Published on the Economic Undertow on January 30, 2017
Discuss this article at the History Table inside the Diner
Why man, he doth bestride the narrow world
Like a Colossus, and we petty men
Walk under his huge legs and peep about
To find ourselves dishonorable graves
— William Shakespeare
The Colosseum in Rome was named for a gigantic portrait statue of Nero commissioned by the emperor in AD 64 to commemorate … himself. It stood within the Domus Aurea, a 300 acre complexes of palaces, gardens and pavilions Nero ordered built at public expense not far from the old Republican Forum, between the Palatine and Esquiline hills. The Domus’ occupied what was previously a residential district for Roman elites adjacent to a marshy lowland. The grounds can be compared to another marshy lowland favored of the elites, the National Mall in Washington, DC. At 309 acres, the two compounds are not entirely identical: one was intended to be as a tourist attraction, the other, a playground for a single person,.
As for the Domus …
… Its size and splendor will be sufficiently indicated by the following details. Its vestibule was large enough to contain a colossal statue of the emperor a hundred and twenty feet high; and it was so extensive that it had a triple colonnade a mile long. There was a pond too, like a sea, surrounded with buildings to represent cities, besides tracts of country, varied by tilled fields, vineyards, pastures and woods, with great numbers of wild and domestic animals. In the rest of the house all parts were overlaid with gold and adorned with gems and mother-of‑pearl. There were dining-rooms with fretted ceilings of ivory, whose panels could turn and shower down flowers and were fitted with pipes for sprinkling the guests with perfumes. The main banquet hall was circular and constantly revolved day and night, like the heavens. He had baths supplied with sea water and sulfur water. When the edifice was finished in this style and he dedicated it, he deigned to say nothing more in the way of approval than that he was at last beginning to be housed like a human being.
The pond was supplied with water from an aqueduct built for the purpose and surrounded with its own colonnade. The rotating hall and other features were said to be powered by a water wheel. The 400 rooms were arranged on two floors as a kind of maze intended for banquets and entertainments, there are no signs of any sleeping quarters. Nero did not live there but in another palace on the Quirinal Hill.
Rooms were built with 30- foot vaulted ceilings, were lit with skylights and clerestories, decorated with frescoes, elaborate mosaics, fountains and grottoes. The complex was constructed largely of brick and Roman concrete then finished over with marble, alabaster and other colorful stones. Nero’s statue might have been the largest cast bronze artwork of ancient times, exceeding the by-then destroyed Colossus at Rhodes. By comparison, New York’s Statue of Liberty rises one hundred and fifty-one feet from her metal base to the torch. Lady Liberty was built like a car or a washing machine in a factory, assembled from hammered copper sheets riveted together onto an iron armature. Nero’s sculpture was cast in sections which were then braze-welded together and hoisted onto its base. It was a marvel of Roman artistry and craft; the techniques needed to make large castings were lost and forgotten for over 1,200 years until they were reinvented by Donatello in the early half of the fifteenth century.
Not content with showing his proficiency in these arts at Rome, he went to Achaia, as I have said, influenced especially by the following consideration. The cities in which it was the custom to hold contests in music had adopted the rule of sending all the lyric prizes to him. These he received with the greatest delight, not only giving audience before all others to the envoys who brought them, but even inviting them to his private table. When some of them begged him to sing after dinner and greeted his performance with extravagant applause, he declared that “the Greeks were the only ones who had an ear for music and that they alone were worthy of his efforts.”
While he was singing no one was allowed to leave the theater even for the most urgent reasons. And so it is said that some women gave birth to children there, while many who were worn out with listening and applauding, secretly leaped from the wall since the gates at the entrance were barred, or they feigned death and were carried out as if for burial. The trepidation and anxiety with which he took part in the contests, his keen rivalry of his opponents and his awe of the judges, can hardly be credited. As if his rivals were of quite the same station as himself, he used to show respect to them and try to gain their favor, while he slandered them behind their backs, sometimes assailed them with abuse when he met them, and even bribed those who were especially proficient.
As he grew into maturity, Nero was consumed by his insecurities, his crimes were many, there were no checks upon his viciousness and greed. The Domus was built in an area that had been ravaged the great fire of 64:
When someone in a general conversation said: “When I am dead, be earth consumed by fire;” Nero rejoined “Nay, rather while I live,” and his action was wholly in accord. For under cover of displeasure at the ugliness of the old buildings and the narrow, crooked streets, he set fire to the city so openly that several ex-consuls did not venture to lay hands on his chamberlains although they caught them on their estates with tow and fire-brands, while some granaries near the Golden House, whose room he particularly desired, were demolished by engines of war and then set on fire because their walls were of stone. For six days and seven nights destruction raged, while the people were driven for shelter to monuments and tombs. At that time, besides an immense number of dwellings, the houses of leaders of old were burned, still adorned with trophies of victory, and the temples of the gods vowed and dedicated by the kings and later in the Punic and Gallic wars, and whatever else interesting and noteworthy had survived from antiquity. Viewing the conflagration from the tower of Maecenas and exulting, as he said, in “the beauty of the flames,” he sang the whole of the “Sack of Ilium,” in his regular stage costume. Furthermore, to gain from this calamity too all the spoil and booty possible, while promising the removal of the debris and dead bodies free of cost he allowed no one to approach the ruins of their own properties; and from the contributions which he not only received, but even demanded, he nearly bankrupted the provinces and exhausted the resources of individuals.
Nero was known to disguise himself then go out into the city at night and rob passersby, also break into houses and shops and steal the contents which he would later sell in the palace. These encounters were often violent so that soldiers were sent to follow behind at a discrete distance and rescue the emperor from those who fought back.
Then, it became notorious that the depredator was the Caesar; outrages on men and women of rank increased; others, availing themselves of the license once accorded, began with impunity, under the name of Nero, to perpetrate the same excesses with their own gangs; and night passed as it might in a captured town. Julius Montanus, a member of the senatorial order, though he had not yet held office, met the emperor casually in the dark, and, because he repelled his (Nero’s) offered violence with spirit then recognized his antagonist and asked for pardon, was forced to commit suicide, the apology being construed as a reproach.
Nero was suspected of conspiring with his mother to murder by poison his step-father, the emperor Claudius. It is possible the youthful Nero was not involved directly, but he became emperor as a consequence and was thereby an accessory. He later grew weary of his mother’s interference and had her put to death after a brutal ordeal; he also murdered his half-brother, also the daughter of Claudius by his second wife (Claudius had four wives); Nero also killed his own two wives along with the husband of the first so as to gain access to her; also a man who was his mother’s lover; also his first cousin and maternal second cousin along with that individual’s widow, children and father-in-law. Nero did away with many servants including long-time tutors and advisors, Seneca, and possibly Sextus Burrus, his military aide. Due to his insatiable need for funds he used the plot of Gaius Calpurnius Piso as an opportunity to murder hundreds of distinguished Romans; their wives, children, even their servants in order to confiscate their properties, he also murdered ordinary citizens.
Nero needed the money because of his stupendous wastefulness …
Accordingly he made presents and wasted money without stint. On Tiridates though it would seem hardly within belief, he spent eight hundred thousand sesterces a day, and on his departure presented him with more than a hundred millions. He gave the lyre-player Menecrates and the gladiator Spiculus properties and residences equal to those of men who had celebrated triumphs. He enriched the monkey-faced usurer Paneros with estates in the country and in the city and had him buried with almost regal splendor. He never wore the same garment twice. He played at dice for four hundred thousand sesterces a point. He fished with a golden net drawn by cords woven of purple and scarlet threads. It is said that he never made a journey with less than a thousand carriages, his mules shod with silver and their drivers clad in wool of Canusium, attended by a train of Mazaces and couriers with bracelets and trappings.
Nero gave himself over entirely to debauchery and vice.
Besides abusing freeborn boys and seducing married women, he debauched the vestal virgin Rubria. The freed-woman Acte he all but made his lawful wife, after bribing some ex-consuls to perjure themselves by swearing that she was of royal birth. He castrated the boy Sporus and actually tried to make a woman of him; and he married him with all the usual ceremonies, including a dowry and a bridal veil, took him to his house attended by a great throng, and treated him as his wife. And the witty jest that someone made is still current, that it would have been well for the world if Nero’s father Domitius had had that kind of wife.
All of this and more were paid for out of the Treasury then extracted with increased violence by the tax collectors.
In point of extravagance and notoriety, the most celebrated of the feasts was that arranged by Tigellinus; which I shall describe as a type, instead of narrating time and again the monotonous tale of prodigality. He constructed, then, a raft on the Pool of Agrippa, and superimposed a banquet, to be set in motion by other craft acting as tugs. The vessels were gay with gold and ivory, and the oarsmen were catamites marshaled according to their ages and their libidinous attainments. He had collected birds and wild beasts from the ends of the earth, and marine animals from the ocean itself. On the quays of the lake stood brothels, filled with women of high rank; and, opposite, naked harlots met the view. First came obscene gestures and dances; then, as darkness advanced, the whole of the neighboring grove, together with the dwelling-houses around, began to echo with song and to glitter with lights. Nero himself, defiled by every natural and unnatural lust had left no abomination in reserve with which to crown his vicious existence; except that, a few days later, he became, with the full rites of legitimate marriage, the wife of one of that herd of degenerates who bore the name of Pythagoras. The veil was drawn over the imperial head, witnesses were dispatched to the scene; the dowry, the couch of wedded love, the nuptial torches, were there: everything, in fine, which night enshrouds even if a woman is the bride, was left open to the view.
Nero was a coward, he never led an army in battle, nor was the Empire expanded during his rule. The Romans waged an on-again, off-again war against the Parthians in Armenia (eastern Turkey). An uprising by Boudica in Celtic Britain was triggered by oppressive taxation and cruel Roman administration …
To all the disasters and abuses thus caused by the prince there were added certain accidents of fortune; a plague which in a single autumn entered thirty thousand deaths in the accounts of Libitina; a disaster in Britain, where two important towns were sacked and great numbers of citizens and allies were butchered; a shameful defeat in the Orient, in consequence of which the legions in Armenia were sent under the yoke and Syria was all but lost.
The legions ultimately prevailed in both places, Boudica’s army was scattered and she committed suicide. The Parthians withdrew and Armenia remained a Roman client.
I may fairly include among his shows the entrance of Tiridates into the city. He was a king of Armenia, whom Nero induced by great promises to come to Rome; and since he was prevented by bad weather from exhibiting him to the people on the day appointed by proclamation, he produced him at the first favorable opportunity, with the praetorian cohorts drawn up in full armor about the temples in the Forum, while he himself sat in a curule chair on the rostra in the attire of a triumphing general, surrounded by military ensigns and standards. As the king approached along a sloping platform, the emperor at first let him fall at his feet, but raised him with his right hand and kissed him. Then, while the king made supplication, Nero took the turban from his head and replaced it with a diadem, while a man of praetorian rank translated the words of the suppliant and proclaimed them to the throng. From there the king was taken to the theater, and when he had again done obeisance, Nero gave him a seat at his right hand.
Given a little time it is likely Nero would have put on the bridal veil and wed the king of Armenia, the dowry was already paid. And yet, the ordinary Romans were satisfied with their emperor, whose outrages were directed toward others, whose vices were to them only rumors. The plots against Nero rose from the elites, whom he prosecuted with increased ferocity until he was undone by bad luck: besides pestilence, there were damaging storms and food shortages. Rome was entirely dependent upon grain shipments from the provinces particularly Egypt. Interruptions for any reason held serious consequences. As belts were tightened, Nero’s popularity with the ordinary citizens evaporated:
When another rebellion arose in the western provinces he ignored the warnings, seeming at first not to take them seriously. After a delay of some days, during which he was abandoned by his courtiers and bodyguards, he fled to the house of a servant in a nearby suburb. Declared a public enemy by the Senate, he committed suicide to avoid being beaten to death in the Forum. He was 32.
Nero was in office for fourteen years, which seems to suggest his reign was successful; he was not deified afterward which suggests it was not. Leaving aside the epidemic and famine, it is likely the better classes of Rome had grown anxious of his vanity and licentiousness; the constant demands of the tax collectors; also the debasement of the currency and persecutions and murders. Nero’s follies did not bring the empire to a end or even lead to it; ironically his vast money-waste stimulated the Roman economy … there were no other places for the funds to go outside of the empire. Over the course of the following year, Nero was succeeded by three mediocrities; Galba, Otho and Vitellius; the fourth, Vespasian, was at least competent.
The Domus was a public reminder of Nero’s excesses, within a decade it was stripped of its decorations and partly abandoned to the bats and wild dogs. Parts of the building were used as storerooms or as stables. The pond was drained to allow for the foundations of the enormous amphitheater built in its place. Other parts of the palace were built over or became dumping grounds for garbage and rubble left over from earthquakes and building demolition. It was this accretion of structures and material that preserved the remains of the Domus that can be seen today …
Vespasian removed Nero’s likeness from the Colossus and fitted it a new head representing the Roman sun god; later Hadrian moved the statue to allow construction of the new temple of Venus and Rome on the original site. The triumphal arch of Titus and the Bath of Trajan were built nearby along with warehouses, bakeries and apartments. Note: the temples of ancient Rome were not houses of prayerful worship and propaganda like churches today; the priests acted as notaries, mediators, fiduciaries, keepers of vital records and contracts; temples functioned as banks, law offices and trading rooms as these things did not exist as such during that time. The last mention of Nero’s statue was in a description of the city in a manuscript published 354 AD. It was likely broken up, perhaps toppled by an earthquake, with the remains sold off as scrap: Sic Semper Tyrannis.
– C. Suetonius Tranquilis, ‘The Lives of the Twelve Caesars’
– Publius Cornelius Tacitus, ‘The Annals’
– Furius Dionysius Filocalus / Unknown author ‘The Chronography of 354’
Published on the Economic Undertow on December 23, 2016
Discuss this article at the Geopolitics Table inside the Diner
Santa came early this year, he left presents for all the children … whether they wanted them or not!
Hard to say what Santa will offer next year, Christmas may be cancelled … or Stukas might be dive-bombing Poland. In the twilight of ‘More’ anything is possible except ‘more’.
Americans who voted against Trump are feeling unprecedented dread and despair.
I have never seen anything quite like the grief being felt by the majority of American voters who did not vote for Donald Trump.
Back in 1980, there was disappointment among Democrats when Ronald Reagan won. In 2000, after the long Florida recount and the intrusion of the Supreme Court into the decision, there were plenty of upset people who thought Al Gore, not George W. Bush, deserved to be president. But the losing voters in those elections were not despondent. They were not breaking out in tears weeks later. They were not waking up each morning with feelings of dread about what was to come.
This time it is different … (David Frum):
“Construction of the apparatus of revenge and repression will begin opportunistically and haphazardly,” Frum wrote. “It will accelerate methodically.”
Do you mean the apparatus of revenge and repression aimed at Chelsea Manning, or the citizens of Boston? How about other ‘Brand X’ whistle blowers? (Justice Integrity Project):
OpEd News (OEN) Publisher Rob Kall, another speaker, has a different view. “Since Obama has taken office,” Kall reported in ‘RoughTime for Whistleblowers’, “most whistleblowers say his administration and his DOJ treat whistleblowers worse than any previous president.”
Kall quoted GAP Homeland Security and Human Rights Director Jesselyn Radack, a well-credential ethics advisor in 2001 at the Bush Department of Justice. It promptly ousted her from her job and tried to inflict harsh reprisals in her later career after she provided to superiors her opinion that FBI personnel committed an ethics violation in questioning American John Walker Lindh after he was caught with the Taliban in Afghanistan. “Obama,” she told Kall, “has brought more prosecutions against whistleblowers under the Espionage Act than any previous president and all presidents combined.”
Thank you sir, may we please have another! Everyone knows Trump is a Fuhrer who is making lists and identifying enemies, (WaPo):
Obama administration tries to shut down visitor registry program before Trump takes office
The Obama administration on Thursday took the unprecedented step of creating obstacles to a widely-anticipated but poorly understood plan by President-elect Donald Trump to establish a Muslim ban or registry — by dismantling the registry system that already exists.
In fact, almost every ‘crime’ the oafish Trump is being accused of in advance has been committed already by preceding administrations including Obama’s, starting illegal wars, snooping on citizens, raping the environment, cozying up to bankers, bankers, bankers and more bankers.
Don’t forget Obama’s ‘drone war’, suspension of habeas corpus, arbitrary imprisonment and torture in secret prisons. These programs took form under Bush but Obama did nothing to end them or much to rein them in.
Erratic, bullying, Nazi, paranoid … all are unpleasant to contemplate, but are hardly new. The issues that defines our new (gauche) president are matters of form rather than substance. The conflicts of interest, the ‘massive self-enrichment’ by office holders and ‘retaliation by means fair and foul’ are as entrenched in Washington as traffic jams. Our small-d democracy isn’t threatened, it vanished a long time ago, after people decided to let ‘experts’ tend to their affairs and for corporate marketing and PR to do everyone’s thinking for them.
Comparing Combatants in Syria – Iraq Theater
|COUNTRIES – INTERESTS||WHAT THEY INTEND TO GAIN||COST||WHAT THEY OFFER||GOVERNMENT: CURRENT | PROPOSED||ECONOMY|
|USA||Arms sales. To destabilize region to import consumption||Operational expenses & loss of influence||Transient tactical advantage for no one in particular||Corporate plutocracy / None||Capital destruction – consumption / Ponzi finance|
“Corporate Plutocracy / None” … that’s us!
So is Capital destruction – consumption / Ponzi finance!
This generated blind fury across the mediasphere; the suggestion is Trump is a nuclear madman.
Obama’s Russian Rationale for $1 Trillion Nuke Plan Signals New Arms Race
February 23 2016
The Obama administration has historically insisted that its massive $1 trillion nuclear weapons modernization program does not represent a return to Cold War-era nuclear rivalry between Russia and the United States.
The hugely expensive undertaking, which calls for a slew of new cruise missiles, ICBMs, nuclear submarines, and long-range bombers over the next three decades, has been widely panned by critics as “wasteful,” “unsustainable,” “unaffordable,” and “a fantasy.”
It’s okay as long as ‘our guy’ does it: it wasn’t Trump who ringed Russia with military bases, missiles and combat formations, it wasn’t Trump who sent spies and provocateurs to destabilize Ukraine or attack Russian clients Syria and Libya from the air. It wasn’t Trump who is engaged in questionable wars in multiple countries across the globe all aimed at driving energy- and resource consumption to the world’s largest energy hog. It isn’t Trump who made al-Qaeda into a defacto ally of the Pentagon and the CIA, who gave the militants arms and training, who enabled the rise of Turkish neo-Ottoman ambition alongside Saudi Salafism and state terror. It was Obama who did all these things and more, following in the footsteps of American presidents going back to Truman.
Or was it? Whoever is president doesn’t matter, he is irrelevant. Our managers (including Trump) are actors reading from scripts, performing at the direction of shadowy back-door men, employed strictly by how they conform to the public expectations created by corporate marketing. Conforming includes how they look, dress, speak, where certified and whom they ‘know’; where they live and work and how they travel. Trump himself acknowledges this reality by selecting as footmen those who are possessed of a certain je ne sais quoi, that is, they have the appropriate outward appearance. Activities that require labor, skill, difficulty or do not present a marketing opportunity are penalized with diminished status. There are no grimy proletarians, mechanics or farmers in the current administration or those set to come; nor in Congress or the Courts. Instead, there are neatly coiffed thievish mandarins. Because our Ponzi- economy is divorced from reality the scam managers are expected to be incompetent, they have to be even as they are fashionable. There is no penalty for stupidity in America.
Competence is unacceptable except where it allows for the proper internal functioning of the enterprise. Our ostensible Ponzi- masters are grasping buffoons while those tending the boilers (Goldman-Sachs) must know what they are about.
The conflict in America is not between ‘left’ and ‘right’, ‘liberal vs. conservative’ but between logic and illogic, between reality and denial. The establishment’s factions are parties to malfeasance and mis-communication. To tell the truth is to acknowledge that business as usual is bankrupt regardless of who is in charge, (Brooking Institute):
Another Clinton-Trump divide: High-output America vs low-output America
Last week, as my colleague Sifan Liu and I were gnawing on some questions asked by Jim Tankersley of The Washington Post, we happened upon a revealing aspect of the election outcome. While looking at number of influences on the presidential vote outcome, we found that in a year of massive divides, one particular economic split stands out.
Our observation: The less-than-500 counties that Hillary Clinton carried nationwide encompassed a massive 64 percent of America’s economic activity as measured by total output in 2015. By contrast, the more-than-2,600 counties that Donald Trump won generated just 36 percent of the country’s output—just a little more than one-third of the nation’s economic activity.
Candidates’ counties won and share of GDP in 2000 and 2016
Figure 1: US counties voting preference, (Brookings Intitute, click for big).
Here you can see very clearly that with the exceptions of the Phoenix and Fort Worth areas and a big chunk of Long Island Clinton won every large-sized county economy in the country. Her base of 493 counties was heavily metropolitan. By contrast, Trumpland consists of hundreds and hundreds of tiny low-output locations that comprise the non-metropolitan hinterland of America, along with some suburban and exurban metro counties, as Indeed Chief Economist Jed Kolko pointed out in a tweet …
The foundation of Brooking’s argument is breathtakingly false, yet is so fashionably rendered anyone looking at it uncritically would take the authors’ premise at face value: that the metropolitan areas who fell to Clinton ‘produced’ greater ‘output’ than the backwards redneck promised lands that supported Trump. By way of Brookings’ logic, the consumption that takes place in cities is ‘productive’ because the various banks magically output ‘money’ to pay for it.
