Things could get really scary, so why aren’t we preparing?

Is the Western economy on the brink of a worrying collapse? There are different views on this, but there is enough real world evidence to suggest our failure to prepare could be something we seriously regret.

You want to hear something unnerving? JP Morgan recently modelled what is going to happen to the oil prices based on a range of assumptions. The result was so scary they didn't publish it. Basically if they model an extended closure of the Strait of Hormuz the implications are so unprecedented they break the model.

It is probably time to become alert to this. More and more voices are starting to raise alarm. There are a series of red flashing warning lights about the Western economy and we've been ignoring them for a while now.

I try to avoid the left's habit of predicting the final crisis of capitalism every ten minutes, but things are happening and at the moment it looks unwise to assume it will 'just be OK'. So why aren't you hearing more of this? There are quite a few reasons but one of them is that the rich and powerful really need the better case scenarios to be correct. Let me explain.

In the few years after 2007, a revolution happened which you were excluded from. The financial crisis really risked taking wealth from the wealthy, which is why every lever of government at every level was pulled frantically to save them. It is always framed as 'to protect your savings and the economy', but they would say that, wouldn't they?

So government flooded the market with liquidity from quantitative easing at exactly the point demand was falling. The rich came up with a scheme – they used that money to increase the value of their own assets. Basically they bought shares in themselves to boost share prices higher than the money they borrowed to do it with. That is how the rich got so rich.

At this stage the richest ten per cent of American's don't make their money in wages but in assets. This is why they are all suddenly not all that fussed about GDP. In theory, GDP makes your income go up but a rising stock market makes their income go up. Note Trump's strange statements implying the economy isn't important so long as share prices go up

Every powerful person in the US gains from a rising stock market, and they are the ones who predict the stock market and basically own the stocks. They are talking up the assets that make them rich. They all have a vested interest in not asking questions about whether share values are merited.

This has led to an extensive literature on whether the stock market (and at the moment oil prices) are best understood as delusional. A lot of people think the stock market isn't pricing in blatantly obvious risks because it is incentivised not to and so may be a rather fantastical picture of where things really are.

The scary word for the stock market set is 'correction'. This is a euphemism for 'crash until the numbers make sense'. Want a number that doesn't make sense? Anthropic is about to launch as a $1.5 trillion company but this year it made profits of $4.5 billion. So this is a company which at the moment would take well over three centuries to actually earn the value of the company from profits.

Where is the risk? It's the 'everything about it' to be honest. It's hard to know where to start. The US is a country where the top ten per cent now represent 50 per cent of consumption. Consumer demand is held up by a group of unrepresentative super-wealth and without that there is no economy.

And they've bet the house on AI which is also a worry. Separate the technical issues (does AI really do what they say?) from the economic issues (is this the right way to invest in it?) and it gets scary again. At the moment literally no-one has any idea how existing AI is meant to recoup anything close to the investment being made in it.

This is a phenomenal gamble that AI will reach 'general intelligence' at which point it genuinely might pay for itself, but no-one knows if that will happen and a lot of people doubt it. AI-related investment is now a third of the US stock market. If that goes, the picture is also scary.

It would start to expose a lot of other things. You think Google and Facebook and Apple are technology companies and that is a mistake. Google and Facebook are advertising companies, advertising making up 75 per cent and 98 per cent of their income respectively. Apple is becoming a subscription company that makes phones. Only ten per cent of its income is non-iPhone hardware.

The point is that for all the hype, new tech companies were unable to come up with a business model for their services other than to monopolise advertising. Meanwhile a company in the US had been using AI during the period when companies were running it at a loss. Now AI corporations are charging and it has been reliably reported that an unnamed corporation ran up a $500 million bill on AI in one month for no real productivity increase. The company instructed all staff to stop using AI.

Then there is the original worry JP Morgan was hiding from – oil. The technical reason it withheld predictions was that 'the data was insufficient'. But that was a metaphor for something else – their whole mechanism of predicting oil prices was based on the assumption of stability and abundance. The model doesn't work just now because it's underlying premise doesn't.

Alternatively it does work, but you don't want to see the results, and these are both different ways of saying the same thing. We are very close to where we were in the late 1990s when the dotcom bubble led to confident predictions that the stock markets would rise forever and ever. They didn't.

