Futurology blog: what’s the next trend that’ll disrupt our world, financially, socially or just pointlessly?

Friday, 12 September 2008

We do have a black hole and we're all being sucked in

No-one seriously expected the LHC to produce a black hole and of course it didn’t. However, the American and British financial institutions have created a financial black hole and it looks like the world’s entire economic system might just be dragged into it, to its utter destruction.

The governments of these two countries are pouring more and more money into the hole, hoping to fill it. But as we know, black holes don’t work like that. The more that goes in, the more powerful the black hole becomes.

In this analogy, the more value is lost, the more the banks have to ‘deleverage’ themselves, and the faster that good debt will turn to bad. What’s more, when we sell our bank shares, we have to do something else with the money. We can buy shares in other sectors, but ultimately the banks’ reluctance to finance new economic activity will reduce their value too. We can put our money into a savings account … which will only last as long as the bank does.

The black hole’s sphere of destruction has already widened far beyond America and the UK. Let’s assume that it carries on getting worse and worse until every last piece of credit is sucked in and destroyed. When you consider the insane amount of leveraging that banks were doing as a matter of course, it’s not impossible. Total debt really could surpass total credit, especially as shareholder panic continues to destroy share value.

We’d then simply have to start a new economy based on something else. Clams weren’t international enough, metals like silver and gold didn’t really work as people could always just dig them out of the ground, and credit is on its last legs. It’ll certainly be interesting to see what comes next.

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