Cities are sinks not sources, their actual output is little or nothing but waste. The backwaters of America don’t ‘produce’ either, they extract our nation’s wealth — our non-renewable resource capital — and speed it to its death. Soil fertility, water, oil, gas, coal, metallic ores along with the lumpishly unfashionable activities that require labor, skill, difficulty … all these and more are sucked out of our towns making stops at Hillary Clinton’s capital-annihilating colonias on their way to the landfill. Retail sales and speculation are measured as production by Brookings’ economists and the banks which fund the process, lending abstract ‘wealth’ into existence using the wasting processes as collateral. Given four- hundred-plus years of mechanized pillaging the flyover counties have been emptied out with the extractive returns captured by well-positioned rentiers. The locals cry, “where’s our cut?” The fact of the question itself reveals the answer …
Establishment whines about ‘fake news’; what is fake is denial of the onrushing consequences of resource squander and how these are making themselves manifest.
Figure 2: Fed Funds by FRED, (click for big). Immediately before president-elect Obama took office in ’09, Santa gave the children negative real interest rates, that is, yields below the rate of inflation. Bargain basement borrowing costs were the incentive for firms to borrow astronomical sums, to fund carry trades of all kinds, to become larger and more concentrated, to buy out competition, to overpay for the firms’ own shares. Tycoons borrowed to buy luxury real estate, yachts and fine art. This offered the impression of a recovery from the ’08 crash, everyone looked like geniuses for a little while including Obama, for whom it can be said it is better to be lucky than good …
Even without the Fed, rates would have been low. Because of the Great Recession, there was a ‘flight to safety’ and the bidding up Treasuries in the absence of real, non-financial returns elsewhere. Added was systemic moral hazard and the eagerness of banks to lend back-and-forth to each other. The outcome was dollar carry trades speeding US inflation around the world; ‘Lucky Obama’ able to enjoy interest rate tailwinds every single year throughout his term in office.
Figure 3: Chart by estimable Doug Short, (Click for big). Obama is jumping ship before the storm breaks: 10-year Treasury rates are galloping upward due to dollar preference which pressurizes foreign exchange and unwinds dollar carry trades. The ‘official narrative’ is future US inflation but the decline in bonds is the re-pricing of repayment risk and the forex depreciation that is certain to come. In developing countries, borrowers with cavitating currencies cannot repay their dollar debts. The incoming president promises (more) tax relief for overburdened tycoons, those expected to pick up the tab are the same developing countries already tapped to service and retire prior rounds of credit expansion.
Remember dollar preference? Don’t pick up that economics textbook, you won’t find it there! Just because Marshall or Keynes didn’t write about it doesn’t mean it isn’t real. Dollar preference is what it sounds like: given the choice between accepting a dollar as payment or one- or more foreign currencies; between holding the dollar or spending it for shit or between holding the dollar or non-cash assets, people will choose the dollar. At issue is what determines the dollar’s worth. Conventional Lucas/Friedman economics suggests ‘efficiencies’ going forward discount future money: this and time preference ‘discovers’ present monies’ worth. The conventional narrative supports the rate-setting role of central banks and centrality of monetary policy. Debtonomics insists dollars and other currencies are priced by their exchange on demand for petroleum, something that takes place millions of times every day at gas stations around the world. Question for Donald Trump: millions of motorists vs. a handful of central bankers and corrupt politicians, who wins? The worth of the dollar is the fuel price bargain each one represents relative to other currencies, also what future dollars will be worth in a fuel constrained world. In this narrative, dollars are a proxy for fuel as dollars and other currencies were proxies for gold was during the periods of the gold standard. As such the dollar is a hard currency now becoming harder, to be hoarded out of circulation for the value it represents.
Put another way, dollar preference is the convergence between the value of the oil capital and the dollars that are exchanged for it. Fuel by itself is worth more than the real-world enterprises that make use of it regardless of what means are used to ‘adjust’ the price. By this way of reasoning, fuel in the ground in North Dakota is worth more than fuel wasted in a car stuck in traffic on an LA Freeway. Business (wasting) enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, gaining- and making use of credit is their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the retirement- and servicing burdens onto others.
Our economy as nothing more than a vast cost-shifting regime, our ongoing crisis is the shortage of ‘others’ able to bear the burdens of rapidly increased surplus-related costs.
Figure 3: Emerging market currency ETF: carry trades have been unwinding since 2011 as the dollar becomes stronger. A dollar carry is a way to sell the dollar short; investors borrow in the US at low rates then ‘sell’ dollars for higher-yielding assets in another currency. Decline of dollar becomes profits to those holding the overseas assets. When the dollar strengthens as it is doing now, the deal is a bust. Any asset appreciation in an overseas currency is more than offset by foreign exchange losses. What this means is costs are more difficult to shift, that dollar debts held overseas cannot be retired. The export of dollars and the shifting of costs that have been the mainsprings of globalization; that and the petroleum trade. Resource depletion and dollar preference are undoing all three …
Figure 4: Polygon of Doom: since 2008, price peaks in oil markets are followed by sharp declines, the amplitude of peaks diminish as the world’s customers go broke, chart by TFC Charts (click for big). Unraveling of carry trades, currency depreciation, runs out of forex and generalized credit contraction ruins millions of customers at a time. This in turn strands oil drillers who cannot extract the cheap petroleum as our economy requires. In our over-financialized world, fuel shortages don’t manifest themselves as gas lines or odd-even days. Rationing takes place through the credit transmission channel. When oil price rises high enough credit vanishes and customers cannot buy. How high is too high? Last year $65/barrel turned out to be pricey enough to torpedo China’s currency; the diminution of Chinese consumption crushed the price of crude. The current barrel price of $55 appears to be too high with another predictable banking- and credit crisis unfolding in Europe.
Energy deflation occurs when shortages cause prices to fall instead of rise. This is another something not found in your macro textbooks, it’s real nevertheless and unfolding under @realDonaldTrump’s nose. Because shortages can’t make customers richer, they are unable to borrow in order to bid up the price. The drillers are stranded because they don’t have customers to sell products to. Ruined customers is the reason why oil prices have declined 60% since 2014, broke customers are why the entire oil extraction industry is insolvent.
Oil prices can only decline as there are diminished returns on each energy dollar invested … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Going forward, real energy costs will increase relative to the ability to meet them … even as nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … in a vicious cycle.
Energy deflation and dollar preference are large forces beyond the control of politicians, generals or central bankers. They are driving countries and events toward involuntary conservation. America’s new president is the product of economic failure; the inability of the economists to make correct analysis, a long grinding recession disguised as recovery; media falsehoods and the unwillingness of Americans and others to face reality, government policy failures and the headwinds of resource depletion. Trump and his cretinous gang of thieves represents the last gasp of a defunct industrial system that is sinking under the weight of its own costs.
Keep in mind, oil producing states like the US tend to be autocratic. The US, Canada, Mexico and others are on their way to becoming single-party police states like Saudi Arabia or Iran. Because of autocrats promise of access to energy, they gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between the (vague) promise of convenience or having a functioning republic.
Published on the Economic Undertow on September 20, 2016
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The United States military’s endless war against everything, everywhere, all the time … is spreading:
The experts agree; the war in in Syria and Iraq is a big one, it has many adversaries, etc. They neglect to mention the war showing up in Raleigh, North Carolina; Tulsa or a suburb of Minneapolis … or in your town. The wars are supposed to remain at a safe distance felt only as pangs of gratification before and during sporting events. Now the dogs are running wild, who will they bite next?
Maybe a better question is how much does it all cost and who’s paying?
Islamic State had an amazing run, if only for its outrageous, mind-torquing audacity. Like a bad LSD trip amped with Jack Daniel’s and crystal meth, ISIS was so idiosyncratically, disgustingly, CRAZY … so embedded at the very center of Warholian pop- slash media culture … it made for Great TV. But, like all other fashions it had its fifteen milliseconds of fame … Poof! There it went!
As for hard evidence of Islamic State’s incapacity; this is all you will ever need:
There is other evidence: Turkey’s entry into northern Syria a few weeks ago was the equivalent to a surrender document: if Islamic State was able to defend its supply lines, it would have done so. Instead, the patron (Turkey) had to scramble to fill the vacuum left by its fleeing agent; an action that speaks for itself.
If you can’t see the connection between Syria, Middle East, Dallas and Baton Rouge you aren’t looking hard enough. War has become ‘business by other means’, one that kills off its clientele. A ‘thug’ in one place is the same as a ‘militant’ in another; what pays is the process of identifying threats then bumping them off. If the ‘threats’ are not inherently dangerous — hapless Negroes in the wrong place at the wrong time or bumbling agents of a Nato ally — so much the better!
What keeps ISIS alive and menacing in the Western mind is the marketing. When intelligence officers, generals, talking heads on your favorite news outlet report ‘the danger of Islamic State’ or an ‘Islamic State Offensive’, Abu Hajaar is who they are talking about, (March, 2016).
Keep in mind, it is in the interest of the Ponzi Pentagon and its partners to inflate the capabilities of ISIS to serve its own interests. Terrorists and threat of attacks are the sole justification for US military intervention in Syria and Iraq. Without Islamic State there is no bombing Islamic State; there is no need for Operation Inherent Resolve, no need for thousands of ‘operators’ (mercenaries) on the ground, no need for bases and their supply requirements and their fleets of contractors; no need to spend billions per day combating a group that for all practical purposes does not pose a threat. If the Islamic State was audacious, so is the fraud that has been erected around it!
Perhaps by way of his lonely and painful death Abu Hajaar offers us all something of value. The US government’s absurdities are revealed. Sadly, citizens are too entangled in the non-stop media crossfire to recognize the fraud for what it is, they can’t grasp it or they don’t want to; the marketing is too comforting.
The Islamic State is still dangerous … but only within the capacities of the individuals associated with the group. The ‘Monkey-Piano’ hypothesis suggests given enough time a roomful of monkeys with pianos will produce the complete works of Shostakovitch. Give the same monkeys much less time and a roomful of Kalashnikovs, they will kill everything downrange including themselves, yet the United States military is not going to go to war against monkeys!
By the end of 2011, the Pentagon had been ‘invited out’ of Iraq, it was hunting for opportunities to expand its presence in the region. The great wave of social change set into motion by the US invasions eight years prior was breaking across the Arab world, taking the form of a generalized uprising against the status quo. The wave had already broken over Syria; demonstrations against the Bashar Assad government had morphed into vicious street fighting and a divide in the country. The government was able to control- or contest the heavily populated western half of the country from Latakia on the Turkish border to Jordan in the south, the lightly populated east was left to fend for itself.
Arrayed against Assad and his army was a grab-bag of revolutionary militias operating as the Free Syrian Army. Some groups were comprised of disaffected civilians able to arm themselves and organize. Others were recent defectors from the Syrian army. Assad had emptied his prisons of criminals so as to refill them with political enemies. Many of those released had military experience or were Islamic extremists, they signed up with the FSA. Assad would later point to these individuals as the terrorists he was fighting against … begging for aid while holding himself up as a defender of Western civilized values at the same time.
The distress in Syria offered possibilities for the US partnership that included Turkey, Saudi Arabia and Qatar. The Arabs were intent on using the disturbances elsewhere to deflect or short-circuit their own malcontents. Ankara’s dilemma revolved around the country’s lack of domestic petroleum resources. Turkish motorists were burning through two hundred fifty million barrels of imported oil per year, paid for with borrowed euros and dollars. The result was increasing pressure on the economy and the lira. Turkey could look toward Greece to see what happens when those funds had to be repaid; to Argentina to see what happens when they were not. Turkey had the region’s most powerful military, it could invade its neighbors easily, winning afterward was hard. Dictator-in-waiting Tayyip Recep Erdogan and his generals could look to the US mis-adventure in Iraq and see the difficulty in making off with another country’s resources.
Saudi Arabia and its Gulf neighbors were looking for advantage vs. Iran over market access for their petroleum. This contest had evolved over time into a proxy war that occasionally boiled over. The US didn’t mind, instability is one of its top exports. Resources lurking underground might indeed be hard to steal but grabbing consumption was child’s play. Consumption was a complex, above-ground undertaking with many dependencies including the need for (expert) management, complex infrastructure and hard currency loans. A wrench in the right spot would strip the gears, a pin would pop the balloon. Whatever could not be consumed in a ‘Brand X’ country would be available to Americans; even if a producer like Libya or Iraq could not use its own oil it would still export. As Sherlock Holmes would say, “The game’s afoot”.
The game plan for Syria was simple, the Assad government was vulnerable, poke at it until it deflated, death by a thousand pins. ‘Why’ did not matter: Assad’s demise would be rationalized afterward. The Turks would provide a base from which anti-Assad rebels would operate. They would be armed, organized and given necessary training … Arms would come from the US by way of the Saudis or from Libyan arsenals captured after the downfall of Muammar Gaddafi, Hillary Clinton’s war. Materiel would be shipped directly from Saudi stockpiles, Libyan supplies would reach the rebels by way of CIA ‘ratlines’ from Benghazi. Turkey would become the conduit for Islamic militants heeding the call for jihad that were flooding into Syria from around the world. The model was the brushfire intifada waged against the Soviet Union in Afghanistan during the 1980s by CIA- supported Islamic mujaheddin, Charlie Wilson’s war.
The US’ role was to provide funds and would coordinate between partners, it would offer training to militants where appropriate. The Special Operations trainers were the camel’s nose inside the tent, the rest of the camel would come later: aircraft and bases, advisors, the ground troops all at the cost of hundreds of billions of dollars. Besides being a conduit for arms, Saudis would provide funding and ‘volunteers’; the Qataris would offer ‘public relations’ (propaganda services). The Turks would hold the bag; if anything went wrong they would get the blame.
Turkey’s aim was to create a de facto Turkish protectorate; a New Ottoman Empire that would reach into Iraq with its billions of barrels of proven oil reserves. Enough success and the Shia Muslim/ Iranian protectorate at the south of Iraq would be undone. Unlike the Americans, Turkey would not have to conquer anyone or steal anything, Ankara would heed the call to rescue the victims of its own subordinates’ aggression. Meanwhile, Saudi Arabia and its Gulf allies would gain influence in a territory from which they had long since been excluded. All these advantages would be at the expense of Iran.
The strategy was simple to implement and began well but defects soon emerged. Assad was no fool, his father Hafez was an old-school Soviet-style tyrant who, when confronted, hammered his adversaries without mercy. Timid son Bashar clearly paid attention in class. He short-circuited the Syria succession regime leaving his Alawite- and moderate Shia constituents without palatable alternatives. It was to be Assad or nothing, there would be no Lady Macbeths or Colonel Gaddafis waiting in the wings for the leader to fail. Assad sanctioned genocide, giving his officers freedom to commit whatever atrocities and excesses they would. This bound the officers to Assad, each becoming complicit in the others’ crimes. If Assad failed or the army, both would fall. Atrocities provided Assad with leverage over civilians whose loyalty might waver: he could massacre his foes (stick) or he could call off his own dogs (carrot). He also bellied up to his Iranian allies who had a large investment in the Syrian project and much to lose from an Assad defeat. The Iranians offered supplies and funds.
The anti-Assad rebels also had a distressing tendency to fight among themselves rather than attack Assad. This made sense; even with training and logistical support the rebels were no match for the Syrian army. When the rebels attacked with rockets and machine guns, the army responded with artillery, aircraft and tanks. The inexperienced civilian-rebels were soon wiped out and their units disbanded. The ex-army defectors either died, fled the country or flipped to more competent organizations. Successful units tended to congeal around Islamic militants who had experience in urban combat; soon enough the jihadis became dominant among the rebels. Yet, jihadi success tended to work against the rebels’ aims. Instead of encouraging the Syrians to distance themselves from Assad, the jihadis drove the two together out of desperation. The more effective the militants were on the battlefield, the stronger Assad became. The jihadis could win battles but they scared the horses.
Encounters tended to be grinding affairs with both sides suffering heavy casualties; operational expenses were an increasing burden as manpower losses could not be easily made up. Assad would take a town or a neighborhood with armor but could not hold it because he lacked the ground forces. As the casualties mounted morale was slipping. The Syrians on the rebel side would fight until they felt compelled return to their families. If the families left the country — and millions ultimately would, the fighters left too. This left rebel forces made up increasingly of foreigners, which had the effect of driving more support to the government.
Eventually, Assad’s losses forced him to request reinforcements from Iran and Hezbollah. This resulted in loss of support for his side and more defections. There were splits within Assad’s army whose soldiers resented control by Iran. The nature of the fighting presented a problem with the foreign fighters on both sides; engagements were intense but confined to towns and neighborhoods. The foreigners did not know the ground, before they could learn they were killed. On the rebel side, success fell toward the groups with a mix of locals who knew the territory and veteran jihadis who were the best fighters. This offered a problem of its own: larger attacks by the rebel side were out of the question because the different groups and fighters couldn’t or wouldn’t work together. The Assad side felt the same problem in reverse: the targets the rebels presented to were too dispersed for his army to assault all at once, this left him to bomb residential areas with the hope of killing one or two fighters. This induced more Syrians to leave the country shrinking the manpower pool.
Ironically, the drain upon Assad’s ‘human resources’ dramatically increased with Russian assistance in September, 2015. The Russians brought airplanes and missiles but few ground troops. Russian air support began to dictate the tempo of offensives by the Syrian army and its allies … increasing Syrian army losses. The Syrian government and its supporters found themselves trapped by Assad’s expedients; his need to fight and to not-fight at the same time. In order to win he had to use up his army, he needed to hold back in order to save it. Assad’s dilemma was the same as the rebels’ earlier: the more effective the Russians were on the battlefield, the weaker Assad became because of the human toll.
Meanwhile, blowback was increasing in the West, the US was increasingly collaborating with unsavory actors, including militants affiliated with al-Qaeda. Questions were being raised in Washington. The US president was handed an opportunity to intervene directly in the Fall of 2013 after several hundred Syrian civilians were killed in a poison gas attack. The war-hawks in the administration were calling for a no-fly zone like the one that had undone Gaddafi. The US public reaction was strongly negative; after ten years of fruitless war in Iraq and Afghanistan and the ongoing debacle in Libya, the citizens were opposed to more military adventures; there were no vital US interests at stake in Syria. The only benefits of a US action would fall to groups the US had pledged to destroy.
There was another factor, something that became clear when Islamic State emerged into public consciousness in the Summer of 2014: A large, general war across the Middle East was unlikely because none of the nations including the US could afford to fight one. Marginal oil production would be cut and the resulting finance crisis would cripple everyone. This established an upper bound on the level of ‘investment’ the dictators and plutocrats could make in twerking their rivals. Within limits the wars could go on, they could morph and congeal, burn out in one place or flare up in others, but exceed those bounds … Poof! Everyone would be living in caves!
Allahu Akbar Motherf**ker!
Anyone with access to a TV knows what happened in June of 2014: the group that had been booted out of al-Qaeda for being too violent erupted like a chest-bursting alien from the scrublands of eastern Syria to overran Mosul and a dozen other cities and towns across northern Iraq. Over the course of a few days the entire Iraqi defense/security establishment, a $35 billion dollar Pentagon (mal)investment … bases, generals, tanks, helicopters, prisons, Humvees, golf courses and officers’ clubs; 300,000 so-called ‘soldiers’ … Poof! You know the rest!
Immediately there was a jarring disconnect: the gap between the mission and those who were tasked with carrying it out. The last time an Arab army mounted a successful large-scale offensive without outside leadership was during the Middle Ages. The needed talent and command infrastructure simply didn’t exist. Abysmal leadership on both sides has been- and still is a number-one reason for the stalemate in Syria. One had only to look to the wasteful sieges across the region to see how governments and militias planned- and carried out operations. Thousands of lives were wasted every month to wrestle control over a few blocks or neighborhoods, with entire cities such as Homs reduced to deserts of concrete rubble.
It isn’t just Islamic State ineptitude:
The Hezbollah commander sent his soldiers out to die. There was no objective they might reasonably capture, or even a way to return fire. By the end of the operation the Hezbollah unit lost its fighters, its vehicles and its base of operations, no doubt purchased with many more lives: Abu Hajaar all over again!
Every day dozens of similar pointless operations take place all across Syria, with the same depressing outcomes. The leaders don’t care and don’t know any better, repeating the same failed processes over and over hoping to wear down the other side(s) by attrition.
In single party states such as Syria and Iraq (Iran and Saudi Arabia), effective military commanders are seen as internal threats, they are rarely given opportunities to succeed. Officer ranks are filled with dull, self-serving careerists chasing comfortable sinecures. The ex-Saddam loyalists identified as Islamic State commanders leading the blitz across northern Iraq were pliant yes-men with highly developed survival instincts which was why they had their jobs in the first place. These individuals were never military geniuses, they were experts at running away. That was why they lasted long enough to become involved with ISIS. When given the opportunity, these commanders shoveled their best fighters into the furnace of Kobani, another futile siege. When the Kurds finally gained control over the city, ISIS was left with a disorganized mob of Abu Hajaars and some snuff video producers. The rest had been sacrificed.
