Is Our System on the Verge of Collapse?

Another blog post from DU Member Digital Business Coach.

This is probably the most difficult article I have ever written. Trying to remain positive when the news is far from it and not offending those who have lost so much during this pandemic is akin to the high wire artist crossing a deep valley in a gale. But I will try.

The lockdown is beginning to ease here in the UK; some are pleased, some less so. The media continues to frighten, focussing on the negative side of the story and deliberately ignoring the more positive news.

I recently read an interesting piece on the chances of dying of COVID-19 and the findings were very interesting. The author Sir David Spiegelhalter [Chair of the Winton Centre for Risk and Evidence Communication] analysed data from March 28 to June 5, specifically the number of deaths. His report is “out there” but he summarised by saying this; the risk of death is deemed so small that “it would normally be deemed an acceptable part of life.” Perhaps the protestors and beach goers and Liverpool supporters have read his article. I suspect not.

The older we get the greater the risk, this we know. For the over 90s he likened the chances of dying to taking part in a bombing mission during World War 2.

Of course there is counter opinion and it is for each of us to decide but make our decisions in the best interests of not just ourselves.

To date over 500,000 people have died of COVID-19, this from 10.2m confirmed cases. 85 million died in World War 2 and 20 million in World War 1. An estimated 50 million died from Spanish flu in 1918-19.

COVID-19 is not a war but it is an economic war. Estimations of 6m unemployed in the UK; 42% of pandemic-induced lay-offs could become permanent; 45 million already out of work in the US, a number similar to their great depression. US debt now exceeds $25 trillion. If you lay a runway, long enough and wide enough in dollar bills, for a passenger jet to take off on, this would only require $1 trillion.

4.3 million US home owners did not make mortgage payments in May and the Cares Act financial support is due to end next month. The real estate market valued at around $17 trillion is expecting a 40% hit [source: Starwood Capital] Commercial real estate is facing similar challenges; it is expected that 1/3 of hotels in New York City will go bust. As in the UK, Americans have adapted to working from home leaving employers now mulling over the need for costly business premises and buildings. As commercial property is a staple diet for pension funds on both sides of the pond the implications are sobering indeed.

BBC News online reported that the US Treasury sent $1.4 billion in pandemic aid to dead people…

At home thousands are dying for fear of going out to see a doctor, many more are dying economically. Domestic abuse, child abuse, no home schooling and a record 40% increase in divorce applications help illustrate the pandemic in the UK.

Sky News reports that 3 million still await government support; of over 2,000 questioned 61% said they had no income or work now or on the horizon. 72.4% said they now survive on less than 20% of pre-COVID income. 53% of respondents were self-employed.

The Bank of England Governor was happy to take credit for saving the UK from bankruptcy in March; as the financial markets collapsed the bank printed £200 billion [QE] to “rescue” the Government. The fact that it is the Central Bank’s job to support the Government seemed to have temporarily escaped him.

There was a further printing out of thin air of £100 billion just last week – this illustrating the banks deep concerns. Just out of interest – sorry – in 1694 bank base rate was 6%, peaking at 17% in 1982. Today it is 0.1%. Amazingly today there are still 1.2 billion “unbanked” so stories like the one regarding Tina [Guardian] being refused her groceries in a supermarket because she only had cash will become more common. The Chancellor announced steps to protect cash in his March 11 Budget but quite a bit has happened since then.

Other news you may have missed; inflation now at 0.5%, down from 1.5% in March. The more serious threat of deflation is now heightened. The Sunday Times [21st] suggests the Chancellor may cut VAT – just as Alistair Darling did in 2008 and that employers NICs may be reduced to stimulate employment. On average it costs employers £2,400 each year to employ someone.

Not surprisingly came the news from the tax authorities that their generous and caring side ends midnight Tuesday; from 1 July all VAT, PAYE and CT must be paid and we can expect arrears to be chased.

Talking of banks Money Mail reports increasing complaints from readers, mainly elderly being turned away from branches as their visits were/are deemed unnecessary by their highly trained staff. The Telegraph reported that banks may share branches in outlying areas to boost the availability of cash. Good sound bite.

Retail was further damaged by the news of Intu going into administration with debts of over £4 billion.

Royal Mail is the latest big employer to announce job cuts – 2,000. Swissport are to get rid of 4,556 of its employees reaffirming the peril facing the aviation industry.

The European Central Bank has dished out 1.31 trillion Euros in loans using 742 banks across 19 countries; this is in addition to the 1.35 trillion in QE.

System Provider Good News

The new boss of the financial regulator the FCA will start on a modest salary of £455,000 pa plus a 12% of salary pension contribution. The giants of the regulated product advice world St James’s Place were celebrating the acquisition of a healthy £3.85 billion new money into its suite of products and investments.

System Collapse?

2 further stories, both very big.

Wirecard – founded in 1999 in Munich this is a German epayment facility which has been exposed, not by its highly regulated auditors but by the Financial Times. To cut a very long story short the company has “lost” $1.9 billion. Apparently its auditors omitted to check the company’s bank statements for 3 years. This will become the biggest accounting fraud in post war Europe eclipsing that of Enron. We discover that Wirecard was within a holding company and the german financial regulator did not regulate the company in trouble. Wirecard holds billions of companies funds on account – but where?

Ernst Young are the auditors – a licensed and regulated firm and the many third parties like British Airways Executive Club will be having a worrying time just now.

Wirecard has $500 million held for UK customers so how do they stand? It turns out that the company operated in the UK under an EU Passport License which could very well mean no FSCS protection.

So, what about regulation and audit? It took the FT to expose the story rather than highly paid and regulated auditors. This one will run and run.

CDOs – collaterised debt obligations are blamed for the last financial crash in the US and rightly fell out of favour.

Not to be outdone CLOs became the investment of choice. Collaterised Loan Obligations.

Simply swap troubled home buyer loans with troubled business loans.

Loans of the sub-prime world are bundled together – loans to companies which have maxed out on borrowings and can no longer obtain credit. There are currently $1 trillion in these loans in default, the majority held in CLOs.

US lawyer and attorney Frank Partnoy told The Atlantic that many US banks have huge exposure to CLOs that will default due to the pandemic.

Wells Fargo has $29.7 billion of CLOs on its balance sheet and if these fail, the bank will collapse. It will not be the only one.

Numbers

Have you noticed how numbers like millions and billions and trillions are bandied about these days like they mean little? To someone surviving on a furloughed wage or universal credit they probably mean nothing. But therein lies real danger. These numbers are largely associated with debt. And debt is either repaid or the debtor goes bust. Debtors in this article are large corporations, banks and countries.

When you reflect on the price of the pandemic and then compare it to the risk of dying from it you can perhaps begin to see why lockdown must be brought to an end, and quickly.

Decentralised System

Might this be the answer? Millions believe so. I believe so. FaceBook believes so.

There is much to learn but if you seek independence from the current, controlled, centralised system, which has the power and authority to do all of the above, without our consent, let alone understanding then you must start your journey as soon as possible.

Get in touch.

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