“For the absence of any doubt here, we’re the Mayans in this scenario”

But there is another factor in this which is new – China. Sticking to AI for a minute, China is miles and miles behind the US on 'compute' (which is what the industry calls the capacity created by data centres). In fact it is four years behind the US on compute – but it is only three months behind them on AI performance.

Let me state that simply for you – the US went for lavish for of AI and the business model is 'what is the most we can charge consumers to get into our IP-protected environments?' while China focused on 'let's make the code efficient and the IP open source and focus on delivering the cheapest AI services'.

US AI is almost three times as expensive as Chinese AI but the difference in performance is negligible – and the Chinese AI is open source so you can just take the code for yourself and implement it in your own systems. Most companies (and governments) around the world are choosing not to bet everything on a single proprietary US system they don't own.

This is the point; China focusses on making things people need. Basically the US now only exports petrochemicals, Chinese-made phones and computers, bad code and Dollars. If we shift away from oil and drift away from the Dollar as the global reserve currency, there isn't very much that the US makes that anyone else needs.

And let me just add at this point that I’m not even covering the fact that all the kinds of risk which caused the 2007 banking crisis and which was supposed to be cleared from the system are all back because regulation has been quietly relaxed when we weren’t looking. There is a whole other group of commentators sounding massive alarm bells about the threat of the shadow banking industry bringing the economy down again. On top of the worries above.

Right, so this all being generally accepted, what does bad look like? Start by thinking 'the inverse of good'. At the moment the system is in large part being held together by the wealth and abundant confidence of the people running the system. What if JP Morgan's predictions for an extended Strait of Hormuz closure is correct? What happens without abundant wealth and confidence?

Nothing works any more. Food rockets in price (almost all food relies on petrochemicals for production and processing). Stock markets lose confidence overnight and everyone tries to run. Borderline investments collapse (the scale of speculative investment in AI would make it borderline in a crisis).

Then consumer sentiment collapses, consumer markets contract and everything else then starts to topple. And with what does the US and Europe steady itself? More bad code? More quantitative easing? More financial products? More.... what? What do we make that everyone else needs in an emergency? What are we trading when all the physical goods are made in China?

That's the risk here. It isn't that 'capitalism' would necessarily 'end', it could just be that Western capitalism falls apart and Chinese 'capitalism' takes over. On a global historical scale the world might not notice that any more than it did when the Mayan civilisation collapsed. Something else comes and takes its place. It is irrelevant.

Unless you're Mayan. For the absence of any doubt here, we're the Mayans in this scenario.

And no, it wouldn't look like total population collapse, but it would make every recession of our lifetime look lightweight and could potentially eclipse the Wall Street Crash and the Great Depression. As Richard Murphy argues in this video, everyone thinks something bad will happen this year but no-one is doing anything about it and a lot of people are playing down risks they acknowledge.

So let me finish with this; what would you do if you were super-rich and saw this? The answer is you'd look for one last payday before it all comes down. Now look at the SpaceX IPO (which means flotation on the stock market as a public company). Musk has hidden all his junk in SpaceX. He has shifted all his loss-making divisions under there to hide them.

And then the company is going to unprecedented steps to goose its launch numbers. This is odd – traditionally, launch artificially high and all that happens is a market run when everyone realises, which looks terrible. But this time there is a certain logic – because of Musk's celebrity there are a lot of 'retail investors' (ordinary punters) who will buy shares in SpaceX, seeing it as a safe bet.

A lot of people think this may be pump-and-dump – Musk will inflate the sale price, take ordinary people's money and then cash out when the company starts going down. And down. The AI IPOs are all happening at once (ChatGPT and Anthropic are going this year too, and a big chunk of SpaceX is xAI) which is why we finally know the (unconvincing) profit data.

I'll come back to the question of what to do about this in a later article. But at the moment, just hold on to the thought that rich people look at their calculator, said 'oh, hold on, that's petrifying, we better keep that secret' and then immediately started taking steps that look like a bunch of rich people scared the house is coming down.

This could all go a different way, but if the pessimistic predictions are scary, the optimistic ones are little believed. It is time to pay attention. Something bad might happen. And it could be very bad. We ought to be preparing contingencies but instead we're bashing immigrants. It's not a healthy picture.