, he needed to run as a Republican. But that's only 40% of the voters. Not enough. And President Bush was so unpopular (this week he recorded a 20% approval rating, the lowest in history, lower than Nixon in the last days of Watergate), that to win the votes of anyone else at all, McCain had to run as a crazy maverick who wasn't anything like Bush and, sure, was hardly a Republican at all, at all. And you can't be both King of the Republicans, and the Scourge of the Republicans. (Look what happened to the last guy who tried to walk that tricky line.)

It has been very refreshing to have two presidential candidates that I really like and respect running for the big gig. (I wasn't impressed by the character of either candidate the last time.) It has been sad to see McCain ripped in two by the situation he put himself in. Much of the anger he expressed in that last month was probably at himself. I think he will be very glad indeed when this is over.

Obama had the easier task but, even allowing for that, he has run a stunningly good campaign. I think he'll walk this election. On water if necessary. He's not trying to win the popular vote (fat lot of good winning that did Al Gore), he's aiming to sweep the Electoral College. I think he will.

OK, that's who will win (oh, and one last prediction... Obama will do well among white voters, getting a bigger share of them than Bill Clinton got, and all that talk about the Bradley effect will turn out to have been fluff too). But who should win? I don't think novelists should have opinions, especially political opinions. It damages their work, by ruling out certain readings, and closing down ambiguities that should not be closed down. I do have private opinions and preferences, but they are private. And my books do not necessarily share my opinions. So I shall outsource my opinion to someone much older and wiser than me, the very wonderful Alan Abelson, of Barron's (Wall Street's favourite newspaper): "This election pits one candidate who should have been elected eight years ago against one who should be elected eight years hence."

There you go. Fair and balanced.

May the best man win.

Though personally, as a satirist, I would like to get in early, and officially endorse Sarah Palin's 2012 bid for the presidency. She has given so much to us, we have a duty to give something back.

I know, I know, you've already watched it fifteen times, but indulge yourself one last time...

And, above all, on this day of all days, it is your political duty, if you haven't done so already, to click on this link, and then click on everything you see when you get there, with the sound on.

Update on 2008-11-05 04:14 by Julian Gough

The super-duper New York Times interactive map is addictive and delightful. I've been enjoying making my own calls on the states, ahead of the networks and newspapers, by zooming in and trying to work out, county by county, how the tide is flowing. I'll make a call here, for the fun of it: I think Obama will just pip McCain in Indiana. As I type, McCain is only .2% ahead, and there's still a lot of votes to come from Lake County, which contains the city of Gary, which is breaking 2 to 1 for Obama. McCain is winning in the rural counties, but they have largely been counted by now.

And now I'm off to bed, it's nearly 5am in Berlin.

Update on 2008-11-05 04:36 by Julian Gough

Nah, I couldn't go to bed, it's too exciting... Florida looks like a big win for Obama. He's 2% ahead of McCain as I type, but McCain's counties are counted, the big blocks of votes still to come in are all Miami-Dade, Palm Beach and Broward counties, (so, urban - Miami, Fort Lauderdale - and Democrat), and they are going to swing it strongly to Obama.

I really should go to bed, this election is over. Ah, it's a great shame McCain was robbed of the Republican nomination by the Rove/Bush machine in 2000. That really bent American democracy out of shape. And what consequences...

But in 2008, Obama deserves his victory. Here's the bravest and most important speech of the campaign, from either candidate. Character is destiny, and Obama has character.

Update on 2008-11-05 04:54 by Julian Gough

Yes, it's officially over. The networks have called it, and after the Kerry/Bush debacle, they ain't going to be leaping to wild conclusions. Wow. President Obama.

I'm incredibly happy. What a great day for America. What a relief for the world. (What was the global opinion poll result again? 75% of those with an opinion were for Obama?) The number of wounds that this helps to heal... holy cow.

So, what happens next?

Well, like I said, blogging about seeing value in some areas of the equity markets last Friday "would have made me look fierce cute for a few hours." Markets go up a record breaking amount Monday - and back down nearly the same amount Wednesday. And the US markets give investors whiplash Thursday (way down, then way, way up in the last hour.)

I'm not going to bother talking about these immense shifts, because they are largely noise, not signal. They're the meaningless volatility you get around around major economic transition points. A huge one-day leap does not mean everything is going to be OK, and a huge drop does not necessarily mean it's the end of the world.

