Top Economist Warns: You Have No Idea What's Coming

Everyday Americans are dealing with higher costs for gas, groceries, housing. When everybody starts losing all their money very very quickly you see this contraction. So we're likely to see a financial crisis coming out of this ridiculous war not caused by a boom and bust in the financial sector. Meet Steve Keen, the economist who predicted the 2008 crash before it happened. Now he's warning that the next crisis could come from somewhere unexpected. Energy shortages, disrupted supply chains and crushing private debt. We're facing a 10% fall in energy availability. That implies a 10% fall in gross world product is coming our way. That's where we're going to see the shock. So we will have a financial crisis but caused by the physical economy going bust. But the main thing is there simply won't be the availability of oil to sustain the level of economic activity. I predicted the global financial crisis because unlike mainstream economists I focus on the role of credit in the economy, the role of private debt as well. And looking at both I saw that private debt in America in about 2005 was 150% of GDP and it was rising very quickly. The rate of growth of debt peaked at equivalent to 15% of GDP in 2006. So looking forward from when I first started warning about this in December of 2005 I said that that rate of growth of credit cannot be sustained. At some point the level of private debt will cease rising and when it ceases rising rather than credit just falling and becoming smaller than it was in the past we're likely to see credit turning negative. Now that's what actually happened during the global financial crisis. So credit, the increase in private debt peaked at being equivalent to 15% of GDP in the middle of 2006 and it fell to minus 5% in 2009. That's what caused the downturn then. Now this time round it's not credit that's causing the trouble. It's what you have to do to sustain a level of credit and that is you've got to continue servicing existing debt. When individuals take out debt or companies take out debt they've got to service it out of their cash flow. So workers will have wages they try to pay their mortgages out of. Companies will have profits they try to pay their corporate debt out of. Until the war began that was fairly sustainable because the economy had survived the global financial crisis it had obviously been affected by but we hadn't fallen into a Great Depression. So the economy was effectively ticking over when 2020 hit. Continue being feasible for individuals to service their mortgages and for companies to service their corporate debt with two things coming our way. The impact of the closure of the Strait of Hormuz with the El Nino which is within almost within weeks of starting. Those two factors but certainly starting with Trump's stupid war. The supply shortages that's going to cause are just about to start hitting the American economy. So there won't be as enough fertilizer as there normally is for American crops though Americans do create some of their own fertilizer. There won't be the helium sulfuric acid that are the main impacts upon the manufacturing sector. Again the next few months we're going to find that companies that need helium for their production processes and their workflows and that's the high-tech industry, magnetic residence imaging in hospitals and so on they won't have the helium anymore to enable those to happen. So those production processes will stop. You won't be able to create the copper anymore without the sulfuric acid and that's really that's one point where the Persian Gulf is absolutely critical because the oil around the Persian Gulf has a high level of sulfur content. They call it sour in the trade and that means that when you refine it you've got to take the sulfur out of the oil to make it usable and when you do that you generate lots of sulfur dioxide and that's what's used to make sulfuric acid and sulfuric acid is then involved in so many manufacturing processes but the easiest one to identify there is making copper. You have to use sulfuric acid to refine to get copper in the first instance. Copper is critical for data centers. We're going to lose about half the world's supply of sulfuric acid so at some point that means firms that produce copper that have to use sulfuric acid to do it and they've got corporate debt. They won't be able to sell. The increase in the price will not make up for the fall in the volume so they won't be able to service their debt as easily. Companies that rely upon sulfuric acid for their production processes won't get it so they will also be unable to service their interest payments so the combination is likely to mean a whole pattern across the entire country and try a globe really of individuals and companies that can no longer service the level of private debt. That means that in that case they're going to start accumulating bad debt. They quite possibly will be foreclosed upon. That will run through the rest of the economy so we're likely to see a financial crisis coming out of this ridiculous war not caused by a boom and bust in the financial sector but caused by the physical economy going bust courtesy first of all of the war and then secondly of the El Nino. So those two effects are likely to mean a totally new form of global financial crisis. It's going to be a global supply crisis which manifests in the financial sector because so many companies, so many individuals are carrying high levels of private debt. That's where we're going to see the shock so we will have a financial crisis but ironically for once it won't be caused by the financial sector. It'll be caused by Trump's adventurism in the war and then what's going to happen with the impact of the El Nino when that comes through to it later in the year. We were in for a classic capitalist boom and bust sequence anyway with artificial intelligence because AI as a new technology is on the scale of the impact of railways back in the 19th century. It's hard for us to imagine this back in the 1800s. Trains were high-tech, it's a technology you needed to have your economy to catch up with more advanced economies so railways were the high-tech of its day. Railways were first invented, everybody saw huge profits so there was a huge proliferation of companies building railroads and building steam engines and so on as well and that caused a huge boom but then there