Inept leadership is why Islamic State has been death’s door ever since (February, 2015). The fighters in every group including ISIS flip over from other groups; they don’t arrive from outer space. At the beginning, ISIS offered the possibility of a quick victory and large gains; fighters from across Syria and northern Iraq were eager to join. After the Kobani debacle, the group offered the certainty of being thrown away for nothing or a date with the hangman. Like the rest, the group cannot make up its losses.
The US has similar faults, its command is riddled with uninspiring ‘company men’; experts whose corrupt relationships with the defense industry leaves what (little) remains of the institution’s integrity compromised. None possess a longer term vision or sense of mission. The United States military hasn’t won a war since 1945 and it is certain nobody alive today remembers how …
The conclusions that can be drawn are much different from those of the experts: The war is a product of the United States and its unscrupulous, self-interested and largely incompetent partners. It is a proxy contest between petro-states Iran and Saudi Arabia, which the US encouraged. There was nothing resembling real plan, instead, the US relies on dangerously unstable proxies who are more of an enemy than Assad. A grievous error was underestimating the Syrian dictator and his capabilities. The assumption was he would be killed by his own like Gaddafi or would flee Damascus leaving the country to the Turks or pro-Western proxies. He instead chose to slug it out, something the 1,271 government intelligence offices, agencies, bureaus including the CIA and Defense Intelligence Agency (DIA) as well as the 1,931 private contractors … never detected.
Assad was unlikable but not an adversary of the US or the West. For all of Assad’s faults, his regime is the legitimate government of Syria: it has never attacked the United States. The last Syrian war against a Western ally was vs. Israel in 1973. There is no justification for the West’s brutal mugging of the Syrian citizens.
PART ONE: It Only Gets Worse
PART TWO: Abu Hajaar
PART THREE: Sharia For Sale
Published on the Economic Undertow on September 20, 2016
Discuss this artile at the Geopolitics Table inside the Diner
Carl von Clausewitz famously remarked, “War is the continuation of policy by other means … ” What do the experts at the New York Times say?
Syria’s Paradox: Why the War Only Ever Seems to Get Worse
What is true for Syria is true for everything else. The economy only ever seems to get worse. Business and trade only ever seem to get worse. The state of the environment is flat-out getting worse no ‘seems to’ about it; much more of our precious industrial ‘prosperity’ and our world will be reduced to barren rocks surrounded by raging oceans of poisonous slime, an ‘out-world’ from a sci-fi novel. Our social- and political discourse only ever seems to get worse … our media … our public services. In our rapidly unfolding Age of Less, ‘Worse’ is the corollary. Heaven help us when we get to worst, we’ll be looking back at the Syria war as a kind of Golden Age.
Experts on civil wars say there are several reasons Syria is
“a really, really tough case” that defies historical parallels.
There is a basic fact about Syria’s civil war that never seems to change: It frustrates any attempt at resolution.
Despite many offensives, peace conferences and foreign interventions, including this week’s Turkish incursion into a border town, the only needle that ever seems to move is the one measuring the suffering of Syrians — which only worsens.
Academic research on civil wars, taken together, reveals why. The average such conflict now lasts about a decade, twice as long as Syria’s so far. But there are a handful of factors that can make them longer, more violent and harder to stop. Virtually all are present in Syria.
Many stem from foreign interventions that were intended to end the war but have instead entrenched it in a stalemate in which violence is self-reinforcing and the normal avenues for peace are all closed.
The fact that the underlying battle is multiparty rather than two-sided also works against resolution.
The experts’ conclusion in twenty-five words or less: there is indeed a war, it’s a big one, it has many adversaries arrayed against each other and it is likely to get worse. The subtext is ‘lucky for us Syria is safely out of sight’. This is the same subtext behind the endless barrage of marketing for the Pentagon and its minions. “Thank you for your service,” means ‘thanks for starting and fighting your endless, stupid wars somewhere far away.’
The experts never mention resource depletion and the battle over what little remains. In the conversation about wars that get worse, anyone bringing up limits is a Luddite consigning the human race to living in caves …
Other experts weigh in … offering more of the same. It turns out experts are one of our corrosive, undermining problems; there are too many of them, they intermediate everything, or rather they insert their all-knowing intermediation into every aspect of our lives. Our economies are managed by bankers and economists, the environment by business executives and process engineers, foreign policy by think tanks and shadowy, unaccountable ‘intelligence’ agencies, by diplomats and generals and their staffs of sub-contracted experts … sorcerers’ apprentices and their armies of mop-slaves.
The professionals always seem to begin well, there are reasons why they become experts in the first place. Soon enough, they falter and then they are stuck; they have done their worst already they have nothing more to offer. All that remains is for them to throw up their hands and ‘rationalize’ which is expert jargon for ‘lie’. “Thank me for my service, suckers!”
The Syria war like all the others is the product of experts, their prescription is always more of what has failed already. According to them the war in Syria is about the war in Syria and nothing else. Obviously the experts cannot conclude they- or their fellows are at fault because doing so would call into question the entire enterprise. Expertise pursues it own internal logic, the perpetuation of the status quo in a kind of self- suspending animation until the problem — or the experts themselves — fade away, lose interest, become senile and die of old age.
Expertise is a form of marketing. The experts’ job is to craft narrative myths that ‘sell’ American-style material progress: more and more modernity, more cars and diversions, more real estate, consumer goods and services … Experts are actors, their first job is to conform to public expectations, ‘as seen on TV”. By so doing, the expert fixes his place within the culture while the materialist culture’s supremacy is reinforced at the same time.
Given the relationship between war and politics one would think the experts would put the players into some sort of political context. After all, politics is the art of resolution. Instead, they dance around the subject or leave it out of the conversation altogether as if it is distasteful. Politics is the dog that doesn’t bark; a Vatican convocation where Jesus is never mentioned; dying patients surrounded by doctors who cannot bring themselves to make a diagnosis. Part of the confusion is ‘the fog of war’; participants have little- or no idea what is going on right in front of them. Analysts have perspective that comes with distance but must rely on second- and third hand material. What appears in the media including the social networks is public relations intended to serve business interests. The Syria war is among the first taking place in real time on Twitter and YouTube, untangling trends from the background noise and red herrings becomes a labor of the gods. There are endless, conflicting ‘official versions’ layered with wishful thinking and the purposefully malign indifference of corporate marketing.
Meanwhile, around the corner, over the horizon and through the forest of trees lurks reality and its invisible, entropic, smashing hand. Reality is never hard to see, but like the nameless horrors of H P Lovecraft, one must be able to bear looking at it. We never do, we’d rather look at the pretty pictures, instead:
Nice color scheme by Charles Lister, a bona-fide Middle East Expert! Can a six-figure Defense Department hire be far off? Here is another version from CNN, they both say ‘there is a war in Syria’: Dudes, we know that already!
Figure 1: Syrian combatants tastefully arranged in a circle by CNN, Note the central position of Islamic State. The graphics restate the obvious — and nothing else. Meanwhile, experts are busy creating more problems, all of which require more ‘expert’ solutions.
Figure 2: click on the image or on this link to bring up the full-size version in a new tab, (.pdf alert). If this looks familiar, it should be, it’s been used previously, courtesy of economist Ha-Joon Chang.
The chart is more or less self-explanatory: to the side are the countries involved along with non-state actors or ‘interests’. The global superpowers are at the top with militants toward the bottom. In between are regional powers such as Iran and Israel, the ‘in-theater states’ including Turkey, and the ‘innocent bystanders’, Lebanon and Jordan. Excluded for arbitrary reasons are Libyans, Iranian Kurds, Palestinians and Yemenis. They are engaged in related struggles but not within the Syria-Iraq theater.
Across the top are categories; what the countries and interests intend to gain by fighting; the overall cost up to and including national bankruptcy; what the nation or group ‘sells’ or offers as blandishments to its subjects and others; the political system of the enterprise and what it envisions for Syria or other areas of control. The final category is each country’s economy … all the above formatted into a table that is viewable on the web page!
Comparing Combatants in Syria – Iraq Theater
|WHAT THEY INTEND TO GAIN||COST||WHAT THEY OFFER||GOVERNMENT: CURRENT | PROPOSED||ECONOMY|
|USA||Arms sales. To destabilize region to import consumption||Operational expenses & loss of influence||Transient tactical advantage for no one in particular||Corporate plutocracy / None||Capital destruction – consumption / Ponzi finance|
|EC – UK||Arms sales, thwart militant attacks on the Continent||Irrelevance; expanses related to managing migrant influx||Homeland for migrants||Corporate plutocracy / None||Capital destruction – consumption / Ponzi finance|
|RUSSIA||Arms sales, increased international prestige||Bankruptcy of Russia||Transient tactical advantages for Syrian – Assad government||Single party police state ‘Tyrant on a stick’ (TOAS) / Single party police state (TOAS)||Petro-state|
|IRAN||Regional hegemony vs. Saudi Arabia, strategic advantage vs. Israel||Bankruptcy of Iran||Transient tactical advantages for Syrian – Assad government||Sectarian dictatorship (TOAS) / Single party police state (TOAS)||Petro-state|
|SAUDI ARABIA||Regional hegemony vs. Iran||Bankruptcy of Saudi Arabia, civil war||Funds, weapons, political cover, tactical advantages for anti-Assad forces||Sectarian monarchy (TOAS) / Single party police state||Petro-state|
|QATAR||Collaborator w/ junior partner of Saudi Arabia||Bankruptcy of Qatar||Funds for militants, ideological support||Sectarian monarchy (TOAS) / Single party police state||Petro-state|
|ISRAEL||Destabilize rivals – neighbor states||Unknown||Nothing||Republic trending toward single party police state / None||Capital destruction – consumption / Ponzi finance|
|SYRIA||Perpetual rule by hereditary tyrant||Total destruction of the country||‘Stability myth’||Genocidal single party police state (TOAS) / Genocidal single party police state (TOAS)||Post-peak oil petro-state / agrarian|
|IRAQ||Control over territory and resources (by factions)||Partition of the country of the country into three components & operational expenses||Sectarian intolerance||Effectively partitioned ‘IRAQ’ is an Iranian protectorate – fake republic / Various – None||Petro-state(s)|
|TURKEY||Organic fuel supply by way of a protectorate including Syria and Northern Iraq||Bankruptcy of Turkey, civil war and partition||Sanction for genocide (by way of proxies)||Sectarian single party police state (TOAS) / Neo-Ottoman satrapy sectarian police state(s)||Capital destruction – consumption / Ponzi finance|
|JORDAN||Repulse jihadi militant inroads, resolve refugee crisis||Operational and refugee management expenses||Nothing||Old-school constitutional monarch / None||Capital destruction – consumption / Ponzi finance|
|LEBANON||Repulse jihadi militant inroads, resolve refugee crisis||Political instability, refugee management expenses||Nothing||Quasi- republic (see Hezbollah) / None||Capital destruction – consumption / Ponzi finance|
|ISLAMIC STATE||Control fuel supply in Syria – Northern Iraq (for Turkey)||Destruction of its basis of support||‘Fake’ political – religious legitimacy||Warlord on a stick | ‘Sharia’ type warlord state||Outright theft|
|NON-ISIS JIHADIS, FSA||Replace current Syrian government (acting for Turkey, KSA, US, Qatar)||Destruction of its basis of popular support||Nothing||Warlord(s) on a stick | ‘Sharia’ type warlord state||Proxies of external powers w/ external funding|
|HEZBOLLAH||Become Shia sectarian successor to Assad’s ‘Baathist’ regime in Syria: (Iranian proxy)||Severe manpower losses, loss of credibility leading to the destruction of the organization||‘Security myth’||Sectarian single party police state ex-Lebanese Republic (TOAS) / Sectarian police state (TOAS)||External funding by Iran|
|SYRIAN KURD||Autonomy within a Syrian federal republic framework||Operational expenses, subject to genocide by Turkish proxies||Self-determination, womens’ rights, anti-jihadi secular government||Modified self-rule / To be determined||Agrarian – smuggling|
|IRAQI KURD||Independent Kurdish state||Operational- and refugee management expenses||Anti-jihadi secular redoubt||Hereditary duopoly, pan-Kurdish nationalist / possible amalgamation with other Kurdish states||Petro-state|
|TURKISH KURD||Political legitimacy within framework of Turkish constitution||Operational expenses, political marginalizatin||self-determination within framework of Turkish constitution||Modified self-rule / Call for independence under certain circumstances (see below)||Agrarian – smuggling|
NOTE: ‘Government current / proposed’ lists the countries’ governments along with what they would impose on the areas where they operate.
A glance at the chart makes it clear why the experts avoid politics … and why end of the Syria war remains out of reach. Except for the Kurds in Syria and Turkey, also Lebanon, Jordan and Israel there are no politics at all, they have either failed or been swept aside. What remains are tactics and leverage intended to gain transient advantages; administrative overlordship by whatever means come to hand.
Of the seventeen state and non-state actors in the theater, ten are single party police states with personality cults erected around their aggressive, paranoid leaderships. These are ‘Tyrants on a Stick’, (TOAS) named for the official portraits carried by weeping followers at military parades. These Dear Leaders live like termite queens in impenitent splendor; their feet never touch the ground, they hear only what pleases them or else their (ex-)experts are taken out and … well, you know! Meanwhile, the business bloat-ocracies of the west are just as corrupt, their leadership just as isolated. They are concerned only with finding greater fools and maintaining the flows of credit- and resources toward themselves.
Tyrants rely on experts because they cannot trust anyone else: in a real democracy, the public decides to go to war … or perhaps not. They might decide the bosses have overstepped their bounds or are incompetent. In a police state, the expert reaches for his calculator, the boss nods and the yes-men go forth to announce the decision and break heads. In a tyranny the leader thinks himself better than his public because he has stolen power from them. The power itself is evidence of the tyrant’s capability: that the thief is smarter than his victims. In a democracy the people are smarter than the leaders, if nothing else they are more in touch with reality because they are not insulated from it. The people save the leaders from their vanities and those of their lackeys. In a tyranny there is no restraint on the bosses, as a consequence they are always one misstep from disaster.
This is why the Kurds are succeeding … without powerful patrons or great wealth, without a country to call their own or much in the way of an economy. By the accident of history and an abundance of good sense they’ve taken advantage of zero-cost resources that are spurned by the others or are useless to them; the inclusion and participation of women in their national project and bottom-up decision making. They know their neighbors are out to steal from them or murder them all; that their own leaders would be killed or thrown into prison. They have had to decentralize to survive, to push decision making down the ladder of authority then cut off the top. By doing so the Kurds have saved themselves from the tyranny of experts and self-centric malfeasance that weighs down their adversaries …
Like everything else in the West, politics has been hollowed out, turned into a ‘Punch vs. Judy’ spectacle that plays out in the media. Small-d-democracy is given lip service and nothing more, all the important decisions are made out of sight by ‘others’: as George Carlin famously remarked, “It’s a club and you aren’t in it.” Our representative system has devolved into a shopping network for cartels. Because politics are conversations intended to build consensus and resolve disputes they are an anathema to the tycoons and the system that enables them. Consensus cannot be compelled from the top only apathy and a grudging acceptance. Allowing the citizens their own initiatives is dangerous, they might balk at taking on the tycoons’ obligations. This would leave the tycoons to meet the obligations themselves, they would all go broke! The strategy is for the bosses to trivialize everything within reach, to boil away the character of resolution leaving a scrim of incomprehensible noise. The current US election campaign is a perfect example: billions are spent on marketing with winner certain to be ‘none of the above’.
Clausewitz could not have imagined war as being ‘business by other means’. There is also ‘war as the means to murder’ which would have been unthinkable to the bourgeois Prussian aristocrat, yet we have it. A drilldown into the Syria war reveals American meddling for short-term business gains from the beginning, expanding now to include the Russians. The intent on every side — except for the Kurds in Turkey and Syria — is to make money. When war is good for business — as the Middle East wars are for the Pentagon — there are few- if any incentives to end it.
Published on the Economic Undertow on July 24, 2016
Discuss this article at the History Table inside the Diner
What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it …
We solved Hegel’s pesky problem in 1998 when Francis Fukuyama posited the prospect of universal liberal democracy, along with it, the end of history:
What we may be witnessing in not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.
This is not to say that there will no longer be events to fill the pages of Foreign Affairs yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run …
… because that is the futurist narrative in its entirety: to consign whatever it deems obsolete/old/unfashionable including history itself, to the dustbin of history!
By 1998, the narrative made some sort of sense: the outré Soviet Union had crumbled under its own weight even as the Chinese export ‘miracle’ was gathering force; in Europe the ground was being prepared for the euro. The West had triumphed over what it had painted as socialist tyranny — the absence of consumer choices. Gone were the, gloomy, paranoid Stalinist dictators in Russia and across Eastern Europe, swept aside by cheap color televisions and counterfeit Levis, menthol cigarettes and Ronald Reagan. The nuclear boogeyman had been seemingly stuffed back into a bottle then redeemed for a 10¢ ‘peace dividend’. Oil prices were low and American confidence in endless Ponzi wealth was high. Technologies were appearing out of what seemed to be nowhere offering solutions to problems we did not know existed: robots (to replace workers), Internet (to replace more workers) and genetic engineering (to replace the remaining workers). Certainly all of the above would bury history forever … right?
The West was to become a Keynesian paradise of endless abundance and leisure, a suburbanite fairyland of Negro-free gated ‘communities’, of pastel McMansions and luxury SUVs; of gourmet meals crafted from GMO ingredients washed down with magnums of Veuve Clicquot and narcissism. We would play croquet as eternal children under the glorious sunshine of prosperity while ‘disutility’ (labor) would be performed ‘somewhere else’ (Mexico). The waste and destruction associated with industrialization would vanish because we would all be rich enough to hire robots to clean up after us.
There were a few clouds: the tail-end of trivial conflicts in Central America; the ‘War on Drugs’, the Asian finance crisis in 1997 and the collapse of the Russian economy the following year. Long Term Capital Management followed the Russian economy into the toilet in early 1998 necessitating the first ‘rescue us or else’ mega-bailout of Wall Street. These events were diversionary theater: people who could afford it lost some money, bosses who badly needed new jobs lost theirs. All in all the entire reconfiguration process turned out to be remarkably painless.
Looking back, the notion of final geopolitical resolution was naively optimistic, a quaint artifact of a particular zeitgeist, like Beatle Boots or flip cellphones. What was really happening was the ending of the ending: ancient monsters were not vanquished only hibernating so as to take new forms. Now, when we need it most and want it least, history has stormed out of its coffin like a vengeful, blood-hungry vampire, reminding us all why we wanted to be rid of it in the first place.
Enter the new millennium and (quasi-)liberal democracy and finance capitalism are being shellacked and nobody can figure out why. Extreme events are tripping over each other like – add your favorite cliché here – cheese and macaroni. Radicals are ascendant as the status quo proves unable to prevent the consumption utopia from slipping out of reach. Strategies that once bore fruit are revealed as nonsense; military ‘stimulus’, central bank witch doctoring, austerity, institutionalized discrimination, trivial interest rate- and foreign exchange manipulation. The outcome is credit transfers from those with less to those with everything … and fury. With chaos on one side, dithering on the other, the public turns toward autocrats while societies — particularly across the arc of northern- and central Africa to south Asia — blow apart at the seams, writhing in agony, frantic to escape the vice-like grip of ‘less’ and unmet expectations.
This is the terror that dares not speak its name; not to be engulfed by refugees or shot by militants but forced by desperate necessity to become one! Rage is fear by another name.
Events rise up like rogue waves, smash with shocking force … and then vanish. In the space of a month there is the #Brexit vote — against the backdrop of faltering credit — US police shootings, also people shot by police; terrorist truckers, airport attackers, car bombings in city markets, nightclub massacres and more nightclub massacres. There are the coups that aren’t and the rounding up the usual suspects … the droughts and floods, grinding wars, food shortages and millions of desperate refugees, all lingering on Twitter for an instant then … gone. Staring us in the face is the breakup of the Eurozone and the end of the euro, currency- and economic failure in Venezuela and Brazil, environmental degradation and habitat collapse, the deflation of property/asset bubbles worldwide … unraveling is no longer a matter of ‘if’ but ‘how bad’.
Figure 1: … the status quo proves unable … Mazama Science (click on for big). Turkey has almost nothing in the way of domestic oil resources yet it burns through three-quarters of a million barrels per day, paid for with borrowed euros and dollars. Turkey earns some hard currency from tourists as well as a modest margin from pipeline fees. These last are far from enough: without loans the economy collapses in a hurry, with loans the collapse takes a little longer. The Turks could save themselves by way of stringent conservation but choose instead to wager the rent on a New Ottoman Caliph, betting that utopia can be rationed away from domestic enemies or stolen from its (even more bankrupt) neighbors.
Figure 2: Turkish lira relative to the US dollar, chart by XE (click for big). Depreciation of lira is the means by which Turks are forced to conserve against their will. With the passage of time, more liras are needed to obtain the dollars and euros needed to pay for imports. Economic theory suggests that currency ‘values’ run in cycles and that the lira will eventually regain its footing. History suggests the lira is a disposable relic and that markets have not yet ‘caught down’ with reality. Turkey’s currency represents little other than empty gestures and voracious demand. When history was on vacation, symbols and demand were assets to be leveraged; in the new Age of Less these things are liabilities. As the Turkish inter-temporal balance sheet breaks down so does the currency.