The Plain People of the Internet: What transition?

Well, the crisis is finally transferring from the financial economy to the real economy.

The Plain People of the Internet: What will that mean?

Some class of a recession. Less credit means less borrowing, less investing, less money, less jobs. We will save more, and spend less, because we will have to. Which will be good for us in the long term, but bloody painful in the short term. No chocolate on our biscuits for a while. And for a lot of people, no biscuits at all.

The Plain People of the Internet: Will the real economy collapse as much as the ghostly financial economy has?

Jesus, I hope not. The shadow banking system (which grew up outside the regulated banking system over the past decade), has been completely destroyed. The real economy will not be completely destroyed.

Within the financial sector, entire business models, an entire worldview, and an associated set of incredibly stupid but almost universally believed economic theories, have been annihilated. Basically, the financial sector has lost its money, its job, its house and its religion. The real economy will do much better than that. It might get quite a nasty kicking, but I am strangely optimistic about the real economy in the medium term, say the next few years. (Short term, sure, it's going to be horrible.)

The Plain People of the Internet: Will the markets fall further?

Yes. At least 20% and almost certainly much more.

The Plain People of the Internet: Will house prices fall much further?

Yes. US house prices will fall at least another 15%, and almost certainly much more, unless there is a massive government intervention in the mortgage market (on top of its recent interventions in the financial markets). The next US president will be inheriting a foreclosure catastrophe. Millions are set to lose their homes, so some major further initiatives are likely. This is a very dynamic situation, and it's hard to predict how it will turn out. The nature of the way in which mortgages were sliced, diced, packaged and sold on makes the problem very difficult to solve.

Oh, and Irish house prices will have their arse kicked much harder than that. There will be parts of the country where you'll be picking up houses for a few grand in another couple of years. I've seen ghost estates, built on spec in ridiculous places all over Ireland, that noone will ever live in.

The Plain People of the Internet: Is it the end of the world?

No. It's just going to be the big, bad recession the West should have had after the dot-com crash, but put off for years - and made much worse - with low, low interest rates and loose, loose money. (OK, if I wanted to be fair and balanced I'd mention a bunch of fascinating technical stuff about how the Chinese government stopped the country's dollar income reaching the workers, and diverted it straight back to the US instead... but that stuff gives people a headache, and needs a post of its own.)

Bear in mind, a country cannot get rich through its people selling houses to each other at ever higher prices. The ongoing collapse in house prices makes people with huge mortgages worse off. But it makes a heck of a lot of people without houses better off. Rents will go down, first-time buyers won't have to sell a kidney and bankrupt their parents to buy a dodgy flat, etc.

In fact, people, on average, are happier in a recession (as long as they don't lose their job or their house). There's a lot less status anxiety, and people appreciate what they have, rather than wishing for what they have not. And pop music always improves in recessions. So it's going to be great!

How To Invest In A Great Bear

Well, this is the post that I wrote on Friday, but didn't publish, because I hadn't time to finish it before my flight to Ireland...

"If I had invested all my money from my first novel, Juno & Juliet, in the main Irish stock index, the ISEQ General Index, back in late 2000/ early 2001 when I sold the book to the UK and US, I would now, after eight years fully invested, be down anywhere between 30% and 50%, depending on which months I'd put the money in. If I'd invested all the installments of my advances as soon as I'd got them (on signature, delivery and publication), it'd probably average out at a 40% loss, after eight years. So I'm glad I didn't listen to my Allied Irish Bank adviser. He also wanted me to plunge into tech stocks. I was a naive innocent in financial matters back then, compared to now, but I wasn't retarded. "Er, why would I invest in what is clearly a bubble at what is probably the peak?" I asked him. (I think the bubble popped about a month later). He made some noises with his mouth, ("Ah, well, er... you...um"),  but he didn't actually answer. Putting my money into the Nasdaq would have lost me up to 55%. Again, averaged out, probably a loss to date of roughly 40 to 45 %.

What did I do with my advance? I spent it on food and books and chocolate. And bought a couple of nice paintings, which I still have and which make me very happy. And lived in London for six months, and the US for a few months, and had many romantic dinners with my beloved.

