Wheels Falling Off…

Off the keyboard of Steve from Virginia

Published on Economic Undertow on April 14, 2013

Discuss this article at the Economics Table inside the Diner

In 2013 it is 2007 all over again, there is a sense of foreboding. Markets are breaking down except for the self-funded stock markets. When these markets begin to break … ?

A difference between now and the ‘good old days’ is that management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero and cannot be effectively lowered. Torrents of cheap credit flow from central banks toward commercial finance. Bad loans have been shifted from the private sector to the public’s accounts. Trillions in all currencies have been borrowed and spent by governments … largely to benefit finance. Every one of these are rear-guard efforts, behind them there is nothing, only desperate flailing, arbitrary confiscation, stealing what remains to steal … capitulation to reality … and ruin.

HSNIF 041213

Figure 1: What a fuel price hedge looks like along with its collapse, the Incredible US Housing Recovery compared to the monumental surge in housing churn that took place from 1990 to 2007. The ‘recovery’ is the tendril on the far right. Realtors want Americans to believe what is underway right now is the start of another ramp-up in house building and selling. This is a lie: Americans are broke, suburbia is too expensive to duplicate. A palatable alternative to suburbia in 2013 does not exist.

What would make a ‘recovery’ sustainable? Fuel prices returning to sub-$20 per barrel of crude oil. Otherwise, most of what is seen on the chart is a stranded ‘investment’.

What would derail any hope of recovery and leave the world a sustainable ruin? Fuel prices returned to sub-$20 per barrel of crude oil. At that price there would be very little crude oil available, there would be insufficient buying power to lift the hard-to-reach petroleum that now remains.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 91.29 -2.22 -2.37% May 13
Crude Oil (Brent) USD/bbl. 103.11 -1.16 -1.11% May 13
RBOB Gasoline USd/gal. 280.18 -2.92 -1.03% May 13
NYMEX Natural Gas USD/MMBtu 4.22 +0.08 +2.01% May 13

 

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,501.40 -63.50 -4.06% Jun 13
Gold Spot USD/t oz. 1,482.75 -78.75 -5.04% N/A
COMEX Silver USD/t oz. 26.33 -1.37 -4.93% May 13
COMEX Copper USd/lb. 335.00 -8.35 -2.43% May 13
Platinum Spot USD/t oz. 1,486.75 -45.55 -2.97% N/A

Bloomberg commodities: precious metals and US petroleum were hammered on Friday. Metals have been leading indicators, petroleum is declining to the price level where drilling becomes unprofitable. Without new drilling there is no replacement for rapidly depleting existing reserves.

As reserves are exhausted so is the ability pay for them. The fuel waste process is collateral for fuel extraction, not the fuel itself. The reason for this should be obvious: as soon as fuel is extracted it is destroyed, it is useless as collateral. Instead, the fuel wasting implements become collateral for the funds used to waste more. As credit expands, it first becomes more costly then unaffordable. Industrial output — which is  nothing more than non-remunerative waste — becomes impossible to finance. Ultimately, credit contracts, the nominal prices decline … as the ability to meet prices declines faster … we are entering into the credit contraction phase now.

This is a dynamic that escapes conventional analysis, which assumes an economy running normally in the background and providing credit … even as its fuel supply is depleted. Meanwhile, the economy runs down in real time, credit is diminished and analysts are perplexed.

Triangle of Doom 041213

Figure 2: (Click for big), Brent crude @ $118 in February accompanied the robbery/crash of Cyprus, panic in Japan and deflation. Brent crude today is $103.11, nearing the marginal level where extraction becomes unprofitable. Chart by TFC Charts.

Since 2008 the world has been in the grip of deflation which reflects facts on the ground. With depleting resources, multiplying claims against these same resources or adding wasting implements does not create anything new but depletes what we have access to, faster. Deflation exposes claims as worthless, the fuel extraction process itself is stranded. We have so successfully cannibalized ourselves that it is becoming too late to do anything useful about it.

20y JGB yields 1

Figure 3: (ZeroHedge) Japan 20 year bond yields have become massively volatile: bonds are offered for sale driving up yields which retreat as the Bank of Japan steps up to buy. For Japan’s central bank to meet its targets it must flood the world’s markets with … more credit. This credit-for-credit exchange is a charade, it cannot alter the trajectory of Japan’s fuel- and resource reality, it cannot even change Japan’s finance reality … it is capitulation, the wheels finally coming off in Japan.