was massive over-investment and this is a classic thing in a capitalist economy because when you have a new technology like railway and now like AI all the firms that go into it have the ambition of being the dominant player in the industry so therefore you get a level of over-investment. If every firm going in hopes to become the monopolist for that industry sector then you're going to get five and ten times as much investment this is actually warranted by the appeal because they're all going to hope that they're the survivor and the other 90% fail. Now in fact what normally happens is 10% survive, 90% do fail and you therefore have a boom and a bust sequence so the boom is going on right now heavy AI spending for building data centers and building up artificial intelligence software and so on is stimulating the economy. Well if this video has alerted you to the fact that what you thought you knew about e-comics is wrong you'll thoroughly enjoy the free book bundle that has been requested by over 5,000 people already it's worth $50 but it's free right now click on the link in the description or go to stevekeene.com and click on the black button and fill in your information about 60 seconds you'll get the free book bundle and after that if you want to study with me personally and use my proprietary software Revell there'll be an invite to join that course as well and what will then happen is that as this technology starts to really affect the rest of the economy so you start using AI to take the place of legal assistants use AI as a diagnostic tool you have AI being used in robotics as that starts to happen it will actually depress other parts of the economy when a new technology comes in it stimulates the economy when it starts being developed and sold it undercuts the previous technologies and then it'll cause a slump and this is the best person on this to explain was Joseph Schumpeter way back in the early 1900s the wonderful book called The Theory of Economic Development and he basically explained this Berman bus cycle and said that's endemic to capitalism so we're seeing another version of it with the AI that means we have this initial stage where there's massive investment that stimulates the economy and not just in the strictly speaking AI sectors but the people who are learning that money then buy other things with it so they stimulate other parts of the economy as well so we're in that stage at the moment when the technology comes online if it really is effective it undercuts existing technologies and causes a slump and then as it happens the technology gets embedded in society during the slump period that's something you can see with the internet for example so we had the big internet bubble up to and including 2001 there was then the bust in the American stock market in 2001 where the market fell 14% in one day when the bubble finally went out of steam and so there were many many companies like for example pets.com now pets.com was going to take over the food distribution market for pets well have you shopped at pets.com? no you haven't because it was one of the many companies that went bust but of course can you imagine the world without the internet these days it has permeated all of society so Schumpeter's argument was the boom begins with some technological advance which means the company that creates that technology gets a lead over all the others but it's got to invest to get there the investment stage causes a boom then when the product starts rolling out it undercuts existing industries and causes a slump and then in that stage that's the basic pattern now with AI it looks like the scale of investment compared to the potential revenue streams is wrong by a factor of at least about 10 when you look at the costs of AI companies versus the revenues you're often looking at a ratio of 10 to 1 so they're making losses now and the belief is they'll make profits in the future but just like that happened with the internet bubble the expectations of profit were far larger than the sector could actually sustain we're still about to see that break come through there's also the wild card of what will happen if China produces a cheaper version of AI than America can manage that seems to be a large part of the focus of the Chinese is to make it use less energy and be cheaper and be running AI on your own computer rather than needing a data center they may have a slump for the over investment boom might be followed for a slump where all those investments become obviously worthless because the Chinese don't need the data centers on the same scale the Americans do it may be Chinese companies that don't dominate AI the remaining Americans don't make anything like the revenue they expect so we're in for a I think a fascinating period we're starting to see this turning up already in the price that's being charged for the tokens that are part of an AI system at the moment that price is well below the cost of using the energy in those data centers that perform the calculations for you at some point those prices are going to go up the number of people using AI will fall fairly dramatically and AI will then be focused just in the industries where it does things that we really can't do any other way before the period of the slump in AI actually starts but that's the outcome I expect so we're going to get a slump out of AI it's still going to have an impact and permeate through a society but nowhere near as widely as most of the AI advocates thought they're not making revenue out of it but they're letting people create cartoons using AI and charging them one-tenth of the cost effectively to make the cartoons while the cartoons are going to go there will still be serious uses for AI and it will settle down into those uses but it might be one-tenth the scale of the economic impact that people originally thought it would have because they've invested 10 times as much as they should have The warning indicators in terms of the slump we're about to face are the straight-up hormones and when the oil stocks start running out so one of the reasons that oil prices didn't rise as much as people thought they would initially is that China has reserves of the order of one and a half billion barrels of oil so America has a strategic reserve measured in millions of barrels and China's got them measured in billions of barrels so by running down its stock it actually suppressed the increase