However, if I had any money now, I think some value is at last, for the first time in my investing life, beginning to surface"

...Well, that's where the post ended, no full stop because I hadn't finished it. Really REALLY wish I'd posted it anyway, given that on the fecking Monday we had the biggest ever one-day points rise in the US stock indices, and quite a few others world wide.

Not that a one-day rise means anything (or a one-day fall, for that matter), but it would have made me look fierce cute for a few hours.

No, I'm not calling the bottom of the market, this market is now too nutty to call. I'm just pointing out that some stocks (and some municipal bonds, some corporate bonds, and a few other things) are now at good prices for a brave longterm investor. But the wild ride in the markets will continue for quite a while yet.

I'm typing this in Tipperary on a very slow machine, so I can't be arsed putting in all the links and a photo. I'm not even going to spellcheck it. Normal highly erratic service will be resumed from Berlin shortly...

My Thoughts On The New, Steam-Powered, Horseless, Electronic Book!

If you’re interested in my thoughts on the future of the electronic book, I’m quoted in today’s Irish Times, towards the end of this piece by the mighty Conor Pope. (And how quaint “electronic book” will seem in a few years! It’ll read like “horseless carriage” does now…)

Sample quote from me:

"I can't see how you can control the distribution of words. Good writers could end up with huge readership but they will probably have to find new ways of earning a living from it, which is fine. Good writers were never likely to make much money. Yeats never made more than £200 a year from his writing until he won the Nobel Prize."

The Great European Competition Hurdles - and they're off!

Ah, now, look, that's cheating. The Irish Government have robbed me of victory in the The Great Irish Bank Collapse Sweepstakes. And I'd put my last eleven euro on the favourite!

Here's the Irish Times, talking about the Irish Government's meeting in the early hours of Tuesday morning:

"The option of allowing one particular bank to fail and then moving to nationalise it was seriously considered, but it was decided that legislation to protect the entire banking system would have a better prospect of achieving long-term stability."

I'm pretty damn sure the bank was... well, I'm saying nothing. No point making things worse for them. (But, in one of those crazy coincidences no doubt, I got a huge number of hits over the past 48 hours from people who'd googled: anglo irish bank collapse.)

Incidentally, Anglo Irish shares soared 67% immediately after the announcement of the Irish Government scheme.

I'm still not entirely sure how a government as small as ours can "guarantee" the debts of a banking system as big as ours. As a number of helpful commentators have pointed out, the Taoiseach, Brian Cowen, and finance minister, Brian Lenihan, have just promised to back liabilities that are ten times greater than our national debt. And, though the two Brians have postponed the Great Irish Bank Collapse Sweepstakes, they still have the EU Competition Hurdles ahead of them. (The job of running Ireland is a veritable pentathlon lately.) The British (and others) are furious at this move, as it gives Irish banks a huge competitive advantage, and could suck money out of fragile English banks. (AIB have a big presence in the English business sector, Anglo Irish do a lot of UK property loans etc.)

And the English, Dutch, Belgians and Danes all own banks in Ireland (Ulster Bank, ACC Bank, IIB Bank, and the amusingly named National Irish Bank- it's Danish), which will not be covered by this scheme, so they're afraid they'll lose all their depositors to Allied Irish Bank, Bank of Ireland, and - God help us - Anglo Irish Bank. There's now a strange, competitive, nationalist element to bank bailouts in Europe, as each government bailout or promise destabilises the banks of its neighbours. We need a unified EU response. And in a pig's hole will we get one, not till a few really big banks go under. Try getting twenty-two finance ministers to fly to Brussels this week, when they're all up till 5am every night, fire-fighting the collapse of their own national banks.

Of course, national banks have grown to become European banks, all over Europe. Many countries now face the problem of trying to save banks that are bigger than the country that, technically, controls and regulates them. The Financial Times has a beautiful overview of this. You'll see from it that both AIB and Bank of Ireland have liabilities that are almost exactly the same size as Ireland's entire GDP...

Well, on a lighter and more entertaining note, Momus has written a wonderful piece on the pleasures of having nothing. He did me the great honour of including some video of me in this intriguing meditation on Brecht, Wilde, and the end of the world as seen from Berlin.

We've been through all this before. It's not so bad. Nicht so schlimm...