Tyrants like Trump and Erdogan (and Clinton) are products of industrial resource capitalism no different from McMansions and automobiles, they are also fetishes. Unlike vicarious pleasure-pussy Taylor Swift, tyrants symbolize power, ruthlessness and control … and increasing surpluses. Their promise to harvest gains by whatever means is the substance of their public appeal. The relationship between tyrant and followers is symbiotic and self-reinforcing. Adherents give form and color to the tyrant’s outline while the tyrant suspends- or outruns institutional restraints, providing the necessary sanction for adherents to act out their own impulses, destructive or otherwise.
The emergence of tyrants like Trump and Erdogan (and Clintons) is suggestive: that technology cannot produce the consumer outcomes we are desperate to preserve. If technology could save us autocrats would not be necessary. They are reductive rather than creative, their first- and last resort is coercion as when governments dragoon pensioners rather than machines to rescue finance.
We are in the middle of a crisis that has been ongoing for over five years: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?
The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Europe, in the US … in cities and states: pensions everywhere are under attack.
Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying our grandparents? Technology is supposed to save us but the raiding of pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology doesn’t work, from the people who are in a position to know.
What happens after the retirements are pillaged? Who knows? Nobody has a plan.
The world’s Trumps and Erdogans (and Hitlers) are First Law change agents and as such are integral/inevitable components of national- or supranational surplus aggregation … one of the costs of our ‘success’. History shows us that empires at the point of decline choose rotten emperors and incompetent caliphs. This is analogous to Hyman Minsky’s ‘Financial Instability Hypothesis’ that suggests periods of investment success are by themselves destabilizing w/ speculative malinvestments leading to crashes. Socio-political ‘Minsky Moments’ are products of long periods of dominion by a particular clique or political enterprise which becomes fertile ground for corruption and self-dealing, also malinvestments in perverse reasoning.
Because industrialization has produced outsized surpluses, the rottenness of caliphs (cost) is increased in proportion. Tyrants’ failures are more destructive; so are the failures of well-intentioned elected caliphs. The First Law outcome is invariably surplus reduction, nothing can stop it; conventional policies only makes things worse. Resource depletion is both unpleasant and permanent, the only strategy is to carefully navigate decline; to surf the smashing waves rather than be swept away by them. Depletion cannot be defeated in battle or outmaneuvered, it cannot be negotiated away or paid off. Less can only be adjusted to: unwillingness to adjust leads to exhaustion and ruin. Sadly, no leader, not one … no economist, no central banker or financier proposes to voluntarily make do with less, to embrace the ancient virtues of restraint, patience and modesty; to corral our competitive greed and tread lightly upon our life-support system …
Appearance is higher than mere Being −− a richer category because it holds in combination the two elements of reflection−into−self and reflection−into−other: whereas Being (or immediacy) is still mere relationlessness, and apparently rests upon itself alone.
“It is only shallow people who do not judge by appearances. The true mystery of the world is the visible, not the invisible….”
— Oscar Wilde
In the twilight of modernity we have become intoxicated with the idea of power, to have our way at the expense of others who are powerless to do anything to stop us. The idea (appearance) has more potency than does the thing itself, as the exercise of power carries with it consequences.
American Exceptionalism boils down to a kind of property right; to own human and mechanical slaves, to stake claims against the entirety of nature; the plants and animals and water even the rocks under our feet … to possess whatever is in sight like a chair or pair of pants … and with the same degree of accountability/carelessness.
There is our pitiless assault on everything, living and non-living, without which there is no ‘our’. The frenzy is to burn the world before someone else beats us to it, to render and distill and catalyze everything into money. Our precious tycoons will burn that as well … we have gone insane.
The fetishes have us in their thrall: the rifle and machine gun, the tank and the airplane and the hydrogen bomb … also the strip mine, the excavator, the chain saw and the automobile. Also the lies on television.
If we possessed the wits we would be mortified, would beg forgiveness and search for wisdom … As inhabitants of Sodom and Gomorrah we are simply cursed to live out the consequences of our own madness.
Published on the Economic Undertow on June 8, 2016
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Figure 1: Chart by TFC Chartz (click for big): It’s called the Triangle of Doom for a reason, carried through to the end, no outcome is possible other than demise of the automobile industry and its petroleum dependencies. Since 2000, there have been a series of petroleum price surges intended to meet the industry’s exorbitant extraction costs. Each attempt has failed as credit conditions outside the fuel markets deteriorated. As can be seen, many of the credit failures originated within the European Union. These fails, credit shocks and price retrenchments are to some degree, a product of EU structural shortcomings. Now, the British have voted to leave the EU, panic ensues: (NY Times).
‘Brexit’ Sets Off a Cascade of Aftershocks …
Maybe the future does not include flying electric cars after all.
By Steven Erlanger
Britain’s startling decision to pull out of the European Union set off a cascade of aftershocks on Friday, costing Prime Minister David Cameron his job, plunging the financial markets into turmoil and leaving the country’s future in doubt. The decisive win by the “Leave” campaign exposed deep divides: young versus old, urban versus rural, Scotland versus England. The recriminations flew fast, not least at Mr. Cameron, who had made the decision to call the referendum on membership in the bloc to manage a rebellion in his own Conservative Party, only to have it destroy his government and tarnish his legacy.
So it goes. There is a huge reaction and certainly more to come as markets digest what has happened … and what is certain to come. In the end it is very simple …
The Brexit vote was inevitable. Britain had no choice but to jump in the lifeboat and abandon the sinking EU Ponzi scheme.
Will it succeed? Probably not but it has to try. If not England it would have been another big European country, perhaps Italy as the first to abandon the scheme. The rest have to wait … but not for long. England’s alternative would be to devolve in a few short years to a petty euro protectorate like Greece or Ukraine begging Russia for fuel and Frankfurt for loans and forbearance. At issue is UK’s massive (£6+ trillion) external balance sheet, its banking liabilities vs. the dubious quality of its assets.
Brexit states unequivocally the City of London is insolvent; at the the point where it cannot finance itself any longer. This is the reason why the establishment rolled out the Brexit referendum in the first place, to save the banks. Think of Brexit as a bailout: the small will pay for the excesses of the great. The City certainly cannot finance the rest of the country and its massive and non-remunerative fleet of gas-guzzling automobiles; something has to give. There are 31.5 million cars in a country of 64 million humans, each car requires the resources of 20 persons. UK staggers under the equivalent human population of 630 millions on a small island … the bulk of those being dented, metal deadbeats. Talk about immigration, no wonder the economy struggles.
The automobiles and their need for fuel imports and infrastructure paid for w/ endless credit issue have bankrupted the entire West, not just England. In Europe: the euro = gasoline. For once — maybe not realizing exactly why and not being entirely happy about it — the British have voted against their cars.
It’s about time!
Published on the Economic Undertow on June 8, 2016
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Unknown photographer (Bundesarchiv): The central powerhouse of the IG Auschwitz ‘Buna’ chemical complex at Monowice, Poland, in 1944. This giant factory was built by the chemical firm IG Farben to produce synthetic rubber, motor fuels, styrene and other compounds for the Third Reich, using raw materials mined nearby. The plant was a monument to brutality, built largely by tens of thousands of Jews and other slaves press-ganged across Europe by the German SS and ‘rented’ to Farben. Unlike much of wartime German manufacturing, toiling under the lash of Allied bombing; set up in flimsy sheds, in caves or even out in the open, the Buna facility was built of permanent materials to the highest standard. The intention was to produce wartime supplies for the German military during the years of conquest, then commercial plastics after the war was won. It was also meant to put the German stamp on defeated Poland, a permanent landmark for a thousand-year empire.
Farben was a cartel created in 1925 by combining the firms BASF, Hoechst, Cassella and Chemische Fabrik Kalle, Bayer, Chemische Fabrik vorm. Weiler Ter Meer, Chemische Fabrik Griesheim-Elektron and Agfa. These firms were founded beginning in the mid- 19th century, to synthesize dyes and related compounds from coal tar, a toxic material left over from the manufacture of illuminating gas. By the time the combine was formalized, interests had expanded to fuel, fertilizer and pesticides, cosmetics, non-ferrous metals, explosives, pharmaceuticals, reagents; also construction, mining and materials. The leading firm within the Farben combine was BASF, which had become dominant by way of the high pressure hydrogenation processes it developed beginning in 1912.
During that year Fritz Haber and assistant Robert Le Rossignol learned how to produce ammonia by combining atmospheric nitrogen with hydrogen from methane in a pressure vessel at high temperature in the presence of a catalyst. Engineer Carl Bosch at BASF expanded the process to the industrial scale. Arguably one of humanity’s significant inventions, synthesized ammonia represented a superabundance of fertilizer, allowing crop yields to increase geometrically without the need to increase the area of land under cultivation. The Haber process was soon combined with the Ostwald Process to synthesize nitric acid which together produces ammonium nitrate; this allowed for nearly unlimited supply of explosives and propellants. The timely adoption of nitrate synthesis at the industrial scale right before the beginning of World War One allowed Germany to wage war against its neighbors even as supplies of natural nitrates were cut off by British naval blockade.
In 1913, Friedrich Bergius patented a process for converting lignite coal to liquid fuel by hydrogenation under high pressure and temperature in the presence of a catalyst. Theodor Goldschmidt, a businessman and chemist with family background in the dye business built a facility utilizing the Bergius process to produce liquid hydrocarbons which became operational after the war. Ultimately, Bergius’ patent was sold to BASF where Carl Bosch perfected- then expanded the process. Starting in 1934, Farben (as Brabag) constructed a dozen coal-to-liquids plants capable of producing at full capacity as much to four million tons of synthetic gasoline and other fuels per year. In 1925, Franz Fischer and Hans Tropsch developed a complimentary coal-to-liquids process that likewise involved passing feedstocks through a catalyst at high pressure and temperatures. The output of the two processes together was sufficient to meet the entire military requirement for gasoline with synthetic fuel until allied bombing destroyed most of the plants and fuel transport.
In 1929 Walter Bach (for Farben) developed a process to produce synthetic styrene-butadiene rubber (SBR) trade named as Buna-S. There were other formulations for synthetic rubber and to some degree Farben had a hand in all of them. including types developed in the US and the USSR by Sergey Lebedev; these were all places lacking a native source of natural rubber. Farben built several facilities to manufacture Buna in Germany and occupied lands including the plant at Monowice. Together these factories were able to meed the German military demand for rubber until they were, like the fuel plants, destroyed or rendered useless by Allied bombers.
Unknown photographer (Bundesarchiv), Compressor station in IG Auschwitz Buna hydrogenation facility in Monowice. The scale of these compressors can be seen by noting the figures on the far right and in the center.
In 1937, Otto Bayer (Farben) developed the chemistry to produce urethanes which today are ubiquitous in adhesives, coatings, paint, insulation and packaging. Farben chemists also developed polystyrene and epoxies, organophosphate pesticides; also photographic film, X-ray plates and developing chemicals; also pharmaceuticals including phenobarbitol and the first antibiotics; also solvents, synthetic fibers and dyes; reagents and chemicals for refining, also catalysts, lubricants and special materials for high temperature applications. One of the production centers within the sprawling Buna factory was intended to synthesize glycol compounds used for explosives, also chemical warfare agents including precursors for the nerve gas Tabun. Glycol is a component of anti-freeze.
The 1925 consolidation created Farben as Europe’s largest company; it was also the world’s largest chemical company; a top-four largest industrial firm after General Motors, US Steel and John D. Rockefeller’s Standard Oil of New Jersey. Operating through hundreds of subsidiaries and merger agreements, the greatest proportion of the firm’s business was outside of Germany. Until the war, Farben was the source of the bulk of pre-WWII Germany’s foreign exchange.
Farben was extraordinarily inventive. A reason was the company did not skimp on critical investments: from The Official 1945 Report of U.S. Congress on IG Farben;
Vast sums were devoted to research. In the period between 1932 and 1943 I.G. spent slightly less than RM 1bn, averaging an expenditure of rather more than 4.1 percent of (war inflated) average annual gross sales. A significant percentage of these expenditures went into research on products not yet in commercial production, and constant attention was also paid to novel applications of products. Well over 1,000 highly qualified men and women were regularly engaged in research work. In addition, the firm financed research work in many universities and scientific institutions.
Unlike the current run of tech firms with little- or nothing to show but borrowed fortunes for executives and venture capitalists, Farben’s top scientists and engineers were Nobel Prize winners … Haber, Bosch and Bergius; later Otto Diels for chemistry, Gerhard Domagk for medicine. Brilliant as the company was, Farben’s crimes were appalling. Farben and its manufacturing counterparts Vereinigte Stahlwerke, Daimler, Krupp, BMW, Messerschmidt, Rheinmetall, M.A.N., Mauser and the rest were the ‘Military Industrial Complex’ before the term as such existed. The complex’s war against Europe cost the lives of thirty-two millions or more, additional millions were wounded or left homeless. Instead of empire, the war left Germany divided and in ruins. The conventional narrative suggests Farben as an accomplice or pro-forma enabler of the Nazi Reich and its horrors but this is incorrect. Hitler and his gangster cronies were products of Farben no different from polystyrene and printing ink.
Technology is seductive. From the dawn of modernity in 1455, it has offered the chance for those who possess it to gain ascendancy over those who do not. The first public expressions of modernity were both revolutionary and aggressive. The printing press enabled Martin Luther’s reaction against the Catholic Church, the three-masted sailing ship made possible the almost instantaneous conquest of much of the Western Hemisphere by Spain and a handful of adventurers. The press put paid to the Church’s monopoly on information and by doing so ended Rome’s position as mediator of public and private affairs across Europe. The sailing ship took rapacious Europeans to every corner of the world, to pillage what they could, to colonize and enslave as far as the oceans could carry them. The roots of technology are in war and revolution, its branches are crimes and misery, death and ruin; we obsess about the flowers while we choose to endure- or ignore the rest.
Like a wrench or a saw, technology offers leverage: the policies that spring from it are entirely self-referential and self-contained. A saw either cuts or it doesn’t; what happens otherwise is never an issue, what matters is the ‘efficiency’ of the cut. Technology sets its own terms. To the saw everything looks like a piece of wood; analysis is reduced to these terms and none other. The observed purpose of technology to expand itself; it is both ends and means simultaneously, with one justifying and reinforcing the other. Spain’s conquests and Luther’s bid for reform set into motion social and economic events that culminated a century later with the Thirty Years War and the annihilation of a quarter of Europe’s inhabitants. On its own terms, Auschwitz was a very good concentration camp, it was able to murder over a million harmless Europeans and provide industry with a million more as slaves at very low ‘per unit’ cost; with very little fuss. Objections were- and are nothing more than sentimentality; those Jews and Russians were all going to die, anyway.
By way of the internal logic of technology, the most outrageous crimes are nothing other than ordinary, predictable mechanical processes. Technology ‘does’ because it ‘is’, there is are no other reasons, in fact reasoning is never part of the industrial equation; here there is never a why. Like the genie and the bottle, technology cannot be ‘un-invented’, it can only be replaced by newer, more revolutionary and warlike versions, or forgotten or starved of the materials it needs to continue. The failure of technology is that while it offers reach and grasp it cannot provide things that are inherently peaceful and accommodating. It is the same with economics, which produces ‘wealth’ but cannot provide money that is impossible to steal.
Within the version of ‘modern’ that Farben conjured as it trundled along, the firm itself was an unexceptional component as were the materialist anti-philosophy and the baggage of self-driven rationalizations that went along with it. Like gravity in Einstein’s universe, Farben ‘bent’ the space of modernity, adapting everything within it to itself. Whatever was in that space was Farben’s property, to do with what it pleased. This included the humans who were victims of the company as well as the governments that victimized them for the company’s profit. Outside the curve, the firm’s products existed for no other reason other than they did not exist before, what was to be done with them after they were delivered and the warranty ran out was never the company’s business … According to the internal logic of technology — not just Farben’s — the product was- and is always neutral; guns don’t kill people, neither do explosives, nerve gas, cars or atomic bombs, tanks, drones or air-to-surface missiles. Hannah Arendt observed of the blandly innocuous Standard Oil of New York employee Adolf Eichmann:
The trouble with Eichmann was precisely that so many were like him, and that the many were neither perverted nor sadistic, that they were and still are, terribly and terrifyingly normal. From the viewpoint of our legal institutions and of our moral standards of judgment this normality was much more terrifying than all the atrocities put together for it implied – as had been said at Nuremberg over and over again by the defendants and their counsels – that this new type of criminal, who is in actual act hostis generis humani, commits his crime – under circumstances that make it well-nigh impossible for him to know or to feel that he is doing wrong.
Eichmann, like Arendt’s ‘others’, was a product … of what-ever branch of industrialization, it does not matter. He was more deadly than some, less so than others. Accompanying Eichmann in the dock was the banality of technology, the dumbest of all automatons; without comprehension or sense; a Golem made of nitrate and rubber hovering both in- and outside good and evil not quite one nor the other, all things being exactly the same. This is the logic and tyranny of the machine, the false idol we have decided it is best for us to live in the center of.
Gerhard Schrader aimed to end world hunger; in the process of developing pesticides he discovered the nerve agent Tabun, that was later produced in large quantities by Farben. The chemical turned out to be difficult to handle and for that reason and for others, it was never deployed. Haber’s ammonia synthesis offered the same benign promise, to feed the hungry. In 1914, Haber without hesitation volunteered his expertise to the Kaiser government, to develop and deploy poison gas during the war, having a personal hand in the first use of chlorine during the Second Battle of Ypres in 1915. “During peacetime a scientist belongs to the world,” said Haber, “during wartime he belongs to his country.” Ammonia synthesis was the foundation of Imperial German firepower, without BASF’s explosive compounds, the German assault on the rest of Europe would not have been possible. Hitler’s war would have been stillborn without the ability of Farben to synthesize motor fuels and rubber — and to obtain essential compounds as well as intelligence from its American partner Standard Oil. The conventional narrative casts Hitler as the convenient villain; that the rest of the German government, its helpful industries and naive populace were dupes. That Hitler was a villain there is no doubt. The narrative one step further makes Farben the industrial villain and that its fleet of partners and lenders, including Brown Brothers Harriman, Standard Oil, Shell Oil, Morgan Bank and the Bank of England were dupes as well. Another step further and the German Schutzstaffel-SS were the evil actors that the Farben executives were taken advantage of; this narrative held longer and was very convenient as scores of Farben executives took high-level management positions within the firms that succeeded Farben: Agfa, BASF, Bayer AG and Hoechst (merged with other companies).
Technology pushes back limits, but cannot eliminate them. It only goes so far, providing some solutions but not all of them. Farben offers a window allowing technology to reveal its shortcomings, it also a means to understand Germany, which to a large degree was a product of the dye firms that were the parent of the IG Farben company.
– Germany, like the United States, emerged from the crucible of war. They also emerged against the same adversary.
– The First and Second European wars were started for the same reason, Germany lost both wars for identical — but different — reasons. Technology gave Germany the chance at success in its wars but technology proved to be irrelevant at the end.
Published on the Economic Undertow on May 10, 2016
March 9, 2011. (AP Photo/Charles Sykes)[/caption]
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In our times of trouble, our nation turns its lonely eyes to …
One morning in the mid-1990s, Mark Mulvoy was on the sixth hole of Long Island’s Garden City Golf Club with Donald Trump when the skies opened, and they ducked for cover under a nearby awning. The rain let up a few moments later, and Mulvoy, then the managing editor of Sports Illustrated, returned to the green. When he got there, he found a ball 10 feet from the pin that he didn’t remember seeing before the storm.
“Who the hell’s ball is this?” he said.
“That’s me,” the real estate mogul said, according to Mulvoy.
“Donald, give me a fucking break,” Mulvoy recalls telling him. “You’ve been hacking away in the weeds all day. You do not lie there.”
“Ahh, the guys I play with cheat all the time,” he recalls Trump replying. “I have to cheat just to keep up with them.”
“The worst celebrity golf cheat?” the rock star Alice Cooper said in a 2012 interview with Q magazine. “I wish I could tell you that. It would be a shocker. I played with Donald Trump one time. That’s all I’m going to say.”
“I’ve never played with Alice Cooper,” Trump said. “That’s a terrible thing to say about people, especially me.”
How sinister! Goldfinger is running for president of the United States!
How will James Bond save us from ourselves this time? Nobody knows. Oscar Wilde famously remarked “life imitates art”; that was in a more genteel time when the world actually had ‘art’. Fast forward to the twenty-first century and life imitates commercials …
… our ‘alternative’ candidate: unstoppable, mechanistic, can’t be reasoned with, doesn’t feel pity, etc. So far, no horror flick about an Ebbets Field era political cliché-slash-fall guy … no doubt Hollywood’s best minds are hard at work on a concept right at this moment.
Pop culture’s leadership program offers a range of stupid-psychotic characters to run our vital systems … so that we might gain the thieves’ return. Systems include governments, militaries, big businesses and religions. Thieves’ return is exactly what it sounds like; it costs the robber almost nothing to steal compared to the expenses borne by his victims whose relative good nature (they are the slower moving thieves) makes them deserving of their fate. The Cortezes and Napoleons, Goldmans and Sachses (and Madoffs), Trumps and their ilk are not accidents or outliers, they are integral components of modernity like the printing press or Hans Wegner chairs … iPhones and battleships. Our precious system cannot function without them.