Bond-holders ‘sell’ their holdings for yen then swap these for dollars or euros in forex markets. Volatility is increased because of the enormity of the trades required to move the generally liquid bond markets. Large lenders to Japan such as banks and insurance companies appear to be dumping bonds, exiting their positions. These lenders become yen sellers as well: because there are more sellers than buyers, the currency is depreciated. There is no real increase in the overall supply of money. Sean Corrigan @ Diapason Commodities Management, (ZeroHedge):

 

Net new debt issues are currently being penciled in at around the Y42 trillion mark a year and, with the BOJ scheduled to buy Y70 trillion p.a., it might seem that JGBs offer a one-way bet even here, but with a current overhang of Y942 trillion as we write, the possibility is not to be  overlooked that while the Bank may be comfortably able to mop up the new flow, it might have its work cut out if others decide to use its resting bid to get rid of some of their enormous existing stock of claims.Prime candidates would be foreigners (with Y87tln to hand and steep currency losses to hazard), the banks (which, we have seen, hold Y425tln in government claims, of which Y360tln in JGBS per se), and insurance companies (with Y222 trillion in debt and Y184 trillion in JGBs & TBs combined). In its last concerted attempt at re-inflation, conducted in 2002-3, the BOJ briefly pushed up both the monetary base and overall M1 by around 30%. The response of prices was modest to say the least: CPI moved from -1.4% to +0.5% three years later. If the same thing were to happen again, all that would have been achieved would be to have introduced an unnecessary disturbance of the pricing structure between inland and foreign trade and, at the margin, between those living off current income and those reliant upon stored past income. Debt would, of course, have climbed inexorably skyward, as would the debt/nominal income ratio.

 

The reason for the gambit is Japan’s vanished trade surplus which had overseas customers subsidizing resource waste by the Japanese. Exports never provided any return for Japan’s customers: they are now broke, they cannot subsidize anyone. The depreciation is a futile attempt to retrieve the irretrievable.

 

Report to Congress on International Economic and Exchange Rate PoliciesU.S. Department of the Treasury Office of International AffairsApril 12, 2013Bruce Krasting discusses the Treasury Department response to the Japanese:

 

There are two potentially market moving sections in the report. The Treasury Department planted a “dirty bomb” at the Bank of Japan, and tossed a grenade at the Swiss National Bank. I’m thinking of all the folks who are big long USDJPY. They are going to have to sweat the next 50 hours. They have to hold their cards and wait. I suspect that quite a few FX players will have their weekends ruined.The key words on Japan (from US Treasury Secretary Jack Lew):

“We will continue to press Japan to adhere to the commitments agreed to in the G7 and G 20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”

“I think we just had the Jack Lew moment that I was anticipating. I believe that Jackie Boy has made a mistake. He picked a public fight with Japan that he can’t win. Having picked the fight, he can’t back off. When the BOJ and the markets make him look silly (USDJPY = 110+) there is going to be pressure on him. Jackie has set himself up for a fall.

In all my years of watching (and participating) in the FX markets I have never once seen a situation where “talk” accomplished a damn thing. In fact, idle talk often creates the opposite reaction to what was intended. So for those who are having sphincter problems this weekend over a long USDJPY book, and the 50 hours you have to wait to find out what happens, I say relax. By the opening in NY on Monday, you will be okay again. In a few weeks you’ll be buying hot cars and houses.”

 

Keep in mind, the Treasury Secretary doesn’t act by himself, he has a fleet of ‘associates’ at the Big Banks pulling his strings. If he makes a mistake they lose and they don’t like to lose = they pull the strings as needed.

Meanwhile, the fundamentals are ignored: the effects of Japan’s maneuvering are likely to be negligible. Management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero … torrents of cheap credit flow, etc. Things cannot be improved, only be made worse.

Japan — like all the other countries — has no independent monetary policy. This is because the price of money has nothing to do with interest rates or trades on forex markets. Rather, it’s priced at gasoline stations around the world by millions of motorists every single day. If gas prices are too high — because of currency depreciation or some other reason — drivers buy less and economies deflate. This undoes the efforts of the money-managers.

Enter the post-1998 peak oil paradigm shift: when gas prices fall drivers buy more fuel but there is quickly less available, prices either increase again or shortages occur. The real price of fuel — that relative to other goods and services — increases relentlessly. Eventually, this real price bankrupts countries like Japan!