"There is no money in this town! The whole economy has broken down! Oh, where is the telephone, is here no telephone, oh sir, goddamit, no!" - Brecht

Update on 2008-10-01 13:39 by Julian Gough

...And here's the latest on the Great European Competition Hurdles, from the Irish Times twenty minutes ago. Will Brian Lenihan even make it over the first hurdle?

Choice quotes:

The European Commission (EC) today confirmed that Competition Commissioner Neelie Kroes is in contact with the Government and will examine under state aid laws the move to guarantee all deposits in Irish banks.

“It [the Commission] will look at any state aid involved as a a matter of urgency. It expects notification from the national authorities and will take decision under the state aid rules soon afterwards.”

And yes the British are very annoyed:

British banks compete with Irish banks both in Britain and in Ireland and have voiced fears they could lose out competitively to Irish banks that enjoy the full guarantee.

The Irish pledge on Tuesday to underwrite the country's banking system triggered a flood of cash from British businesses to Irish banks, a senior Irish stockbroker said.

"We just want the Irish government to look quite closely at the arrangements they are putting in place to make sure they comply with EU competition law," the British government spokesman said. He added Britain was in contact with Irish authorities at a high level over the issue.

The Great Irish Bank Collapse Sweepstakes - and they're off!

Well, it's not the end of the world, but it's going to feel like it for quite a while. The US government bail-out plan was voted down by Congress a few hours ago. If the plan had been passed, it would have given the illusion that things were going to be OK. (Things would not have been OK.)

Now, we won't even have the comforting illusion.

An an Irishman with my fortune (eleven euro) in an Irish bank account, I have a keen interest in the future of the Irish banking system. The main question seems to me to be, in what order will they fail? I reckon it's going to be a photo-finish for first place between Anglo Irish Bank and Irish Life and Permanent. (Though will dark horse Irish Nationwide Building Society make a late surge for the line?) After that, who knows. But they're all banjaxed.

Every Irish bank is massively over-exposed to Irish and UK residential and commercial property, and to Irish developers who can no longer service their vast loans. The Irish banks have been keeping their developers afloat artificially for the past year, in the hope things would miraculously turn around. Things haven't, they won't for years, and soon all the bad debts will have to appear on the books, dragging both banks and developers under. If the Germans and Swiss find the books of the Irish banks too revolting, and can't bring themselves to purchase the wreckage, then the Irish government (with some very irritated help from the European Central Bank) will have to recapitalise the entire banking sector. All this will have to be done during a global financial crisis. It's going to be comically awful, like having to change your tyre in the middle of a demolition derby.

I lived through the Irish property boom of the past decade with ever-mounting incredulity. It really was the most extraordinary case of mass delusion since everybody drank Kool-Aid in Jonestown. And if you want cast-iron evidence that I'm not pretending to be wise after the fact, here I am on Irish television, in May of 2007, saying exactly that, to the stony silence of the studio audience, all of whom had just bought an investment property the day before, and would be buying another one the day after.

(Oh yeah. banks and hedge funds and other financial institutions will also be imploding across America and around the world after this, but I'm so bored with the USA, I thought I'd talk about Ireland for a change... Ah heck, one more US prediction: good, old-fashioned, retro, Depression-era bank runs in America, starting tomorrow.)

Waving a magic wand at a car crash

So there's a bailout plan. Whoop-de-do.

It addresses a symptom - the liquidity crisis.

It doesn't solve the problem. The banks are insolvent.

Let's Nationalise All the Mortgages in America Overnight, And See What Happens

More financial fun. From today's Financial Times:

"The US government on Sunday seized control of the troubled Fannie Mae and Freddie Mac mortgage groups in what could become the world’s biggest financial bail-out."

I've just one comment on this, for now. The US government doesn't really know what it is doing, its public statements are confused, contradictory, and not nearly as reassuring as it thinks, and this action will have huge unintended consequences, some pretty disastrous, for the American financial and housing markets. (With whiplash effects as far away as China.)

The rules are being torn up, but they're not being replaced with anything coherent.

More banks and other financial institutions will fail in the aftermath of this (and not just the ones left holding huge, worthless chunks of Fannie Mae and Freddie Mac).

So, um... Bloomberg for McCain's VP slot?

Well, Obama didn't listen to me. Maybe McCain will.