The idea, to paraphrase Lewis Mumford, is “to maim and kill with more expert precision than one’s neighbor … “ but, to do so out of sight, without making a scene or scaring the horses, to kill and maim in another country. With a certain je ne sais quoi;
- A part of, relating to, or characteristic of the social middle class,
- Marked by a concern for material interests and respectability and a tendency toward mediocrity,
- Dominated by commercial and industrial interests; capitalistic.
In the beginning, the maiming and killing process ‘worked’: gold and riches flowed from Spanish conquests in the New World toward Europe, then from South Asian, African and Chinese colonies toward England other European powers. When the most productive parts of the world were divided the Europeans turned against each other; the rot had begun to set in. America emerged from its century of isolation and European carnage and turned toward colonizing nature itself. With machines, complexity and fossil fuels, Americans and their imitators were able to achieve a level of prosperity and comfort unimaginable in earlier times.
Yet, nothing lasts forever. Analogous to Hyman Minsky’s Financial Instability Hypothesis; prosperity carries with it the germ of its own undoing. Comfort and vanity are corrupting. The parade of thieves across history is evidence that ill-gotten gains are the only kind to be had. Labor, art and creativity are time-wasting hobbies and/or marketing. Innovation and technology are useful only as far as they leverage more efficient theft. Sorry dreamers: facts on the ground speak for themselves: we plunder therefor we are. If any of us chooses to do otherwise someone else steps up to plunder in our place. The iron laws of nature insist that humans pillage or die trying, it is either us… or rabbits and kangaroos: life is a contest with only one winner.
We have made it our destiny to spread our multitudes across the universe, to discover other worlds so we might empty them as we have done with this one … to reduce everything to accounting entities, to turn capital into waste, to replace value with ‘Made in China’ brand poison cat food and and the ‘magic of free parking’.
“Omelets are not made without breaking eggs,” right?
What keeps the various rogues in check is readiness of others to do the same thing. There are too few ‘fools in the market’ able to absorb costs and thereby support the enterprise. Our theft-based economy hiccups because of a shortage of victims solvent enough to justify the expense of stealing from them … or without resources to extract. Those making their way up the economic ladder of deprived of gains they feel entitled to … which in turn amplifies the increasingly vicious pillaging cycle.
Managers’ first and only job is to promote the interests of big business, to stand aside and allow those with most invested to run things. Leadership is a matter of role playing; the leader’s job is to conform to the public’s collective imagination and provide distractions. Managers are employed strictly by how they look, dress, speak, where certified and whom they ‘know’; where they live and work and how they travel. This is how Goldfinger becomes a presidential nominee: he’s a billionaire … or at least looks and acts like one. This is suggestive to his legions of supporters who see something of themselves within him. Under the circumstances, actual competence or capacity is unnecessary, only fashion.
Forms that require labor, skill, difficulty or do not present a marketing opportunity are penalized with diminished status. Because our scams are divorced from reality the scam managers are expected to be incompetent even as they are fashionable! There is no penalty for stupidity in America.
Competence is intolerable except where it allows for the proper internal functioning of the enterprise. The ostensible scam- masters might be buffoons but those who tend the boilers must know what they are about.
Actual or ‘real’ phenomena which take on pop culture’s forms are treated by the culture as if they are scams irrespective of logic: “Buy the fiction, sell the fact.” Because our institutions are acknowledged to be fraudulent and this is winked at it is not hard for marketing to promote what it wishes as frauds. This is how energy companies can falsely accuse climate science of being a scam and have a large part of the public accept it.
The Hollywood villain vicious cycle runs off the rails …
… to maim and kill with more expert precision than one’s neighbor.
Whether they intend to be or not, managers are First Law change-agents. The First Law relates to the costs associated with ballooning surpluses (see the upper right corner of this page). The sensible change-agent voluntarily reduces surpluses before management costs spiral out of control. Our bourgeois bossmen are not sensible, they are actors reading from scripts. In boardrooms and in offices, in central banks and strategy sessions verything possible is done in order to maximize surpluses, to gain them by force if need be. Costs rush through the back door and around corners, the surpluses evaporate.
Whoever wins the election later this year will be ill-equipped to do more but dodge responsibility for the country’s (the world’s) accelerating troubles. If the managers were to tell the truth they would discuss overpopulation, permawar, water- and petroleum depletion, loss of topsoil fertility, diminished waste-carrying capacity; resource constraints that will never ‘disappear’. Instead, candidate Trump blames Mexicans for the American working-man’s plight. He does not understand why Mexicans are at our door in the first place … changes in Mexican agriculture. With climate change and other self-amplifying costs of American industrial surpluses, there are more Mexicans and others certain to come.
We are up against thermodynamic entropy, evidence for this is everywhere a person chooses to look. Entropy is not subject to payoffs, PR or force; it does not negotiate. It is a consequence not an option. We had our chance: Instead of adapting, we were offered supply-side fantasies paid for with the charge card … leaving us with an overwhelming mess and hapless Hollywood villains who do not have a clue.
Good luck on us, we will need it.
Assad photo credit: Joseph Eid/Agence France-Presse/Getty Images
Published on the Economic Undertow on May 2, 2016
Discuss this article at the Economics Table inside the Diner
As JP Morgan famously remarked, markets fluctuate; its impossible at any particular moment to pick trends out of the background noise. Nobody can say for sure whether tops or bottoms are in. Trends only reveal themselves in the rear-view mirror, even as they are obscured by non-stop advertising campaigns and PR. By the time a trend is clear it is usually too late for investors — otherwise known as ‘fools in the market’ — to do anything about it, the free lunch is already eaten and the punch bowl taken away …
Figure 1: Is the bottom in? Chart by TFC Charts (click for big). Oil prices have been fluctuating higher in futures’ markets but nobody can be sure whether prices will rise from here or head back for the cellar.
With current prices at- or below the cost of extraction, drillers look to survive by reaching for the plastic, offering themselves and their properties as collateral. This is a medium-sized problem for drillers: along with all the other industries they have been borrowing from the beginning of time. In the good ol’ days they borrowed less, now they borrow more while praying for the trend change that brings that punch bowl back.
Ordinarily, the oil drillers’ customers step forward with their own borrowed funds to retire the drillers’ loans. Customers don’t simply sign over the money to the drillers, they over-pay for drillers’ products. This is what the term, ‘sustainable business model’ actually means; customers pay higher prices for successive rounds of cheaper-to-produce goods; the margin is used by firms for debt service and the retirement of maturing loans. Naturally, as each round of financing is rolled over the firms borrow more. Some of this money flows to executives, by way of this process CEOs become tycoons. Economists gain as well because every increase in borrowing represents GDP growth they can take credit for.
Fast-forward to the present: goods are unaffordably expensive to produce, emptied-out customers are no longer able to over-pay. They have nothing to offer as collateral for loans but their (near worthless) labor and frantic urge to Waste as seen on TV. Because the customers are unable to borrow, they cannot benefit the drillers, the drillers must borrow for themselves and pray …
Because the ‘waste as collateral’ concept is absurd/ridiculous, both the customers’ AND the drillers’ loans are effectively unsecured. This leaves a maturity mismatch between drillers and their customers. Firms are borrowing tens- of billions of dollars even as their customers are standing in line at the food bank. Customers cannot borrow => they cannot overpay => prices crash as drillers have no place to put unsold crude => whatever collateral the driller offers becomes worthless. The customers stiff their lenders => there is nothing for lenders to seize. At the end of the day, drillers, customers and lenders are all ruined … this dynamic is playing out in real time, right this minute, under everyone’s nose, all over our Great Round World.
This is perfect if unremarkable sense; conditions within oil industry finance must reflect resource depletion and it is clear that they do. The non-stop PR campaigns touting driller technology, efficiency and innovation are irrelevant, none of these things touch the customer. Losses cannot be made up with volume. Real returns, solvency and cash flows matter; when customers cannot gain the means to buy fuel industry products there is ultimately no more fuel industry. Redistribution, or giving customers the means to buy fuel is an immediate-term (non)solution. Some expensive time is borrowed until the customers’ financing is exhausted. Because resource waste offers no tangible returns to the waster; his credit will eventually run out, he will waste no more.
Meanwhile, the drillers must borrow or go out of business while lenders hold their noses and lend! The alternative is an output crash; we are caught between a looming crash and conditions that are pregnant with crash possibilities. Credit access becomes a matter of desperate necessity with every borrowed dollar lodged against the lenders’ deteriorating balance sheets. At the twilight of the petroleum age, drillers survive by cannibalizing their bankers who in turn are becoming the global economic link under the greatest strain.
Giant finance firms preserve the illusion of system sufficiency by lending to each other. Self-pleasure here is deadly; the lenders have become zombies rotten with non-performing loans. Growth is stagnating, economies are falling into deflation, turning Japanese. The zombification of the banks becomes both the reason for- and the consequence of extraordinary monetary quackery: the intent is to goad finance into squeezing out every possible loan, to kick that can one more day while hoping for a miracle. For business as usual, there is no alternative: interest rates fall to zero- then negative, currencies depreciate, pensions are looted and depositors bailed in … we must endure these abuses or else! Everywhere in the Westernized world useless industries and sectors are propped up regardless of consequences. Deflation results from the longer-term inability of billions of end-users to gain purchasing power or returns on capital from a mechanized regime that is designed from the ground up to annihilate capital.
No capital, no purchasing power, no problem; we’ve got iPhones, instead!
Blows are starting to rain down on the technology sector. Instead of saving our bacon as its promoters endlessly insist, the industry is having problems saving itself:
Figure 2: It isn’t just the energy sector: looking at this pretty chart (Yahoo Finance, click for big): Apple’s decline looks to be part of a longer-running trend rather than a fluctuation. The firm reported earnings, which were terrible; the company is being punished for its customers’ misbehavior.
Rotten Apple: Stock plunges 8% on earnings, revenue miss
Apple reported quarterly earnings and revenue that missed analysts’ estimates on Tuesday, and its guidance for the current quarter also fell shy of expectations.
The tech giant said it saw fiscal second-quarter earnings of $1.90 per diluted share on $50.56 billion in revenue. Wall Street expected Apple to report earnings of about $2 a share on $51.97 billion in revenue, according to a consensus estimate from Thomson Reuters.
That revenue figure was a roughly 13 percent decline against $58.01 billion in the comparable year-ago period — representing the first year-over-year quarterly sales drop since 2003.
Shares in the company fell more than 8 percent in after-hours trading, erasing more than $46 billion in market cap. That after-hours loss is greater than the market cap of 391 of the S&P 500 companies.
AAPL is not some disposable startup at the end of a cul-de-sac somewhere in suburbia, it is (or was) the world’s largest company by capitalization. It is the technology sector’s tech company. When people hear the word ‘progress’, chances are they think robots and iPhones. Yet, markets are becoming unfriendly for the behemoth: its shares presently lurk at a support level, that if breached, would indicate a decline to $55 or so … from $125 per share a little over a year ago. In other words, a slump that mimics the fuel price crash.
This is very serious business. Stockholders are a who’s who of finance: pension funds, sovereign wealth funds, central banks, private equity and hedge funds. Shares are collateral for billions in debt that has been used for stock buy-backs and mergers. The entire tech investment ecology is at risk. Damage from a sixty-percent-ish price decline would be severe. Leverage against the shares applied backward compounds the damage just as it expands returns on rising prices; this puts more pressure on the hapless lenders reeling from their debacle in the oil patch. It isn’t just the money: against a backdrop of hand-wringing and denial, the science fiction narrative of a future running on innovation (and sharp business practices) is falling apart.
Ironically, Apple is constrained by a cleverness shortage: successive iterations of iWhatevers have become predictable variations on now-familiar themes. Offering customers novelty in modest increments at stratospheric prices has consequences; buyers are skipping over the brand and buying cheaper look-alikes. Commodity ‘clone’ products represent the race to the price basement, they can’t generate the marginal returns or snazzy narratives that support inflated share prices. In this sense, Apple is a victim of its own success, it must either compete going forward with its imitators on price or invent the next great must-have-at-all-cost consumer product that will re-establish its position of leadership in the technology firmament.
This is what AAPL has come up with …
So much for redemptive innovation and technology … Apple aims to reinvent the Dodge Caravan. It turns out all roads lead to more and more roads. Why not battleships, instead?
HMS Dreadnought, a brilliant technological achievement in 1906, it was rendered obsolete before its keel was laid by the airplane.
Apple cannot be serious! In choosing the car, AAPL lurches in the direction of the hapless Japanese, who make brilliant cars (made brilliant battleships) but cannot return value to the cars’ users (neither do battleships). The auto (battleship) industry is a subsidy hog, it twists in the wind even as it is on life support. By way of its actions, APPL admits its customers can no longer subsidize the company and its lenders, it looks instead toward the government (just like battleship manufacturers), to gorge at the public trough.
Figure 3: TSLA, another investors’ darling, (click for big). Strapped customers can afford the cars by bellying up to their friendly sub-prime auto lender for eight-year loans. Even this absurd financing is inadequate without billions in additional subsidies. These in turn can only come from finance, the same industry under so much solvency pressure from resource depletion … resulting from over-reliance on cars (battleships).
And all for what end? Nobody connects the big picture dots behind the empty gestures; battleships, Teslas and iPhones are status symbols, worth little- or nothing outside their self-generating, hubristic narratives. “In the long run,” said Keynes, “we are all dead”, it seems certain that we have to humiliate ourselves first.
Published on the Economic Undertow on February 29, 2016
Discuss this article at the Economics Table inside the Diner
The past year and a half has seen the relentless unraveling of the post-Lehman recovery, the vaudeville act duct-taped and wired together on the ruins of shadow banking … taking the place of a reflective determination why ‘shadow banking’ is necessary in the first place.
Deflation, or rather, entropy has set up shop on our doorsteps. Call it ‘capital E’ entropy: the Golem we have created by way of our blithe and dithering squanderousness. Entropy cannot be bargained with, it can’t be reasoned with; it doesn’t feel pity or remorse … etc.
Entropy has put all the countries, the regions; all the economies under siege. All are struggling with credit market distortions to some degree, from the diminution of purchasing power to the greatest degree. An important and growing fraction struggles with the consequences of pointless wars and the resulting tides of migrants, other fractions are crushed by debts that can no longer be serviced out of cash flows. There is insolvency, inter-temporal contagion and more deflation in a vicious cycle.
Along with the cycle is the frantic scramble for the next ‘solution’ … even as the only workable response to ‘less’ is stringent conservation. Purposefully doing without is never part of any conversation, it’s unpleasant, it does not offer a fabulous future or much in the way of hope …
There are endless attempts to escape consequences: to cash in, (cash out?); cries for bank bail-ins, increased austerity or the relaxation of it, more quantitative easing or less of it, negative interest rates or higher ones; always more loans adding to what we have in monstrous proportion, a mountain of claims looming over relentlessly diminished purchasing power. We are insolvent, in that purchasing power is the ‘currency’ which we must obtain in order to retire our debts.
Figure 1: The long meander to oblivion, this diagram from 1972 ‘Limits to Growth’, Meadows et al, illustrates what we are up against. The best the establishment can come up with is a non-sequitur:
It’s time to kill the $100 bill
… illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.
Illegal money transfers have been made electronically, in their billion$ by HSBC and other giant banks. The largest recent single user of US currency is the US military. Summers conveniently ignores the greatest criminals are the bankers, who pay themselves, not with used, non-sequential $100 bills in brown paper bags, but with electronic bonuses.
Establishment economists such as Lawrence Summers can be excused for failing to understand ‘purchasing power’ the way it is described here at Economic Undertow. It isn’t taught at Harvard or any other school nor is it a part of an equilibrium economics curriculum. It tends to be understood as the amount of finished goods or services that can be gained in exchange for a unit of credit. More units = more goods = greater wealth. More valuable units also = more goods and wealth. The idea is to manipulate the number of units to access more goods and to prosper; manipulations haven’t been working lately and the economists have no idea why.
In Debtonomics, purchasing power is the relationship between resources and the ‘work’ needed to make them available. Because resources DO the work as well as being made available BY the work, consuming resources also consumes our purchasing power at the same time. This mirrors what is observable in the real world and explains why adding ‘money’ hasn’t accomplished anything, we keep getting poorer all the time.
Resources and purchasing power are not the same but they may as well be, their relationship is unitary. One obtains or ‘purchases’ the other by way of the application of energy to displace matter over time – ‘power’. Each fraction of purchasing power represents an equal proportion of resources — capital — available to us. As capital vanishes into our machines, our purchasing power is irretrievably extinguished. With time and industrialization there is less of it. In Debtonomics, money is a derivative claim against purchasing power; so are labor, infrastructure, industrial production even the industries themselves. Changes to the particulars of the different claims such as numbers on a paper, worker productivity or interest cost are irrelevant; when we run down our resources we are ruined regardless of how much ‘money’ … or other industrial bits and pieces … we have.
Summers’ argument is disingenuous; currency controls are not to thwart criminals but aim to prevent bank runs if- and when deposit rates turn negative. Runs destroy whatever system being run from, whether it is finance, currencies or banks. Summers’ proposal ‘works’ in the sense in that it traps depositors’ funds, but it undermines depositors’ faith in the system at the same time, it is destructively counterproductive.
The establishment’s first instinct is to punish, to lash out and destroy. Our systems are built upon continuing, exponential monetization of waste. When devastation does not produce the desired outcome, we try harder, reaching for the succession of bigger hammers. After the $100 bill is turned to gristle, the $20 then the the $5 will meet the same fate. What’s left is change hunted for beneath the seat cushions. When that time arrives a nickel will be worth today’s $100, fatally undermining the well-crafted ‘policy proposal’ of the ex-Secretary of the Treasury and Director of the Mossavar Rahmani Center for Business and Government at Harvard University!
Summers proposal would effectively shrink the supply of liquid funds, amplifying dollar preference, something else not taught at Harvard. This would rebound against the fuel supply system. Removing funds from the customer = less of a bid for fuel products and lower wellhead prices. Removing fuel from customer: eventual collapse.
Everything Has To Be Perfect Forever!
Excluding the rates paid (charged) on reserves held by central banks, negative interest rates are largely a market phenomenon, they reflect a retreat out of risk; the ‘flight to safety’. They occur when there are more loanable funds available than there are low-risk investments that can absorb them. There does not have to be much of an excess of these funds for interest to fall negative; like the price of crude oil, rates emerge at the margin. Negative rates apply to securities which are considered ‘money-like’ such as sovereign debt. It is government bonds that offer negative returns.
Figure 2: MZM money stock, (Fred). ‘Zero-maturity’ money is liquid funds in the economy (excluding time deposits/certificates of deposit). At the same time finance lends more funds into existence there are fewer destinations for them … they migrate into safe harbors such as bank deposits or credit equivalents.
Figure 3: MZM velocity has been declining for years, the reduced flow cancels out increases in the money stock. The bankers are pushing on a string, no wonder they are desperate.
Negative rates indicate the absence of good investments in the functioning, day-to-day economy; they are the imprints of deflation. Whether or not the central banks are in control or not, promoting deflation is not the bankers’ intent. Instead, it’s an unintended consequence of efforts to bail out private finance at public expense.
Central bank manipulation gives the illusion that risk has been ‘legislated out of existence’. This is dangerously false; risk is a First-Law cost associated with the surplus of debt. Increasing the surplus of loans spreads risk around or pushes it out of sight, but only for a little while. Exponentially increasing risk lurks beneath very low/negative rates like a tiger in the jungle. The performance of the loans depends on the ability of international deadbeats such as the Italian government to borrow endlessly into the future, for everything to be perfect forever! Risk springs out of hiding when supposed pristine borrowers stumble and the loans are marked to market as junk. Under the circumstances, losses to the hapless bond speculators — and central banks — are astronomical, bankrupting the entire banking system at one go!
Risk also manifests itself as increased operating expenses for businesses that lack assets to sell to the central banks. These added costs accelerate vulnerable firms’ drift towards insolvency which in turn torpedoes the firms’ lenders, stampeding investors’ toward government bonds and (perceived) safety. All of this makes the risks worse. Surplus-related costs also discount the overall worth of commerce relative to holding currency = more dollar preference. Intervention endangers through the back door the same enterprises the bosses are desperate to support …
Bringing Excess Claims into Alignment With Purchasing Power.
As the bosses vie to increase growth they undermine themselves by destroying resources. They tilt the balance toward increasing claims while purchasing power is cannibalized. Whatever pittances are gained in the immediate-term are at risk going forward as the overhang of claims increases. Alternatively, removing claims tilts the balance the other way: borrower defaults, debt write-offs; by hoarding money or confiscation = ‘Conservation by Other MeansTM‘.
Managers want low-cost money to keep their Vaudeville act running as long as possible, even as it has exhausted itself by every reckoning including its own. Forced credit expansion no longer stimulates business expansion or growth. More costly money would accurately price in the risk that is ballooning (out of sight) within the system.