Think of the old-fashioned ‘gold standard’ constraining the money supply as well as industry and commerce as it did during the 1930s. With the ‘gasoline standard’ there are the same constraints except it is impossible to go off petroleum and grow the economy as could be done by ‘going off gold’. The only way to escape the gas standard is to jettison cars and other fuel-guzzling gadgets, this also annihilates economic growth which is dependent upon more and more of these things being sold. Meanwhile, in the background where the analysts pretend not to notice, the gasoline standard strands cars and other fuel guzzling gadgets anyway: at the end of the modernity’s ever-shortening gangplank there is no room to maneuver.

Fiddling with nominal prices is pointless: any possible currency-driven export gains are offset exactly by currency-driven import costs. Because Japan is nothing more or less than a car factory with radioactive beaches it cannot gain anything by depreciating its currency. Its export prices are determined entirely by what it pays for imports … including fuel! The only effect of so-called monetary ‘policy’ is steal funds from workers and shift them to plutocrats. Everything else remains the same.

The blowup in Japan is part of the de-carring process which is underway right now everywhere in the World. Depreciating the yen does not bring one drop of petroleum fuel onto the market. The only question is how soon the ‘Abenomics’ experiment will fail and what form the failure will take. As holders of yen and yen-denominated bonds reduce their ‘exposure’ and dump their bonds there is less credit available rather than more. Prices for fuel decline … as they are doing so now! This does not help the Japanese exporters because their customers are still broke … regardless of the price of credit.

When the price of crude declines below the cost of extraction there will be physical shortages. These will reduce credit further which will in turn shut in more crude in a vicious cycle. There will be a return to recession with no way to end it: conservation by other means.

What sort of country does Japan become? A place to look is Egypt which has its own currency but depends upon foreign exchange same as Japan:

 

Short of Money, Egypt Sees Crisis on Fuel and FoodDavid D. Kirkbpatrick (NY Times)A fuel shortage has helped send food prices soaring. Electricity is blacking out even before the summer. And gas-line gunfights have killed at least five people and wounded dozens over the past two weeks.The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals.

 

The establishment insists that the fuel shortage is the result of a money-credit shortage. Instead, the reverse is true: there is a shortage of fuel; there is no useful collateral for new credit, only (obsolete) waste enablers.

Japan can also become Portugal:

Portugal’s elder statesman calls for ‘Argentine-style’ defaultAmbrose Evans-Pritchard (Telegraph UK)Mario Soares, who steered the country to democracy after the Salazar dictatorship, said all political forces should unite to “bring down the government” and repudiate the austerity policies of the EU-IMF Troika.“Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened,” he told Antena 1.The former socialist premier and president said the Portuguese government has become a servant of German Chancellor Angela Merkel, meekly doing whatever it is told.

“In their eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal,” he said.

Raoul Ruparel from Open Europe said Portugal had reached the limits of austerity. “The previous political consensus in parliament has evaporated. As so often in this crisis, the eurozone is coming up against the full force of national democracy.”

The rallying cry by Mr. Soares comes a week after Portugal’s top court ruled that pay and pension cuts for public workers are illegal, forcing premier Pedro Passos Coelho to search for new cuts. The ruling calls into question the government’s whole policy “internal devaluation” aimed at lowering labour costs.

A leaked report from the Troika warned that the country is at risk of a debt spiral, with financing needs surging to €15bn by 2015, a third higher than the levels that precipitated the debt crisis in 2011. “There is substantial funding risk,” it said.

 

To operate its massive fleet of cars, Portugal must compete with China and America for fuel. These countries’ can generate their own credit, Portugal cannot, in fact none of the eurozone nations are able do so. Right now Portugal must borrow from Wall Street by way of EU banks, so as to repay Wall Street. Portugal has borrowed to buy fuel, it must borrow additional amounts to buy more fuel at the same time service and repay its dead-money debts.