By November the US election will be about the economy. Several more huge financial institutions will have gone under, been sold for monkey-nuts, or bailed out by the Fed. The housing market will not have recovered. The credit crunch will not have ended. No domestic US business will be expanding, investing, or hiring. (Bar bankruptcy specialists. And Wal-Mart, as the middle classes go downmarket). No one will care about the foreign policy credentials of Obama's running mate.

McCain has admitted he knows nothing about economics. So pick Bloomberg, he won New York as a Republican for God's sake...

Of course, he won't.

Writers shouldn't have opinions about anything, least of all politics, so I won't express a preference in this race. I like both McCain and Obama a great deal, as human beings. They are both remarkable, in their very different ways. But, from a satirist's point of view, I think a McCain presidency has more going for it. I would dearly love to see an economics novice, in his seventies, who can't even remember how many houses he owns, dealing with the worst economic crisis, and housing market meltdown, in US history. McCain said it best, in the Wall Street Journal in November 2005: “I’m going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated.”

And if he gets to be President in November 2008, boy will he be educated.

As the Wall Street Journal said of him (at the end of that same in-depth interview on his economic policies):

"I come away believing that if I'm ever in a knife fight or in a foxhole, there is no one I'd rather have next to me than John McCain. Whether he's someone who should be steering the rudders of the American economy is a different issue altogether."

Bloomberg for Vice President?

I'll warn you in advance, this is the least informed blog posting I've ever made. I just feel like making a wild, long-odds bet, is all...

I've been watching the mighty brain of the US media pull a muscle try to guess who Obama's going to pick to run as his running chum. Biden? Hmmm. I'd be amazed. Bayh? Nah. Kaine? Well, maybe, but I doubt it. It's too flagged: Kaine looks like a nice guy who's doing Obama a favour, by drawing the press off the scent.

This whole thing, "I'm thinking... I'm checking them out... I'm deciding soon... I've decided! The day before I announce it!"  feels like a circus to entertain the media. I wouldn't be surprised if Obama had decided months ago, last year even.

So I put my novelist's hat on, imagined I was Obama and thought it through. And I was strangely drawn to Michael Bloomberg, for a bunch of reasons. He's a former Republican (can't get more bi-partisan than that). He's rock solid on economics (can't get more important than that). He has run a big company (Bloomberg), and a big chunk of American real estate (New York), both very, very successfully.

And in 2001, in the most Republican borough of New York (Staten Island), he sucked up 75% of the vote. Holy guacamole. That means he can hoover up Democrats and Republicans together like almost no politician ever.

If I was Obama, I'd pick Bloomberg and I would pound the economy as the only issue in this campaign. Forget Iraq, forget foreign policy, forget the outside world. Keep it firmly focused on the economy, and use Bloomberg to take McCain apart.

But that would just be me, I guess.

Mapping Economics Onto Reality

 

I was recommending this article to my friends the other day, so I may as well recommend it to you guys too. I know my economics stuff is of minority interest, but how we live is going to be severely bent out of shape for the next few years by this single fact -  the economic theories used for the past two decades did  not map onto reality, and have totally screwed up the financial system, global credit, the housing markets, et bleeding cetera.

 

George Soros, apart from running one of the most successful hedge funds of all time, making a billion in a day by knocking sterling out of the EMS,  and then using the money to prop up democracy around the world,  is a terrific and original thinker on matters economic. (He's greatly influenced me. Those who know me may have have noticed that over the past few years the quality of my economic thinking, and of my predictions, has improved a great deal. A fair bit of that is down to reading Soros.)

 

Here's a juicy and clear-sighted quote from the article, in Wednesday's Financial Times, if you're too lazy to click:

 

"About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises."

The rest of the article is here.

 

In fact, if you liked that, you should read his interesting overview of the background to the crisis, going back sixty years... 

 

And if you're up for a bit of really meaty economic philosophy, there's a good 1994 paper on reflexivity by Soros here...

 

Did I mention I'm reading in Prague next week? Oh, I'll blog about that tomorrow.

Breaking the Bank of America

 

... and the Asian markets continue to fall. India's stock exchange fell 11% in the first minute of trade this morning (Tuesday, January 22nd, 2008). Trade was automatically suspended for an hour before reopening. (If it falls 15%, there will be another automatic suspension).

