Toby Birch

Articles:

Crash a Blessing in Disguise?

by Simon Tostevin October 2008 Guernsey Press

Toby Birch (pictured), using the pseudonym Hugo Bouleau, wrote The Final Crash: Addictive Debt and the Deformation of the World Economy. The Blackfish Capital Exodus Fund manager talks about how he had predicted the global

financial crisis.

THIS first of three editorials is a synopsis of my book, The Final Crash. The Guernsey Press covered its launch in April 2007 with the caption, ‘Biggest bust since the industrial revolution’. Its forecast of financial failure seemed far-fetched, particularly when markets peaked six

months later. While it has since proved to be prescient, these be prescient, these articles are not an egotistical exercise in ‘I told you so’ but provide a positive message – not for the short term, but for the next generation and beyond.

My epiphany occurred in 2004 when the legendary Alan Greenspan, then-chairman of America’s central bank, made a bizarre pronouncement. He told the public to take out adjustable-rate mortgages rather than lock-in stable long-term rates (the more traditional method). It seemed imprudent because interest rates were bound to rise as they were just 1% at the time. Homeowners would be bludgeoned when mortgages eventually readjusted. It appeared that a housing bubble was being tolerated to prop up the economy and encourage consumer spending. Such manoeuvring has always ended in boom and bust. After 9/11, permanent growth became the new political mantra and no doubt the Fed had good intentions in letting house prices inflate. It is ironic that America’s downturn has not been caused by the terrorist without, but the inflationist within.

The stock-market rally from late 2002 also appeared flawed because the surge in corporate earnings stemmed from artificial stimulation. Banks were left unchecked to create credit by use of fractional banking. This was where a £100 deposit could generate £2,000 of credit. Like an inverted pyramid, the structure was highly unstable, especially when funds were borrowed from fickle financial institutions rather than long-term depositors. This ‘fast-track’ model to gaining mortgage market share has since vanished, courtesy of the ice age in interbank lending.

It was only later that debt could be identified as the common denominator of Western woes. Also known as leverage, its application was an apparently painless way to magnify gains for banks, corporations and speculative funds. There was just one flaw which is only now apparent. Money manufactured from thin air is inflationary, dilutes our purchasing power and decimates our salaries.

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