The end result for all these countries is the same: there are debts that cannot be retired, industrial obligations that cannot possibly be met. As during the early years of the 20th century, the wheels are falling off all over the world … we shall not see them turn again in our lifetime …

Knarf plays the Doomer Blues

https://image.freepik.com/free-icon/musical-notes-symbols_318-29778.jpg

Support the Diner
Search the Diner
Surveys & Podcasts

NEW SURVEY

Renewable Energy

VISIT AND FOLLOW US ON DINER SOUNDCLOUD

" As a daily reader of all of the doomsday blogs, e.g. the Diner, Nature Bats Last, Zerohedge, Scribbler, etc… I must say that I most look forward to your “off the microphone” rants. Your analysis, insights, and conclusions are always logical, well supported, and clearly articulated – a trifecta not frequently achieved."- Joe D
Archives
Global Diners

View Full Diner Stats

Global Population Stats

Enter a Country Name for full Population & Demographic Statistics

Lake Mead Watch

http://si.wsj.net/public/resources/images/NA-BX686_LakeMe_G_20130816175615.jpg

loading

Inside the Diner

Quote from: JRM on July 02, 2020, 05:17:51 PMQuote from: knarf on July 02, 2020, 04:24:13 PMLibertarianhub.com … How does the journalistic quality of this source resonate with the journalisti...

Quote from: knarf on July 02, 2020, 06:23:38 PMCritical theory is the reflective assessment and critique of society and culture in order to reveal and challenge power structures. With origins in sociology as well as in literar...

Quote from: knarf on July 02, 2020, 06:03:28 PMQuote from: JRM on July 02, 2020, 05:17:51 PMLibertarianhub.com … How does the journalistic quality of this source resonate with the journalistic quality...

Critical theory is the reflective assessment and critique of society and culture in order to reveal and challenge power structures. With origins in sociology as well as in literary criticism, it argues that social problems are influenced and created mo...

Quote from: JRM on July 02, 2020, 05:17:51 PMLibertarianhub.com … How does the journalistic quality of this source resonate with the journalistic quality of this?:

Recent Facebook Posts

No recent Facebook posts to show

Diner Twitter feed

Knarf’s Knewz

Quote from: knarf on July 02, 2020, 06:23:38 PMCri [...]

Critical theory is the reflective assessment and c [...]

Diner Newz Feeds
  • Surly
  • Agelbert
  • Knarf
  • Golden Oxen
  • Frostbite Falls

Quote from: monsta666 on Today at 07:03:35 AMMask [...]

Mask wearing during the Covid-19 crisis faces the [...]

Quote from: Cam on Today at 04:58:59 AMQuote from: [...]

Quote from: Surly1 on Today at 04:12:10 AM[img wid [...]

Quote from: Surly1 on Today at 04:12:10 AM[img wid [...]

Quote from: UnhingedBecauseLucid on March 18, 2019 [...]

CleanTechnicaSupport CleanTechnica’s work via dona [...]

QuoteThe FACT that the current incredibly STUPID e [...]

Quote from: knarf on July 02, 2020, 06:23:38 PMCri [...]

Critical theory is the reflective assessment and c [...]

Quote from: K-Dog on February 24, 2020, 06:23:52 P [...]

I wonder how much these coins have been debased? [...]

Precious tip of the day.....Buy silver NOW  She [...]

Scientists have unlocked the power of gold atoms b [...]

Quote from: azozeo on August 14, 2019, 10:41:33 AM [...]

I am OUT of Jury Service!  I got summoned to be a [...]

Quote from: Eddie on May 16, 2020, 10:30:30 AMQuot [...]

Quote from: RE on May 16, 2020, 08:20:06 AMQuote f [...]

Quote from: RE on May 16, 2020, 08:20:06 AMQuote f [...]

Alternate Perspectives
  • Two Ice Floes
  • Jumping Jack Flash
  • From Filmers to Farmers

The Flim-Flam Men by Cognitive Dissonance   I suspect if average Joe or Jane were asked to identify [...]

The Coming War With China Re-posted from CaitlinJohnstone.com   (Have you noticed that (suddenly) Ch [...]

Papers Please! By Cognitive Dissonance     For those who may not know, Mrs. Cog and I live in the mo [...]

Lies, Damn Lies and Coronavirus Statistics By Cognitive Dissonance     “Never believe anything in po [...]

The Decline and Fall of Civil Society Chapter One By Cognitive Dissonance     From my perspective at [...]

2020 - JUN - Spotlight StoriesCategory: Variety Pack2020-06-01 - Boatyard erupts in flame, fire gets huge, in coastal Wadebridge ( [...]

2020 - People Burning To Death2020-06-30 - Car goes up in flames and burns man to death while parked near temple in coastal Bangko [...]