in price causes caused by the cutoff in supplies that has already occurred but they're now restocking that's they're now back in restocking that particular building up the stock that they ran down to do that early neoclassical theory will tell you markets are forward-looking well BS to that they tend to react to the spot market dynamics and because of China's running down of its reserves and the same of America there hasn't been much of an increase in the oil prices when the stocks run out and the flow of supplies also cut off because of the cutting of the Strait of Hormuz then we're going to have a dramatic fall in the availability of oil and that will then affect production processes all across the globe it'll make obviously the oil price will rise but the main thing is there simply won't be the availability of oil to sustain the level of economic activity and this is one of the areas where the mainstream is completely wrong because they don't realise the role of energy in production and that might sound crazy to you and frankly it is crazy because when you take a look at the relationship between energy and GDP it's virtually a one-for-one relationship so this is a raffle file showing both energy and gross world product for the global economy that's taken in from the world energy balances from the International Energy Association and GDP measures from the World Bank and when you plot energy in petajoules and against gross world product in 2015 US dollars you find they're virtually the same straight line but even more significantly the change in energy and the change in gross world product are virtually identical the scale is the same so there's a 4% increase in gross world product there's a 4% increase in energy if there's a fall in one there's a fall in the other that's you can see the impact of COVID there now COVID was clearly a case of the gross world product falling because suddenly there's lockdowns and people can't work anymore and energy consumption fell lockstep with that equally you've got things like the OPEC price rise in terms of the impact that had on the economy back in mid to late 1970s and you can see that there was a boom and then a bust and that was caused by the energy effect so energy can drive if energy goes down so does gross world product if gross world product goes down so does energy they're basically lockstep with each other now that is completely missing from mainstream economics so they're not even aware of the role of energy and what in enabling GDP produced and if you ask an economist what's going to be the impact of say a 10% fall in the availability of energy that will cause a 0.4% fall in gross world product now that's obviously not true on the data but it's in their models that this is one of the problems they have models that are not tested against the data in any realistic sense so this is the real world you can see that the relationship between energy and gross world product is virtually one for one if energy changes gross world products change by the same amount and vice versa that's the actual data but according to their models they claim that because energy is only equivalent to about 4% of the total of GDP then a fall in availability of energy will cause a 0.04 fall in GDP the change in output given a change in energy is equal to the fraction that the particular sector has of GDP so the energy sector is about 4% of GDP so they're therefore saying that if there's 4% is equal to 0.04 as a fraction what they're saying is if there's a 10% fall in energy availability which is 0.1 in decimal terms that'll cause a 4% fall in GDP which is 0.04 in fractional terms and therefore it's pretty trivial 10% fall in energy are only a 0.4% fall in the rate of economic growth so we can forget about it pretty much that is complete nonsense the real world is 10% fall in energy you'll have a 10% fall in GDP why do they make that mistake? and it comes back to how they think about production because the way that neoclassical economists model production is to multiply together capital and labour and energy proportionally to their shares of GDP capital gets about 25% of GDP labour gets about 70% energy gets about say 5% those are the arguments that the neoclassicals have in their production model and that therefore means that if one falls you only get a small so the fall that if one of capital or labour energy fall in their quantity then you'll get a tiny fractional impact of that upon GDP whereas the approach that I use which comes from post-Keynesian economics and is called the Leontief production function under the honour of the person who first found this empirical relationship basically says you can't substitute inputs so if you don't have the capital or you don't have the labour or you don't have the energy you can't substitute if there's a fall in energy you can't substitute by adding more workers that's the basic logic there so if you compare these two and say what happens according to these two models if there's a fall in the availability of energy then if I reduce the availability of energy here by 1% you can see that the neoclassical model says our production is still going to be 99.9% for the previous level whereas the approach that I take literally it's going to fall by 1% if you push it through to say a 10% fall which is what we're expecting at least in terms of the decline in energy coming from the Strait of Hormuz the neoclassical model says that that will only reduce GDP by 0.5% which you're seeing over here but the post-Keynesian model says it's going to fall if energy availability falls by 10% then GDP is going to fall by 10% and then the only way you can get a catastrophic fall out of the neoclassical model is everything has to disappear so there I've got a 10% fall in energy if I add in a 10% fall in machinery and a 10% fall in labour then I finally match what the post-Keynesian model says is going to happen that's basically treating capital and labour and energy as substitutes that's as if if you don't have any petrol you can put your kids into the petrol tank I'm sorry you can't so this sees them as substitutes whereas the approach that I take sees them as complements if you don't have one of those three inputs then you can't produce the output so a 10% fall in any of those sectors will cause a 10% fall in GDP we're facing a 10% fall in energy availability that implies a 10% fall in gross world product this is coming our way