Managers want their currencies to be cheap so they might increase goods exports and gain foreign exchange. Forex becomes collateral for domestic loans leading to the mercantile increase in ‘wealth’, (China). This strategy fails when all managers strive to export at the same time. The outcome is diminished trade overall and less Forex collateral, amplifying deflation in a vicious cycle. Currency depreciation is also counterproductive for credit providers such as Japan, the US and UK. When credit is a country’s only real product, depreciation represents a reduction of the country’s output. This is also ‘Conservation by Other MeanTM‘ as the credit provider cannot finance imports by ‘borrowing’ them.
Managers also want money that is worth less than commerce so customers lack incentives to hold onto it. This is also dangerous as money can become so cheap that commerce becomes unaffordable.
Diminished finance sector returns, or Net Interest on Margin (NIM)
Figure 4: Because finance creates its own funds it has no need to borrow. Interest margin represents the narrowing spread between finance returns from loans to largest- and presumably most creditworthy borrowers and returns from lending overall. NIMs have been declining for decades along with velocity and are, ironically, the consequence of increased financialization and declining customer income. Reducing interest paid by the central banks on excess reserves narrows NIMs further, undoing the bailout effects of QE.
There is no overcoming entropy or declining purchasing power, only strategies to ameliorate the consequences and preserve resources/purchasing power for the future, along with some small component of institutional integrity. Managers fail to grasp the seriousness of our onrushing predicament: the destructive potential of declining resource availability/purchasing power is equal to- or greater than a nuclear exchange, the results are just as permanent. If managers aim to destroy this country, doing nothing- or more of the same is a good way to go about it! The establishment obsesses about money even as the real problem is a shortage of resources needed for our economy to produce the goods and services we expect. What needs to change are expectations. The money-system failures are symptoms of our resource shortfall, including declining petroleum prices and the widening circle of related industrial and finance insolvencies. Schemes that seek to maintain the status quo are certain to fail. Almost all of them are variations on the theme of bond-buying, dubious accounting and trickle down economics = robbery. Almost all of them depend upon central banks which have grounded themselves on their own policy contradictions. Absent change, financial accountability will enter through the back door … as central bankers and the their private sector clients are engulfed by the system collapse taking place under their feet. One way or the other, finance claims will be brought into alignment with purchasing power. The hardest path is the annihilation of claims along with finance at the same time.
Thinking Outside the Banking Box.
One way to start down the road to voluntary alignment is to ‘buy down’ claims. The US government has the authority to produce money by itself, without borrowing; “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;” (the implication is that money is a tool of measurement.) Article 1, § 8, Constitution US, (Legal Information Institute, Cornell University).
— A $100 US Note, a late(st) model ‘Greenback’. Congress allowed the ‘float’ of $346,681,016 of these notes, however, they are out of circulation with the vast majority having been destroyed by the Treasury.
“If the Nation can issue a dollar bond it can issue a dollar bill.
The element that makes the bond good makes the bill good also. The
difference between the bond and the bill is that the bond lets the
money broker collect twice the amount of the bond and an additional 20%.
Whereas the currency, the honest sort provided by the Constitution pays
nobody but those who contribute in some useful way. It is absurd to say
our Country can issue bonds and cannot issue currency. Both are promises
to pay, but one fattens the usurer and the other helps the People.”
— Thomas Edison
Last Summer the Undertow examined the possibility of Greece issuing ‘greenback’ or non-liability fiat euro notes. Greece would use the euros to retire maturing debt and to facilitate internal exchange that was — and currently is — stifled by the overhang of debt and the accompanying demand for repayment. While note issue cannot ‘fix’ structural problems outright, it is possible to ease immediate monetary pressures and use the opportunity to put into effect a conservation plan.
As in Greece, the purpose of US notes would be reduce the overhang of debt-claims and the accompanying demand for repayment funds; to bring claims and purchasing power into better alignment. Issued notes would retire maturing debt without requiring new debt to replace it. It’s a legal ‘cheat’, Bankers will object, but creeping system insolvency leaves them in no position to do anything but complain. By way of notes, debts are ‘repaid’ rather than haircut or defaulted upon; the third alternative is a crash or for funds to be forcibly extracted from the citizens and then a crash.
– The Treasury would issue zero-liability US Notes — or ‘greenback’ dollars — as legal tender under current law or new legislation. Unlike the balance of our money supply, notes would simply be issued by the US Treasury rather than ‘borrowed into existence’ from finance.
– Government fiat has been issued for almost a millennium beginning in China. A notable example of sovereign issue money are Demand Notes first introduced during the Civil War by Edmund Dick Taylor. The notes were necessary because big Philadelphia- and New York banks would not lend the Lincoln administration gold at reasonable rates to fund the war.
– The notes would retire government obligations on a fixed schedule, for example, the current $19+ trillion$, to be retired over a period of 20 years. The notes could be applied against any liability that is a claim against circulating dollars.
– Payments would be made electronically, out of ‘thin air’, the same way loans are made by banks, as credits on borrowers’ accounts.
– Notes would be legal tender; to repay any debt, private or public everywhere dollars are made use of. Dollars are fungible: Larry Summers notwithstanding, each dollar is the same as all the others. Fiat issuance by the Treasury is the same as fiat issuance by a private sector bank. The difference is no liability to the government issue. The government can provide funds without digging itself deeper into the debt hole.
Loans are simply issued by banks as credits on a spreadsheet. ‘Bank money’ does not exist until a loan is made. The return from lending is the requirement on the part of the borrower to repay with money that is more costly to him than the loan is to the lender. Bank money costs the lender almost nothing to create as it requires only keyboard entries. The borrower must repay with circulating money; he cannot create repayment on his keyboard but must beg, steal or more likely borrow repayment- or have it borrowed by others in his name (government). Whereas interest cost tends to be a small fixed percentage of the principal payable over time, the expense of circulating money is determined by its availability in the marketplace, by supply and demand. When circulating money becomes scarce the real worth of repayment can be much greater than the nominal balance due, yet this is invariably when the demand to repay is fiercest, as during a margin call. If the loan is secured and the borrower cannot repay, he must surrender collateral along with other rights. These are always worth more than a keyboard entry.
US Notes would give the Treasury the ability to make keyboard repayments, to pay lenders ‘in kind’. By doing so the Treasury would remove the currency drain on the private sector (cash demands against depositors).
– What makes up our supply of circulating money is the unpaid debts of others, funds that are ‘temporarily’ out of circulation, overseas (petrodollars) or hoarded. Money created by lending is extinguished when the loan is repaid. The net increase in circulating funds that results from note issue is zero.
– The Treasury can recapitalize banks directly a with note issue, rather than by bailing in unsecured creditors and depositors. The Treasury could act as ‘issuer of last resort’ in place of- or alongside the central bank. The Treasury can also make up account shortfalls in accounts of deleveraging derivative accounts:
Figure 6: US domestic derivative exposure (dollars) is over four times GDP, (FRED). Unforeseen changes in conditions affecting holders’ collateral position could create liabilities that are too large to meet with funds in hand. Central bank funds are loans lodged against the public. Derivatives shortfall could be made up in any amount with note issue, which would then become a liability lodged against the speculators who let their derivatives positions get out of hand.
– Notes would be available in any amounts to plug liability holes until positions could be closed and accounts zeroed out.
– Note issue would re-balance the relationship between banks and sovereigns, the influence of the banking cartel would be reduced.
– Foreign exchange can be leveraged or merged with Note issue. Because the dollar is the primary reserve currency, Note issue would be very effective as a means of backup liquidity everywhere dollars are made use of.
– Lenders would not be able to hold the US or its citizens hostage by withholding funds.
– Notes would render mercantile leverage against Forex unnecessary – dollar depreciation.
– Any fiat regime would require stringent energy conservation as the external (overseas) flows of borrowed dollars to purchase fuel have bankrupted the country in the first place.
– The US and many other countries are in the same situation as hapless Greece. Our debts cannot be retired because our wasteful lifestyle does not provide the means for us to do so.
– Financialization is both incentive- and means to strip-mine our capital base. This regime falls apart under the weight of its own costs. As a necessary component of reform, financiers must be held accountable for their negligence. The present conditions cannot be endured much longer. If managers refuse to act, citizens will take matters into their own hands.
Published on the Economic Undertow on February 1, 2016
There was an abundance of snow last week, too much as it turned out …
Discuss this article at the Economics Table inside the Diner
There was an abundance of snow all over, too much for some, just enough for others.
Untitled screen shot from FBI video of the shooting of LaVoy Finicum, (Oregonian). No snow and Finicum drives right around the Fed roadblock. No snow and the attempt to apprehend LaVoy & Co. at a roadblock is postponed indefinitely.
LaVoy might have known there is no place to run, all the roads lead to … what Kunstler calls; ‘the geography of nowhere’. It’s now the geography of everywhere.
Plainly obvious is the high level of calculation on the Federal side regarding to their ‘management’ of cowboy-style ‘rancher militants’. The FBI wants to end the Malheur National Wildlife Refuge siege without bloodshed, at the same time, gunning down one of the militants on TV sends a message to wannabe insurrectionists — as well as to the country at large — as to what sort of game is being played. Intimidation works, it keeps honest people honest. It keeps those who would never dream of taking part in an insurrection from taking part in an in … oh well, you know.
So far, our homegrown militants have satisfied themselves with making nasty noises and fetishistic gestures; at the symbolic level there are few if any consequences. Actual violence is risky; it takes on a life of its own and spirals quickly out of control. Meanwhile, ending one round of outrage becomes the starting point for the next as the underlying problems are never addressed, (Washington Post):
‘Rolling rally’ in Oregon marks killing of wildlife refuge occupier LaVoy Finicum
Heeding calls for daily protests after Tuesday’s shooting death of a man who had been occupying a nearby national wildlife refuge, a “rolling rally” of dozens of vehicles clogged the streets of this tiny rural town Saturday evening.
The cars and trucks, many of them the oversized, rugged models favored in this rough desert terrain, roared around town bearing U.S. flags, Confederate flags and passengers brimming with rage.
“I feel we are living in a very corrupt government. Right now people are getting pulled out of their car, getting guns pointed at their heads, and they killed an innocent man,” said Judi Rodgers, a local resident of Harney County, who came carrying a sign that read, “Welcome to Nazi Germany.”
Look at it this way … your way of life is falling apart at the seams and you search for answers/someone to blame. We are at the end of a long period of resource plunder, the marginal resource has already been consumed and spat out as waste. People are nevertheless 100% invested in a very high level of resource access. For any particular group to maintain high level access, others must lose it or be denied: pensioners, Venezuelans, Syrians, ranchers, Hapless Negroes, frackers, etc. Any way you look at it, denial of resources is a very ugly process.
Here is the problem: “The cars and trucks, many of them the oversized, rugged models favored in this rough desert terrain, roared around town … “ multiply these vehicles by the number of cities and towns and suburbs across the US and around the world, plus all the other fossil-fuel powered junk; millions of folks roaring around for no purpose other than to waste time and resources, to pretend to be doing something useful, to make vacuous symbolic gestures regarding their self-perceived ‘status’. For some folks … for most … ultimately for all of us … this is the last roar.
Seismic changes of the kind we are experiencing right now — from resource squander to high order conservation — do not come quietly. The shift from European Roman Catholic theocracy to secular nation-states required 100+ years of all-out warfare in the 16th and 17th centuries including the English Revolution, the Spanish war to expel the Moors and the 30 Years War which involved almost all Europeans and killed off about 20% of them.
… the sort of thing we can look forward to avoiding!
Economist Brad DeLong has another idea: he writes at Project Syndicate the (second) largest problem the West faces right is how to manage our incredible abundance (or surplus). At first glance it is hard to tell whether DeLong is being cute or if he has stumbled upon Debtonomics and the First Law by accident.
The debtonomy’s purpose is to direct surplus- related costs away from the holder onto third parties so that he (the holder) can enjoy his gains. Debtonomy evolved to manage The First Law, which states the costs associated with any surplus increase along with it until at some point they exceed its worth. Very much abundance = very much larger abundance-related costs.
DeLong doesn’t aim too high … he merely points out a vanishingly small percentage of the West’s workforce is engaged in food production, that the specter of famine has been banished; that the bulk of those engaged in food processing aim to make food more pleasurable and convenient; that the remaining percentage strives to remedy the consequences of over-eating. Interestingly enough, discussing agricultural labor productivity is as far as DeLong goes with his ‘abundance’ thesis. He veers off into the presumed consequences of increased labor productivity in general, assuming this sort of thing will carry forward unchanged into the distant future …
But job number two– developing economic theories to guide societies in an age of abundance – is no less complicated. Some of the problems that are likely to emerge are already becoming obvious. Today, many people derive their self-esteem from their jobs. As labor becomes a less important part of the economy, and working-age men, in particular, become a smaller proportion of the workforce, problems related to social inclusion are bound to become both more chronic and more acute.
Such a trend could have consequences extending far beyond the personal or the emotional, creating a population that is, to borrow a phrase from the Nobel-laureate economists George Akerlof and Robert Shiller, easily ‘phished for phools’. In other words, they will be targeted by those who do not have their well-being as their primary goal – scammers like Bernie Madoff, corporate interests like McDonalds or tobacco companies, the guru of the month, or cash-strapped governments running exploitative lotteries.
Look at it this way … your way of life is falling apart at the seams and you search for answers/someone to blame. We are at the end of a long period of resource plunder … send in the dancing girls!
Otto Yamamoto, ‘Black Lives Matter
One has to wonder about economists. It would make sense for DeLong to discuss manufacturing ‘abundance’ (over-capacity) in China and elsewhere (which turns out to have little to do with labor productivity) or the mass of plastic waste, found everywhere in the world or carbon emissions, worthless junk or the toxic chemicals that are inundating us.
Because of stupendous material outflows, the resources needed on input side of industrial processes are becoming increasingly short. That this is so is both self-evident and undeniable (except to economists). Excluding some renewable inputs, we started long ago with everything and are feverishly, frantically squandering our way toward nothing.
“Everything” = resources before we begin extracting them, as for example, petroleum before 1858.
‘Nothing’ = a few years later, after we have extracted everything we can get our hands on.
Within the everything-to-nothing regime we are about half way to the bottom. ‘Abundance’ as such only makes sense out of context, where finished products appear by magic out of thin air, crafted by elves from climate gases. As a component of debtonomics’ self-fooling process, the worth (see below) of inputs is discounted, otherwise output cannot be affordably financed. At the same time, resources are considered to have no value at all, how can it be otherwise? If resources had value they would be hoarded, as they would be precious. One does not throw a Picasso into the furnace in order to keep warm even if it’s freezing. But feeding the fires is what we do with our resources … without a care in the world! We burn them because we lie to ourselves, because we are able to do so effortlessly by conflating value and worth as if they are the same (no)thing.
From this starting point of self-deception, corruption by inches takes on a life of its own until it engulfs everything in sight. The Bernie Madoffs, the corporate interests, the (finance) gurus of the month and various governments … where has J. Bradford DeLong been? The modern economy is basically a form of organized crime. Industrial firms are morphed into hedge funds intent on increasing their own worth by way of debt-financed share buy-backs and mergers, by the issuance of dubious ‘securities’ and shifting of liabilities off their balance sheets. Markets as such have ceased to be, they have become cockpits of manipulation and insider trading. Regulators are bought and sold like Ottoman galley slaves. Politicians are sock puppets for finance interests. Wrong-doers walk the streets unpunished: if there is abundance of anything it is malfeasance and fraud and deceit. Even our cowboys are fake!
DeLong plugs behavioral economists like George Akerlof, Robert Shiller, Richard Thaler, and Matthew Rabin but they don’t really need it. He does not seem to grasp the scale of crimes, far beyond the deception of individual investors. Our 21st century looting is both transnational and opaque. The thefts are always presented as ‘making the economy grow,’ implying a ‘helping hand for the little guy’. The beneficiaries are invariably tycoons and finance-level criminals, (Marketwatch):
China’s Central Bank Makes Massive Cash Infusion
China’s central bank is putting the largest amount of cash into the financial system in nearly three years, using a weekly market operation to pre-empt a holiday-induced funding squeeze and offset rapid capital outflows.
The People’s Bank of China offered 340 billion yuan ($51.89 billion) of short-term loans, known as reverse repurchase agreements, to commercial banks in a routine money market operation Thursday.
The central bank provided 440 billion yuan via similar tools Tuesday, the first leg of its twice-a-week liquidity-management exercises.
Given the maturity of 190 billion yuan of previously issued loans, the PBOC’s net cash injection this week totals 590 billion yuan, the biggest of its kind since early February 2013, when it reached 662 billion yuan.
This is a crime but it is invisible. Liquidity provision is nothing more than central bank financing the theft of stolen funds. Nobody asks how theft occurs or who is behind it: certainly not the ordinary Chinese manufacturing worker. Finance managers and government administrators don’t even recognize the crime (except where blame can be fixed on ‘malcontents’). Instead, funds outflow is offered as nothing more than an unfortunate consequence of well intended government policy, bad luck … an (over) abundance of snow!
Liquidity provision shifts (pillages) buying power away from customers toward Big Business and finance. Bosses grab the money and leave the country, using it to buy expensive flats and houses … anywhere besides China, where the ordinary workers are left holding the bag.
At the same time, the provision is self-defeating because the decreasing availability of credit undermines the customer bid for products. Prices fall leading to supplier insolvency which ricochets through finance reducing credit-worthiness overall. The outcome is increased outflow of foreign exchange from the country and currency depreciation in a vicious cycle.
The central bank infusions are intended to defend the currency, yet by itself the defense signals to speculators and arbitrageurs the currency is over-priced. The specs turn around and short the currency in overseas markets where central bank cannot reach, (Wall Street Journal):
Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan
Some of the biggest names in the hedge-fund industry are piling up bets against China’s currency, setting up a showdown between Wall Street and the leaders of the world’s second-largest economy.
Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.
Billionaire trader Stanley Druckenmiller and hedge-fund manager David Tepper have staked out positions of their own against the currency, also known as the renminbi, according to people familiar with the matter. David Einhorn’s Greenlight Capital Inc. holds options on the yuan depreciating.
Expectations for a weaker yuan have led to an exodus of capital by Chinese residents and foreign investors. Though it still boasts the largest holding of foreign reserves at $3.3 trillion, China has experienced huge outflows in recent months. Hedge funds are gambling that China will let its currency weaken further in a bid to halt a flood of money leaving the country and jump-start economic growth …
… and help the little guy!
When a country’s currency is depreciated it is as if a robber goes from house to house stealing a percentage of the goods and money inside. If the depreciation is ten percent, that is the amount of the robbery- times every house in the country! Hedge fund barons avoid the time-consuming mess and hard labor of sledgehammering their way into thousands of houses, they simply switch on their Bloomberg terminals and push a few buttons (this is called risk-taking). Meanwhile, the victims have no idea what has hit them, they don’t even comprehend they have been robbed!
There are more finance crimes, always more; “I feel we are living in a very corrupt government,” says Judi Rodgers, the understatement of the millennium. Our entire economy is based upon pillaging under a veneer of high minded, well intentioned propaganda. We never give anything back, we never have! we never even bothered to learn- or consider how. The militants in Oregon and elsewhere are not interested in improving public lands for the ‘good of the country’, neither are frackers or miners or other despoliators. The hedge fund barons and Wall Street bankers Kyle Bass or Stanley Druckenmiller — or the Chinese central banker Zhou Xiaochuan for that matter — they don’t aim to increase the prosperity of the working man or anyone else, anywhere else; no one but themselves. They grab what they can of the loot and demand more; lest the devil take the hindmost which he invariably does. This is what it comes to: five hundred years of labor-efficient pillaging and the customers cannot afford to retire the barons’ debts. So much for abundance, our businesses are busted.
Busted, insolvent, ruined: our tycoons, our businesses, our workers our banks, our cowboys. So it goes, to the logical conclusion, will the last cowboy out the door please turn off the lights.
The ‘worth’ of something is the financial, monetary measurement of a good (or service) relative to another good or service. Worth = price or rate of exchange.
‘Value’ is the intrinsic character of a good (or person, organization, idea or service) outside of its price, a determination over time of its usefulness to the furtherance of civil society.
Worth is a quantitative measure, value has no arbitrary measure but is rather a matter of quality.
Top photo = Steve Ludlum © Copyright 2015.
Published on the Economic Undertow on January 4, 2016
No doubt a lot of people are happy to see 2015 in the rear view mirror: refugees, their ‘hosts’ in Europe, bond investors, frackers and Brazilians, it is likely that 2016 will bring more of the same, challenges and idiocy … and a ray of light!
— Energy deflation to take hold in 2016
Figure 1 (above): The $64 trillion dollar question: ‘Is energy deflation under way’? If it is, get ready. It will be the biggest story of 2016 and
years decades to come. (TFC Charts, click for big)
Discuss this article at the Economics Table inside the Diner
Energy deflation is similar to Irving Fisher’s debt deflation: a premium or ‘scarcity rent’ is attached to the price of crude. This manifests itself as a reduction in customer borrowing power; the price of crude cannot fall fast enough to offset the ballooning scarcity rent! In energy deflation, fuel prices are always too high for customers while the same prices are too low the drillers. The outcome is a vicious cycle: increased scarcity rent and self-compounding fuel shortages => greater scarcity rent!
If oil prices happen to rise for any reason — such as a war between Saudi Arabia and Iran — the scarcity rent doesn’t go away, the entire combined price becomes even less affordable causing the price to crash again.