2020 - Boat FiresBoats And Ships Burned In 2020: 5802020-06-30 - Boat bursts into flame on Mosquito Lake in Bazetta ( [...]

However don't expect strikes and yellow vests to fix underlying problems [...]

So how many more times are we going to hear that this is our last chance to take action in order to [...]

This is definitely not a bona fide post [...]

Daily Doom Photo

man-watching-tv

Sustainability
  • Peak Surfer
  • SUN
  • Transition Voice

The Great Pause Week 15: Pirata"The white gull can bank steeply, climb, dive, and even invert, but it lacks by a large margin [...]

"The blow felt by a globalized, just-in-time, cheap-energy driven, modern consumer economy will [...]

"There are ten million times more viruses on Earth than there are stars in our universe."H [...]

The Great Pause Week 11: Son of a Lab Rat"Humans, by and large, seem unshakable in their beliefs that skin color, religious affiliation, [...]

The Great Pause Week 10: President Jill Stein"President Stein asked what preparations were warranted at this time. The CDC Director said tha [...]

The folks at Windward have been doing great work at living sustainably for many years now.  Part of [...]

 The Daily SUN☼ Building a Better Tomorrow by Sustaining Universal Needs April 3, 2017 Powering Down [...]

Off the keyboard of Bob Montgomery Follow us on Twitter @doomstead666 Friend us on Facebook Publishe [...]

Visit SUN on Facebook Here [...]

What extinction crisis? Believe it or not, there are still climate science deniers out there. And th [...]

My new book, Abolish Oil Now, will talk about why the climate movement has failed and what we can do [...]

A new climate protest movement out of the UK has taken Europe by storm and made governments sit down [...]

The success of Apollo 11 flipped the American public from skeptics to fans. The climate movement nee [...]

Today's movement to abolish fossil fuels can learn from two different paths that the British an [...]

Top Commentariats
  • Our Finite World
  • Economic Undertow

http://www.shadowstats.com/alternate_data/unemployment-charts he calculates June unemployment at 31. [...]

In reply to GBV. maybe, maybe not. I can't see how capitalism itself has something inherent tha [...]

In reply to GBV. "There’s a part where the interviewer says that he does’t believe in a limit t [...]

In reply to Chrome Mags. Similar to their strategy for world domination. Straight across. No nuance. [...]

In reply to Gail Tverberg. I just listened to the Alhambra Investments "Making Sense Eurodollar [...]

I don't get it. For years this blogger and others like Martenson have been on about the fragili [...]

In reply to steve from virginia. This Brookings webinar goes over some of the ground discussed here [...]

In reply to Ken Barrows. Everything is bullish! [...]

Also, it's very possible we could send the virus packing if everybody would just wear a face-ma [...]

The crux of the problem is that what Chris Martenson has christened the "Honey Badger Virus [...]

RE Economics

Going Cashless

Off the keyboard of RE Follow us on Twitter @doomstead666...

Simplifying the Final Countdown

Off the keyboard of RE Follow us on Twitter @doomstead666...

Bond Market Collapse and the Banning of Cash

Off the microphone of RE Follow us on Twitter @doomstead666...

Do Central Bankers Recognize there is NO GROWTH?

Discuss this article @ the ECONOMICS TABLE inside the...

Singularity of the Dollar

Off the Keyboard of RE Follow us on Twitter @doomstead666...

Kurrency Kollapse: To Print or Not To Print?

Off the microphone of RE Follow us on Twitter @doomstead666...

SWISSIE CAPITULATION!

Off the microphone of RE Follow us on Twitter @doomstead666...

Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

Off the keyboard of RE Follow us on Twitter @doomstead666...

Merry Doomy Christmas

Off the keyboard of RE Follow us on Twitter @doomstead666...

Peak Customers: The Final Liquidation Sale

Off the keyboard of RE Follow us on Twitter @doomstead666...

Collapse Fiction
Useful Links
Technical Journals

This study aims to provide improved knowledge and evidence on current (1986–2015) climate vari [...]

In many countries, urban heat island (UHI) effects come along with urbanization in metropolitan area [...]

The impact that climate change and urbanization are having on the thermal-energy balance of the buil [...]

Although there is a general consensus about the trends of current climate change, the North Atlantic [...]

Follow on our http://www.doomsteaddiner.net/forum/