So what will happen in the US when markets open? Well it's kinda hard to see them going UP. But on a day this volatile, there will be wild swings, as automatic trading algorithms are triggered to pump out enormous buy and sell orders (remember, some traders are making a ton of money by shorting this market... it falls, they win). So, wildly up and down, but mostly down. A serious opening plunge.

Should be a shambles. I'm guessing US markets will also be automatically suspended for a time today.

Well, Fitch did their best. They gave the US markets three days to come up with a plan. (They downgraded Ambac after the markets closed on Friday, just before the long US holiday weekend for Martin Luther King's birthday.) But what plan can you come up with? There's going to be a lot of forced selling into a falling market.

And there's no fixing the fundamental problem: a lot of the "wealth" created in the past few years, from insanely high house prices to comically complicated and poisonous derivatives rated a perfect AAA, was fairy gold, destined to fade away as we awoke from the dream of unlimited wealth for doing nothing at all.

Wow, That Was Quick

 

Wow, that was quick. Very gratifying.

On Friday, I predicted a massive multi-market meltdown as a direct result of the downgrading of the monolines. (Or, as I poetically put it, "if you ARE into economic meltdowns,  this is going to be the World Cup Final of economic meltdowns, and Brazil are about to walk out onto the pitch...") On the next trading day (today, Monday),  markets collapsed all over the world.

Or as the New York Times put it, with their usual blissful ignorance of what actually drives markets,

"Fears that the United States is in a recession reverberated around the world on Monday, sending stock markets from Bombay to Frankfurt into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn. "

Isn't that beautiful? All the world's stock markets except the ones in the USA keel over (US markets are closed for Martin Luther King's birthday), and the New York Times report starts with the words "Fears that the United States..." and end with the words "...an American downturn." Everything has to be about them. Sigh...

Well, they captured about 40% of the truth (about the NYT average for any story that isn't about baseball or a quaint, family-owned deli that's celebrating its fiftieth anniversary by going out of business). Today's market collapses are, in certain respects, about the coming US recession. But they're more about the fact that on Friday, a ratings agency (Fitch) downgraded a monoline insurance company (Ambac) from AAA to AA, and put them on watch for further downgrades. For why that blew everything out of the water, see my previous post. 

Why would that shake world markets enough to cause an avalanche of panic? Because there's only roughly half-a-dozen decent-sized monolines, and between them they insure between three and four trillion dollars worth of bonds. Call it three and a half. That's $3,500,000,000,000. Count the zeroes... Ambac was the oldest monoline (born 1971) and the second biggest, and downgrading it automatically meant downgrading over 100,000 different bond issues, with a total value of roughly half a trillion dollars (or five hundred billion, if you're into mere billions.) Bonds issued to build libraries in Stuttgart, or a bridge in Seattle. Bonds issued to fund corporate buyouts in Tokyo. And, recently, bonds stuffed with dodgy mortgages from who knows where... Bonds owned by everyone from investment banks to your dad's pension fund.

 Ambac's  slogan? "Financial peace of mind". And what prestigious award did it win one month ago? Global Monoline of the Year. Ah, I love the modern world, but it makes life hard for satirists.

Let's have a quote from a respected market insider, so you don't think I'm exaggerating the carnage(God forbid). This is John Authers, the unflappable, seen-it-all Investment Editor of the splendid Financial Times:

"On days like Monday, there is little to do but wait for the casualty count at the end. Even with the US on holiday, the sell-off was the worst single day for global equity markets since the terrorist attacks of September 11 2001."

The Financial Times' coverage of this ongoing credit debacle has been superb, before and during. Sigh. It's so superior to the Wall Street Journal that the continued existence of the Wall Street Journal seems to me evidence that there is no God. Or that he just doesn't care.

 And the US markets open again tomorrow... That'll be interesting...

 

OK, my next prediction (these are going rather well): the collapse of the Chinese stock market, leading to widespread protests and social unrest in China. Timescale... Hmmm. Let me be conservative (I tend to be hasty and assume if something is obvious, it will happen right away). Well, over the next year and a half, almost definitely. But probably a lot (a LOT) sooner. 

 Much more than cut in half from its peak. Could go down to a third or even lower. There you go. More hostages to fortune...

Of course, a totalitarian state has powers of intervention undreamt of in the West, so it'll be interesting to see what the Chinese government will do in response to serious falls (which could well have begun, it's already slipped from its peak). 

What larks!