America’s waste-based economic infrastructure has been built assuming endless supply of sub- $20 crude into perpetuity. The inflated prices the world has endured since the turn of the millennium have left this ‘investment’ hopelessly underwater. The prices have also done a number on the credit-worthiness of ordinary customers. This is why declining prices for crude oil have so far been unable to reboot economic growth … current lower prices are still too high to offer much in the way of (debt) relief. This means more price drops to come; more driller pain.
Right now it is hard to tell whether the current ‘action’ in crude- and other markets is a trading phenomenon or something more, but we are soon to find out one way or the other. The inevitable outcome of energy deflation is the supply of fuel shrinking to the level that can be supported by productive, remunerative use … rather than the current wasteful level supported by access to credit. Because remunerative use of our fuel supply is a (very) modest fraction of overall consumption … a modest fraction of our current fuel supply is what we will be able to afford.
— Dollar Preference emerges as an economic factor in 2016
Figure 2: Hoarding much? M2 money velocity (chart by St. Louis Federal Reserve). While the actual supply of M2 funds is increasing, the volume of transaction taking place with those funds has been shrinking (plummeting).
A component of energy deflation is the effect of constrained energy supply on money. When priced in crude, money — particularly dollars — have real worth (money never has value, otherwise it would never be spent). It turns out a very modest (flow) constraint has an out-sized effect on money-worth. Right now, dollars are exchanged on demand for a valuable physical good millions of times every single at gas stations around the world. Because of this exchange, the dollar can be considered a quasi-hard currency … similar to the way exchanging dollars for gold rendered the buck a hard currency during the early 1930s. What keeps the dollar somewhat ‘soft’ despite exchangeability has been the flood of fuel into markets and gas stations. There is no obvious reason to prefer dollars or make an effort to gain them vs. something else; little in the way of ‘scarcity rent’ to distort the worth of dollars.
Given the appearance of a fuel supply constraint and the scarcity rent, the perceived character of money shifts: dollars cease to be near-worthless proxies for commerce, becoming instead proxies for scarce and valuable fuel. They are then hoarded out of circulation … as is starting to take place around the world right this minute!
Commerce withers as the economic activity is reduced to currency arbitrage; trading different forms of money back and forth so es to gain the fuel ‘bargain’ dollars represent … This is what ‘dollar preference’ means: the buck is preferred to all other kinds of money because of its relationship to fuel.
The only way to escape the depression that results from this preference is to break the bond between dollars and petroleum the same way the Roosevelt administration severed the connection between dollars and gold in 1933. The US must ‘go off oil’ the same way it- and the rest of the world went off gold in the middle-1930s.
Figure 3: Along with M2 velocity, gasoline sales have been declining. (chart by St. Louis Federal Reserve). When customer are broke — or tight-fisted — they don’t buy gas. Low prices can’t fix broke.
— The Kurds will destroy the Islamic State in Syria in early 2016.
The sharp decline in fuel prices since 2014 has severely dented the Islamic State which is not possessed of the material means of support: it has no economy to speak of, no industry, finance or organic credit. It must swap goods such as stolen fuel and antiquities with donor states by way of Turkey to gain materiel. Low oil prices means less funds to be spent on war-making, medical supplies and salaries.
Just days before Christmas, with little fuss and less warning, the Kurdish military force captured a vital road crossing over the Euphrates River, putting the Kurds astride ISIS supply lines and issuing the death-sentence for the group, (DW):
Syrian Kurds take strategic dam from ‘Islamic State’
An alliance of US-backed Syrian Kurdish and Arab rebels has taken a key dam on the Euphrates River from the so-called “Islamic State.” The alliance has pushed back “IS” from large swaths of territory.
The Syrian Democratic Forces (SDF), a rebel alliance that includes the powerful YPG Kurdish militia and Arab rebel groups, wrested control of the strategic Tishreen Dam from Islamic State on Saturday after making rapid advances south earlier this week, Kurdish media reported.
Figure 4: In war — as with finance — leverage matters: Tishrin dam on the Euphrates carries the highway from Jarabulus to Manbij- to points south and east including Raqqa and Mosul in Iraq. (Washington Post/Institute for the Study of War). Taking the dam (intact) and establishing a bridgehead on the western side of the Euphrates leaves the landlocked ISIS group at the mercy of the Kurds.
The road connection with Turkey is the only way in- or out of the Islamic State caliphate with Jarabulus-Manbij as the main thoroughfare. Leaders, recruiters, wounded fighters traveling to- and through Turkey, troop replacements from the rest of the Middle East and elsewhere, all ISIS military supplies must travel through this territory; trucks carrying purloined crude travel the other direction. As of now there is no scheduled airline service to/from anywhere in the Islamic State.
The group is responding to the existential threat by adopting a lifeboat strategy: upping efforts to organize in Libya and elsewhere in Africa. Stripped of its precious caliphate heartland and its leadership dead, captured or on the run, the group will lose relevance, becoming target practice for other ‘Brand X’ militant groups and Western commandos. In our current Islamic world without pity, every sign of weakness is an invitation to murder. At the same time, ISIS ‘threat’ will be unmasked as to a large degree a US-media creation, a fashionable ‘flavor of the month’; the ‘New al-Qaeda’ (as opposed to ‘Classic’ version), a militarily inept criminal group with violent tendencies but little else; an instrument to mold US public opinion into an appropriately warlike form.
Figure 5: Syrian zones of control along with gains by Kurdish forces since November, 2015. Islamic State supply lines extend through the area claimed by Turkey as a ‘safe zone’. The weight of strategic necessity draws the Kurds toward Manbij and al-Bab. When these towns are captured the rout will be on. The only surprise will be how quickly the IS group collapses. It will be entertaining to watch the group’s ’emirs’ on YouTube in women’s clothes filter through Kurdish territories toward Turkey in small groups … and being found out; to see them jumping beardlessly into dented Toyota pickup trucks to race like rats across the countryside in every direction looking for a way out.
Fleeing to Iraq offers no hope of escape: there are Kurds in Iraq, too. They all have very long memories …
That the Kurds aim to close Manbij gap is indicated by heavy fighting between Kurds and non-ISIS militants near Azaz and US bombing in and around Manbij. The tactical cat is already out of the bag, there is nothing to gain for the Kurds by waiting … unless they hope to lure more IS fighters into the town so that they might be killed more efficiently.
Islamic State’s primary supporter is Turkey, a Nato member with all the military bells and whistles. It might be expected for the Turks defend their interests and send troops across the border to push the Kurds back. Not this time: they won’t risk stepping into Syria or attacking on the ground without air superiority, something they threw away without thinking … by shooting down a Russian aircraft that was doing them no harm.
In early November, a combined Iraqi-Syrian Kurdish offensive in Northern Iraq dislodged ISIS forces from Sinjar town in Northern Iraq, at the same time Kurdish led Syrian Democratic Force (now QSD) overran al-Hawl a few miles away across the border in Syria. This action cut the road running between Raqqa and Mosul. In December, Iraqi security forces attacked the Islamic State in Ramadi, pushing them out of the center of the city.
The patient Kurds torment the Islamic State in the east, causing them to pull in what reserves they possess, then attack in force in the west. The ISIS group is left with many widely separate places that must be held at all cost including Raqqa, Ash Shaddadi, the oil-producing region near Deir al-Zour and Manbij. This means that none of these place will be held at all.
Turkish blunder and Russian air defense means a Kurdish ‘cordon sanitaire’ along the northern Syria border connecting all the Rojava cantons. This gives Kurds an influence greater than their numbers would suggest. Their control over supply flows would constrain other rebel groups such as al-Nusra. They would be seen to ‘pick winners’, which in turn offers a potential a way out of the endless auto-destructive warfare between the irreconcilable factions. Kurds have demonstrated the ability to coexist with Syrian Arab Army, to collaborate on the ground with Sunni, Arab even Turkmen groups which are otherwise represented by extra-Syrian jihadi extremists. Kurds’ military capability and success increasingly renders Assad irrelevant regardless of Russian commitments … of all the groups involved in Syria the Kurds come across as most reasonable … grown up.
Islamic State — like Ashley Madison — has had a nice little run. Time for them to go, so also:
— Turkish strongman, Recep Erdogan, man of many blunders, to be removed from office by military coup.
The war that keeps on giving in the Middle East reaches out to touch everyone in the region. No escape for Erdogan who has lost his sense of balance. His approach to winning over Kurdish hearts and minds in Turkey is not to embrace them but to shoot. The inevitable outcome: a civil war leading to a belligerent Kurdistan carved out of southeastern Turkey, something the Turkish military — which is charged with the actual winning over part — views with alarm. Who gets the axe? 20+ million Kurds or one deluded mad man in an ill-fitting suit?
Prior to Erdogan and AK Party, the powerful military was the final political arbiter in Turkey. Prime ministers served at the pleasure of the command. If the Generals believed official policy was destructive or would lead to war there was a coup … as in 1960, 1971 and 1980. Erdogan purged the Turkish command by way of kangaroo corruption trials; the army has been a Stepin Fetchit fool-for-Erdogan ever since.
Undertow observes the Turkish military to be resentful and awaiting its chance … Turkish generals understand the army cannot defeat Kurdish militants in urban settings without destroying the country. The key is what the Kurds do over the next few months; as they defeat ISIS, they also defeat Erdogan at the same time. The emergence of ‘protection brigades’ like YPG in Kurdish areas will force the military’s hand. This is the Kurds’ moment, they will not be denied. Erdogan will be ejected and replaced with a national council until new elections can be held. The clue to this outcome is the exposure of Erdogan involvement in the smuggled oil trade with Islamic State. Corruption being the instrument by which the military is purged, corruption will also be the hammer to dismantle the Erdogan regime.
— The China economy will crash … who could have guessed?
Ho hum, who cares! Old news … Oops. The China stock market is crashing already. What took it so long? The cause is excess Chinese leverage + dollar preference, the flight of dollars from China and the stripping Chinese finance of collateral. Turns out China is not a credit provider but depends on millions of Americans borrowing from Capital One to buy stinky China-Brand Poison Dog Food and lead-painted baby toys.
Collapse of China’s economy is ironically best evidence of dollar preference! Said economy has been built on a foundation of borrowed dollars; repayment outside of China makes the dollars which remain in China that much more desirable. The bidding of dollars in China means the unbidding of everything else: China RMB depreciates, real estate stumbles, stocks are socked, the only thing certain in China is smog.
— The ‘Widowmaker Trade’ finally unravels.
Shorting Japanese bonds is called ‘the widowmaker’ because the prices never plunge … even when fundamentals such as the vast overhang of debt-relative to GDP suggest they must. The short-sellers wind up being fed to the pigs … Endless monetization and balance sheet expansion by Bank of Japan and reluctance (good sense) of Japanese themselves to spend has pushed bond prices high as possible and kept them there. (Bond yields are inverse to prices; yields decline and prices increase.) Beginning this year, dollar preference will undermine whatever worth the bonds represent as the yen will (continue to) depreciate relative to the dollar. A problem is the massive position accumulated by BoJ. Should it becomes necessary to sell some of its bonds, the Bank will find there are few buyers because they have been elbowed out of the market by the BoJ!
— Migrants will flood into the US as Puerto Rico defaults leaving millions of US citizens with no means of support.
The island has overspent and cannot retire its loans. Its ambiguous administrative status within the United States and inept leadership does not offer much hope for ordinary Puerto Ricans who will make their way in great numbers to the mainland.
— War between Iran and Saudi Arabia …
Both countries are fighting an all-out proxy war in Iraq, Syria, Yemen and elsewhere; the recent execution of a Shiite imam by the Saudis has inflamed tensions to the breaking point. Reality rules: despite the status of both countries as (wealthy) petroleum suppliers, both countries are actually too poor to afford a general war, particularly one that might adversely affect exports … or propel energy deflation.
— Economic uncertainties will cause world- industry leaders to shelve ambitious plans to combat climate change
Instead: ‘Conservation by Other MeansTM‘ … Entropy always wins, always.
Published on the Economic Undertow on December 10, 2015
Discuss this article at the Environment Table inside the Diner
The most effective policy is to pay people to conserve: to offer a basic income conditioned to meeting conservation standards; to pay citizens who do not have children or own cars.
Figure 1: CO2 content of the atmosphere increases, now over 400 ppm. NOAA and Scripps Institution of Oceanography (click on for big).
Right now thousands of the world’s bosses and their underlings are meeting in Paris in an attempt to wrangle some sort of global reduction of warming gases without actually doing anything, from CNN:
COP21 climate change summit: ‘Never have the stakes been so high’
Leaders of 150 nations, along with 40,000 delegates from 195 countries, are attending the conference, called COP21. COP stands for Conference of Parties, an annual forum to try to tackle climate change on a global political level.
The leaders have one mission: Agree on legally binding reductions in greenhouse gas emissions meant to hold global average temperatures short of a 2 degrees Celsius increase over pre-industrial global temperatures.
The cognitive dissonance is head-spinning: the delegates are flown first-class into Paris or in their countries’ official jetliners; they meander in long convoys of armored limousines from Five-star hotels to Michelin-rated restaurants where they are stuffed like geese destined to become foie gras. Eventually, the meetings end and the delegates jet off to other conferences elsewhere. Filling the otherwise boring interval between flights and limo rides is mindless pontificating and empty promises, all of it paid for by the same sorts of industries that emit most of the carbon pollution in the first place!
One would think bringing relief from what is becoming a runaway global meltdown would be an all-hands-on-deck emergency. You would be wrong … because the only action that will make a difference is to reconfigure our Westernized, garbage-producing society from the ground up, to ditch the gangrenous American Way and its polluting industries and their ‘products’ at once, starting with the hundreds of millions of worthless, non-remunerative automobiles. But the bosses and their minions are like children with their hands caught in the cookie jar; they refuse to give up anything even if it means total destruction. Their strategy is to end pollution is to wait until after everyone as become rich, countries will then be able to afford expensive pollution-remediation technology, that so far nobody has been able to produce.
We live in ridiculous times: bosses are working against themselves. The newer, less-polluting industries are subsidized by legacy versions. Because these standbys — such as coil-fired power stations — are critically important, they are given a continuous lease on life. The output of new and old added together increases ‘economic growth’ that cannot be willingly surrendered. As it is, when the growth fails to materialize on its own, every effort is made to gain it, regardless of consequences. Regardless of consequences. Regardless of consequences. regardless of consequences!
François Hollande’s 34 projects aimed at sealing France’s ‘industrial renaissance’
Driverless cars, nanotechnology and electric aeroplanes – François Hollande launches 34 projects aimed at sealing France’s “industrial renaissance”.
François Hollande denied he was returning France to a bygone age of state interventionism as he launched 34 state-aided projects aimed at sealing the country’s “industrial renaissance” – from futuristic fast trains to electric-powered satellites.
Unveiling the state-subsidised “industrial battle plans”, the French president insisted cutting edge research into “energy transition”, health and food and new technologies would help return France to its glorious industrial past in a globalised world.
Projects include plans to develop a car that can run 60 miles on two litres of fuel, electric aeroplanes, driverless cars, nanotechnology and “intelligent” fabrics, such as incubators made of a material that “cures” jaundice without medical intervention.
… and more pontification and empty promises. What the bosses refuse to understand is there will be the reduction of climate gases; this is an absolute certainty. The process appears to be underway, but not for the reasons often cited. Rather, it is resource constraints/peak oil, deleveraging, breakdown in credit infrastructure, bankruptcies and increases in poverty, ‘Conservation by Other MeansTM‘ whereby citizens are reduced to penury and are unable to afford resources in any form … no matter how low the prices go.
The fundamental problem of any emission-reduction strategy is the benefits and risks are in the future while costs accrue in the immediate present. It makes business sense to do nothing and push the costs into the future even though doing so causes them to multiply. An alternative strategy would be to de-emphasize the frontal assault on carbon and target other forms of pollution, by doing so mitigate carbon emissions indirectly. The idea is to break the main problem into smaller components and deal with them in detail. For instance there are multiple heat-trapping items besides carbon dioxide; there is soot, also nitrous oxides, hydrofluorocarbons, methane- and related, perfluorocarbons and sulfur hexafluoride: some of these emissions are controlled, others such as carbon gas emissions have been reduced to some degree within the US and Europe by shifting manufacturing to other countries.
- The means to manage pollution are familiar and have been deployed successfully for decades, such as the regulatory requirement to produce and market diesel fuel without sulfur. This requirement is uncontroversial, there are no arguments against it. The means to produce sulfur-free fuel exist now and have been proven cost effective. Management is relatively simple because diesel fuel is the product of a relative handful of large, centralized industrial facilities which can be monitored. If the facilities don’t produce the correct diesel they are easily shut down. After the introduction of sulfur-free fuel there are visible benefits both in the form of lower fuel user costs and cleaner air, the diesel fuel producers’ margins aren’t effected.
- Administrative and technical tools to limit emissions can be perfected against more commonplace forms of pollution. Over time these tools can be improved enough to be effective against carbon emitters.
- As components of the climate problem are chipped away, the problem shrinks, it becomes underwhelming. The final reduction of the carbon problem becomes a relatively modest exercise.
There is low-hanging fruit to harvest by reducing smog in developing countries where it is considered to be a naturally occurring by-product of progress. As Americans and Europeans discovered in the 1950s, the costs of smog can be unbearable. Clean air and non-polluted water are not luxuries but a basic requirement for a functioning country.
Once there are visible pollution ‘victories’ — whatever they might be — it becomes easier to produce follow-on victories. Right now there is nothing to the climate dilemma but one administrative failure after another … managers are perceived to be inept and untrustworthy, each failure making it more difficult to take effective action in the future.
- To do nothing is to allow resource depletion and energy deflation to sharply diminish fuel consumption which will in turn reduce the output all hydrocarbon fuels including coal. Mining coal on an industrial scale is no longer a pick-and-shovel operation but requires vast amounts of petroleum. The coal customer must bear these costs otherwise, the coal remains in the ground. Resource depletion is the default solution to climate problems and is underway. The only word one must be mindful of regarding depletion is cost.
- The world-wide increase in suburbs, cars, developments, infrastructure, mines and oil wells ironically renders carbon fuels too costly and valuable to waste. Cost is a hard school, but accelerated development is the most likely cure for climate ills because it is the most certain. The conjecture that billions of tons of fossil fuel resources are immediately available for conversion into climate gases is false, these resources are not affordable in a world visibly going broke.
Kobane, Syria, 2015. Image by AFP Photo/Bulent Kilic: default climate gas management in action. Pollution is not emitted from these buildings. Consider changing the economic paradigm and look to Syria rather than Europe or the United States as the model customer for alternative energy. The shattered country filled with desperately impoverished people is somehow supposed to afford expensive replacement prime movers when they can barely afford what they have now.
- Climate scientists are overexposed in the media and elsewhere, they should step off the public stage. Questions about climate should be answered with a terse, “no comment”. Climate change should become a hip and trendy insider secret, accessible by only a privileged few. This is strictly a cynical marketing ploy as the businessmen would rush to fill the information vacuum with obvious, self-defeating lies. Events and word-of-mouth would do the heavy lifting. Ominous silence from the science community would be terrifying … perhaps enough to stir individual action.
- All climate scientists should get rid of their cars and other polluting luxuries: drive them to the junkyards and crush them. The scientists are either serious or they are not. If not, why should anyone else be?
- Focus on ‘other’ ordinary pollution culprits: ozone, nitrous oxides, volatile hydrocarbon photochemical smog, soot, methane and chlorofluorocarbon gases used in refrigeration, perfluorocarbons and sulfur hexafluoride.
- The primary components of smog are particulates, nburned fuel and nitrous oxides. Ordinary smog is reduced by the use of catalytic converters and fuel management systems. The catalyst combusts the unburned fuel in the stream of engine exhaust gas. Unburned fuel, nitrous oxides in the presence of sunlight produces ozone which is poisonous to vegetation. This in turn accelerates the release of greenhouse gases from agriculture lands and forests. Attacking ozone is a tactic to attack carbon emissions indirectly.
- There is a long history or successful management of photochemical smog sourced from vehicles, this effort should be expanded laterally … to countries without effective smog controls … and vertically … to include all kinds of engines. This includes fixed sources of ozone producing pollution such as generators and industrial prime movers; ship power plants and aircraft engines.
- Catalytic converters should be retrofitted to older engines. Those that cannot be retrofitted should be removed from service and scrapped. A country-by-country approach or by way of the WTO, the setting of requirements for manufacturers; all of these approaches would be effective and non-controversial. Half of the world operates engines equipped with with these converters and does so at low cost, the use of them in the other half represents a manageable expense. The public benefit is cleaner air, fewer pollution-related health problems and less damage to agriculture. The private benefit is the sales of catalysts and replacement engines.
- Soot- and soot-like particles are important components of climate change and is sourced from coal- and oil fired boilers, auto tire wear, brake- and clutch linings, diesel exhaust and from poorly performing gasoline engines, also from wood-burning and forest fires. Soot can be managed by using cleaner fuels, reducing open fires and using particulate traps on prime movers.
- Eliminate chlorofluorocarbon refrigerants that are produced and sold in developing countries. CFC’s are potent greenhouse gases: production and sale of bootleg refrigerants is a marginal activity whose loss would not effect national economies at all. Unlike narcotics and other contraband, CFCs are produced only in a few large factories which can be shut down or modified to produce non-destructive products. What is needed is the administrative impulse to do so.
- Institute a universal ban on 2-cycle engines including those which burn lubricating oil along with gasoline. Unburned oil and diesel fuel in the exhaust stream contaminates catalysts in catalytic converters; the poorly combusted oil is also a source of soot. There are four-cycle alternatives that do not burn lubricating oil, that allow the use of catalytic converters. A short phase-in period would retire or replace all 2-cycle engines including outdoor equipment, chain saws, scooters and mopeds.
- Ban carburetors on gasoline engines. Carburetors are obsolete and generally only found in the US on smaller engines used off-highway such as portable generators and lawn mowers. Carburetors do not allow fuel to mix completely with the air and are a source of photochemical smog. Carburetors are replaceable with electronic fuel management systems such as fuel injection.
- End the export trade in older vehicles and prime movers from the West to developing countries. Older vehicles are a large source of pollution. Ending this trade would be a step away from the proposal that every human is entitled to personal automobile transport without regards to the consequences. There are hundreds of millions of 2-cycle engines, carburetors and antiquated junkers in the world, removing them would make a noticeable difference at very low cost or even provide a return as the use of these things is subsidized.
- End the trade in partially-refined and unblended low quality fuels including but not limited to leaded gasoline and high-sulfur diesel. There should be an industry agreement regarding fuel quality; an international standard to meet. This standard would cost a modest amount of money to implement; like CFCs, fuels are the products of a few large factories that can be managed.
- Mandate the switch to low-sulfur fuels, gas scrubbers and catalytic converters on all ocean-going ships.
- Mandate only up-to-date electric generating plants which use low-sulfur fuels and pollution reducing technology … all of which is readily available. A schedule to update power stations should be agreed to reduce then eliminate non-carbon waste gases … doing so would indirectly reduce the carbon emissions. Non-performing prime movers would be scrapped even those that are relatively new. A fifteen year old thermal plant that produces excess waste gases can be scrapped the same as the fifteen year old merchant ship that falls into the same non-performing category. ‘Forced updating’ is cost-free as the new plant uses less fuel than what it replaces.
- Any sort of conservation policy is low-cost and highly effective. Conservation is the cheapest form of power generation as the plant not built represents billions of dollars of credit effectively earned. At the same time, tackling smog, particularly in developing countries, would demonstrate that managing carbon emissions is possible.
- The most effective policy is to pay people to conserve: offer a basic income conditioned to meeting conservation standards; pay citizens who do not have children or own cars.
- Eliminate fuel subsidies in all countries! This would accomplish a number of goals; a) reduce sovereign expenses in countries currently being bankrupted by their fuel subsidies; b) fuel consumption would be reduced along with auto fleets. This is because subsidies are more useful to those with sub-standard vehicles, c) carbon emissions would be indirectly reduced as there would be less fuel consumed: fuel pricing is a form of rationing.
- Ending subsidies risks aggravating motorists. Drivers and their entitlements will have to be dealt with sooner or later, easy way or hard: the ongoing world-wide bailout of motorists is unaffordable. Once government gains any sort of ascendancy over drivers it becomes a far simpler matter to bring the hammer down on them with regards to climate gas emissions as well as fuel waste. The default strategy to constrain drivers is to do nothing. This leaves fuel shortages caused by drivers’ bankruptcy to do the dirty work.
- Implement a world-wide moratorium on forest clear cutting. This is another easy fix that is practically cost free except to gangsters/Chinese who traffic in bootleg lumber. Commandos would earn their keep by killing loggers who would be otherwise paid not to log. Implementation would suggest a hard limit: this and no more! Forest removal and followup agricultural exploitation add only the smallest marginal additions to national GDP at the same time the costs to the environment and ability of the biosphere to absorb carbon are extraordinarily high. Deforestation by itself is a greenhouse gas emitter.
- Implement and fund a world-wide program of re-forestation, wherever possible. The cost would be modest, the returns would be felt in areas where deforestation has led to degraded soils and watersheds. Reforestation can also be a jobs-providing platform.
- It is important to reforest in ways that increase diversity making forests less susceptible to pests.
- Implement more effective forest-fire fighting efforts. The costs would be modest measured against the increased climate costs of forest fires.
- Put out coal mine- and coal seam fires. This is more low-hanging fruit.
- End gas flaring from oil wells, refineries and terminals. Not only do the flares produce carbon gases but they are also tremendously destructive of insect life.
- Eliminate ‘incidental’ methane leakage from oil and gas wells. Most oil and gas wells do not leak, those that do should be denied connection and ordered plugged immediately at drillers’ expense. Given a few such expensive duds, there would soon be no methane leaks from hydrocarbon wells.
- Eliminate tax advantages and subsidies for fuel use in the US, the world’s greatest waster of fossil fuels. Accelerated depreciation, depletion allowances for oil reservoirs, income tax deductions for ‘business vehicle’ purchases, favorable royalty rates and low cost access to public lands, access roads by the state(s), borrow-and-spend highway subsidies, mortgage interest deduction, favorable treatment of capital gains, etc. Reforms would not cost anything but would reduce costs, the obstacle is politics.
- Reformulate plastics so they degrade when exposed to sunlight or sea water. At the same time, place a ‘producer deposit’ — no different from the old-fashioned bottle deposit — on plastic factories for the packaging products they produce.
- Reform agriculture. CAFO’s — concentrated animal feeding operations or very large feedlots — provide utility the CAFO operator only. These operations with their confined animals contaminate water supplies with animal waste; they also produce massive amounts of climate gases. Shutting down CAFO’s would be a low-cost tactic that indirectly reduces climate gas emissions.
- Reform agriculture, make wider use of biochar.
Figure 2: Warming scenarios from UNEP by way of Robert Scribbler: Efforts to reduce carbon emissions and warming look to fall short, leaving the world to heat up to massively destructive +4°C which would wipe out our agriculture.
- End biofuel subsidies. Feeding cars and feeding humans together at the same time means that ultimately neither get fed. Biofuels are barely net-energy neutral and subsidy dependent, the beneficiaries are a handful of biofuel tycoons who would ‘lose’ with the elimination of subsidies.
- Implement a world-wide moratorium on road building. This is yet another easy fix that is cost free, both it and the moratorium on logging are easily enforced by way of satellite surveillance. Another, related step is to eliminate World Bank subsidies for logging, road building, dam building and other environmentally destructive policies that also produce climate gases or reduce the ability of the biosphere to sequester carbon.
- Electrify railroads and increase both freight and passenger capacity.
- Ban land-grabbing in undeveloped countries by 3d parties. Much of the so-called ‘new’ farm land becomes biofuel plantations, cash crop industrial monocultures that produce climate gases.
The most effective step is to provide incentives — to pay people — to conserve. Subsidizing conservation provides a direct capital return on investment that remains with the recipient. Subsidizing consumption as we do now leaves consumer without the resource, without the subsidy and his children with a mountain of unpayable debts. He’s older and poorer even if his consumption suggests otherwise.
The most effective tool is good management. Individuals can effect small scale changes on their own, in aggregate they can do much. American cities are being made over by younger people acting as individuals, who have turned their backs on suburbia. Managing at-scale industrial processes and mandating engineering approaches is more effectively done by governments with the wit to take action.
Ironically, government activism here would save the tycoons from themselves: left to their own unrestrained cruelty and greed, the tycoons’ self-serving activities will continue to price resources beyond the reach of their customers. Eventually, both resource- and the tycoon ‘problems’ are ‘solved’.
With a bit of effort it is not hard to think of other, indirect forms of action against carbon gas emitters. The benefit of these alternatives is that they would not cost very much or would provide economic gains. Meanwhile, the climate crisis is deflated by a thousand cuts leaving (hopefully) our descendants to wonder what all the fuss was about.
Publishes on the Economic Undertow on November 17, 2015
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When reports of gunmen shooting up nightclubs and cafés in Paris emerged late Friday, the immediate thought was, “What are they going to take away from us now? What remaining liberty will we be forced to surrender … to make us safe?”
The second immediate thought was, “false flag’: what did the intelligence services have to do with this attack? Did they know the plot in advance and did they look the other way? Did they go farther and provide planning, target lists, information, money and supplies? Did they offer safe-houses, transportation or false papers? Who were the attackers? Were they what the media loudly trumpets them to be, Islamic State militants, or were they something else; common criminals or government operatives posing as militants?
These are questions not being asked, instead, there is the non-stop, televised fear mongering, the demand for retribution and the promise of more military action by otherwise inept bosses.
At some level, the agencies had to know of this attack in advance, they could not be so incompetent as to be unaware. Friday’s attack was the latest in a long series of militant strikes against civilians. In Europe as in the US, spy agencies have surveillance over everyone’s computers and smartphones twenty-four hours a day. Like the rest of the modern world’s children, jihadis cannot function without credit cards, Facebook and Twitter … online porn and ‘Candy Crush’. France is thick on the ground with informants and stool pigeons. Many of these are racketeers and hardened criminals who have no fear of jihadi violence and much to gain by trading information about competing gangs to the police. In the poor areas of Belgium; in Molenbeek and the grimy high-rise slums of suburban Paris and Lyon, in Marseilles and elsewhere, everyone knows what everyone else is doing. There are no secrets. Since Friday, the French and Belgian police have conducted 160 raids against terror suspects, they did not come up with names and addresses over the weekend … They knew.
France did not find targets in Raqqa, Syria and send jet aircraft and the other supporting infrastructure to strike them in 72 hours. All of the forces involved were set into motion long ago, the entire operation including the recent attacks appears to have been staged: French military preparations, pre-positioning of hardware and command structure in Jordan and UAE since early in 2015; the French air attacks on Syria; the tit-for-tat massacres in France, the media saturation and hysteria followed by the next level of military response and the urging on by the US and others in a vicious, self-reinforcing cycle. “The game is afoot,” cries Sherlock Holmes; the question is, what sort of game is it?
Militarism is a factor. War is a form of economic stimulus, a self- referential or self- advertising scam; a bastardized Keynesianism directed toward arms manufacturers and ‘service providers’. War has also historically been a way to seize and exploit resources. Western governments tend to avoid the blitz- and conquest approach because of costs. Instead, governments colonize indirectly by exporting political and social instability to targeted countries — particularly the petro-states — then importing consumption capacity along with the crude. This strategy aims to offset the decline in net petroleum exports as described by Jeffrey Brown, (Peak Prosperity):
“I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates … “
Always pay close attention to what the bosses do and ignore what they say: targeted ‘destability’ is by itself evidence for the presumably defunct ‘peak oil theory’ as well as the establishment’s understanding and appreciation of it. Because fuel constraints are destabilizing by themselves; little additional prodding is required to unhinge vulnerable countries. When Syrians, Ukraines, Libyans, Iraqis, Yemenis, Afghans and others are unable to drive because they are car-less, road-less, dead, penniless or refugees, Americans drive in their place. “The American way of life is non-negotiable,” proclaimed George HW Bush in 1992; the inch-by-inch demolition of countries … including Greece, Spain, Portugal and France … is what ‘non-negotiable’ looks like.
The amounts of fuel to be had by way of ‘consumption switching’ from the destitute countries of the global south is trivial, no more than a few hundred-thousand barrels per day; unraveling these countries is overture/practice for the larger game. The prizes are Europe, with its crude daily consumption of 12.5 million barrels; also China and Russia, with their daily output of 15+ million barrels per day. Should Europe be wrenched into consuming half of that current total, Americans will gain the balance. As China- and Russia’s economies collapse oil prices will crash even lower than they are now as more desperate barrels are dumped onto the world market.
The ongoing ‘crude oil glut’ is not the result of fracking technology or Saudi marketing strategy but a result of war and economic distress, purposefully applied wherever there are vulnerabilities. A devastated country with no government or business activity to speak of will continue to pump as much oil as it can, for as long as it can, to provide logistical support to meet increasingly urgent military needs … and to provide ‘safe spaces’ for antsy bosses, whomever they might happen to be, whomever they might happen to be, whomever they might happen to be!
Figure 1: Iraq no longer exists as a unified country but the fragments nevertheless extract 4 million barrels of light crude per day (Ron Patterson/Peak Oil Barrel). The appearance of excess supply glut has occurred during a period when gross crude production has been relatively flat. In the face of unlimited demand (not to be confused with consumption) there must be triage: to accommodate some users, other users have to levered out of the market … by hook or by crook.
Figure 2: Hook vs. crook: French petroleum consumption has been declining steadily for economic reasons, chart by Mazama Science (click for big). French drivers guzzle 1.5 million barrels of MENA (Middle East, North Africa) crude per day. Paris has an interest in destabilizing these areas to absorb their consumption and make them more dependent upon French euros; the US has an interest in ruining France so that it’s millions of barrels of daily consumption might flow into American gas tanks.
The foregoing leaves out the fact that customers in France and elsewhere around the world are broke and becoming less able to afford fuel at any price.
Islamic State is the New Black.
ISIS and other, similar groups are the future revealing itself. Instead of science fiction-y high technology and ‘innovation’, singularities and robot immortality, there is 17th century barbarism. Along with Ukraine and Iraq, Syria is one more fiercely ugly place-of-the-moment where fantasy of unlimited material ‘progress’ and the reality of resource constraints collide. The West and the United States have caught themselves in a trap of their own making. The West requires resources from the Middle East and elsewhere to produce GDP expansion. The West’s (borrowed) fuel payments provide funding for messianic non-state actors that threaten the West itself. If you drive a car you must buy fuel, when you buy fuel you are funding ISIS and growing constellation of similar groups.
To buy fuel we borrow because using fuel is non-remunerative: it’s recreational like sitting in a café in the 11th arrondissement. We are ironically borrowing ourselves into bankruptcy so that we might support individuals whose intent is to murder us all in our nightclubs.
Because the West’s fuel payments are borrowed; the cost threatens the West ‘through the back door’. More expensive credit makes it increasingly difficult to destroy the militants: failing to destroy makes them more ‘efficient’. Our waste + borrowing + warfare cycle has created a Frankenstein monster that nobody can get rid of or control.
The same monster becomes the rationalization for governments to do whatever they will to control their own citizens with the citizens’ blessing. ISIS & Co. has become the end that justifies all means but one … what would fatally undermine the group … to give up the precious automobiles and all the high-cost, money/resource guzzling crap that goes with them.
It’s important to view what is underway in the world right now in both developed and developing countries through a petroleum prism. Economic distress in the OECD and elsewhere is a consequence of the high cost of- and lack of return on fuel consumption. Political ineptitude and social distress is a product of declining economic fortunes. The rise of militancy in developing countries is a consequence of consumption switching and military meddling by the West. Islamic militancy, like climate change has become another ‘wicked problem’, where proposed solutions are simply new problems in drag, with costs that cannot be discovered until the solutions are deployed and found wanting.
Ryan Lissa @ New Yorker observes that none of the Democratic candidates for president have a plan for removing #ISIS. The Republicans don’t have a plan, either. Nobody does because we don’t want to give up anything. We are desperate for pleasant outcomes, managers are satisfied to make minuscule adjustments on the margins which cannot ‘scale up’ resulting in failure.
Militancy cannot be removed from its context of neo-colonial exploitation of global south’s resources. We need to actually change our lifestyles, to make sacrifices, to give somethings up, our useless, costly toys. #ISIS is a consequence, an externality of our squandrous waste of irreplaceable capital. Sending in the air force fails because doing so wastes more capital even as prior interventions are what birthed and nurtured groups like #ISIS in the first place.
We have created a world where we must drive fifteen miles from the living room to the bathroom. We look to shift the costs of this folly onto others far away … which becomes too close for comfort when the refugees and militants arrive onto our doorsteps, begging for handouts or spraying bullets. Instability feeds on itself, whether it is in Raqqa, Somalia or Paris, South Sudan or Afghanistan = ‘Conservation by Other Means™’
Islamic State’ is an idea, not a country, it has little in the way of precious infrastructure to destroy. Bombing it is a waste of time and resources. The only way to get rid of the militants is to bankrupt them. That happens when the West and its imitators stop using fuel.
The fighting in the Middle East would end instantly if the US government instructed the petro-states Saudi Arabia and Iran to stand down or else … The Navy would halt the flow of tankers to- and from the Persian Gulf. It can do so safely from 200 miles away, out of range of (Iranian) aircraft or missiles. Without tanker traffic => no oil sales => no dollars or euros or pounds-sterling => no cash flow for hobby wars or other nonsense. Simply starting a public discussion about this option on television would cause the Middle Eastern oil powers and their proxies to make a run for the negotiating table. To do otherwise would be too risky: if consumers around the world were to free themselves from Middle Eastern crude for even a little while … there is no reason why they could not do so permanently.
The US should also embargo military hardware sales to combatants, it should freeze the combatants’ dollar funds held in the West’s banking system, including funds belonging to the Islamic State. The US leadership could get on TV and instruct the Americans in no uncertain terms to cut energy use in half in two years … to do so or else. Doing so would rid us of useless, bankrupting automobiles, for which so much blood is being shed.
Published on the Economic Undertow on November 1, 2015
Figure 1: Petroleum markets go non-linear as peak oil theory predicted; the steadily increasing price leads to collapse, something peak oil theory missed; chart by TFC, (Click for Big). The cause is the breakdown in credit; customers are broke which in turn strands the drillers; then ultimately the lenders … leading to real, absolute fuel shortages when drillers can no longer borrow. We find ourselves, between the rock and the hard place; without fuel there is no industry, without credit, industry is insolvent.
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Relative fuel shortages occur when increased output does not keep pace with increasing demand. Absolute shortages occur when output decreases regardless of demand. Output is a function of geology and the availability of payments. Demand by itself cannot produce payments, consumption does by way of the collateral function.
“Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.”
— Economic Undertow: Net Energy End-Game Theory
Is this the endgame or something else? A lot depends upon who pays your salary. Traders armed with buckets of zero-interest cost loans push wholesale prices one way then the other, profiting on movement. Analysts insist the change in fuel prices since last summer are a market phenomenon no different from normal/expected price movements in all markets. The same analysts put blame on manipulators Saudi Arabia, Russia, Iran … or USA frackers. They also finger speculators who are spotlighted when prices go up. All of these cannot be true at once: if price moves are normal and expected then there is nobody to blame. If traders/speculators are able to force prices upward they are certainly able to push them the other way; if speculators do not damage the industry with higher prices they have no power to affect the industry when prices decline. After all, losses to one group of market participants are gained by others; the sum for all participants is zero.
What’s missing from the analysis is the existential threat to the industry posed by current low prices. The industry mouthpieces can put out whatever spin they want but facts don’t change; the world’s inexpensive, easily accessed petroleum has been used up, what remains is costly and difficult to extract. Without sufficient funds flowing toward the industry, oil remains in the ground. Without some sort of fundable margin between returns and expenses there is no fuel industry. Right now the spread between industry income and expenses is widening … the wrong way!
The petroleum industry is a classic ‘bottom-up’ business. Every drop of oil or cubic foot of natural gas must be sold in some shape or form to a retail customer. Pump- and product prices cannot increase without ordinary consumers having access to more credit. So far there is little sign of that happening. Monetary- and tax policies such as QE and bank bailouts shift credit away from customers towards big business and their lenders. As tycoons gain the lion’s share of monetary stimulus, less remains for the customers … who are then unable to retire oil drillers’ loans.
Retirement of loans requires productive activities that gain returns that can be applied against principal; productive activity is where ‘means’ are supposed to come from. The gargantuan amounts of debts today indicates there are really no productive activities at all, only borrowing platforms and (false) narratives. Debts are not retired with the output of industry but rather with new rounds of lending. Debts multiply exponentially as old debts drag from coffins like vampires-plus-interest. At the same time, new credit is always needed to fund the latest fashionable failing enterprises. Our dead-money debts are worthless claims against a rapidly diminishing capital account. Not just citizens but the world entire economy is insolvent: the oil price tells us that we can no longer borrow against the promise of future productivity … because there is no such thing.
— Economic Undertow: Oil Shock
Market players pushing the wholesale price leaves middlemen and refiners with excess inventory they cannot sell, hence the apparent supply ‘glut’. The question is whether today’s low prices are a point in the trading cycle or a sea change?
Figure 2: Output declines by way of the US Energy Information Agency Short-Term Energy Outlook, (Click for Big). The agency
believes hopes prices and output will increase by the end of next year. The idea is falling fuel supply will trigger a bidding contest … this assumes there is something to bid with.
Americans are cornered trying to meet skyrocketing housing expenses, higher education costs, medical costs, and more medical costs. Customers are also nickel-and-dimed by rapacious cartels whose cumulative effects must be subtracted from the nation’s gasoline budget:
Figure 3: Gasoline sales in the US stutter even at very low prices FRED, (click for big). Absent the necessary cash flow, drillers look to credit markets, yet the increased repayment burden leaves drillers further underwater. Companies jettison investments and assets, perhaps even precious dividends; (Oil Price):
The U.S. Department of Interior announced the cancellation of the two Arctic offshore lease sales on October 16, which were to be held in 2016 and 2017. This sealed the fate of future Arctic exploration for the next few years (at least) as the Obama administration officially slammed the door on any future U.S. Arctic drilling, limiting the North American prospects for offshore drilling by some of the world’s biggest oil majors.
With sustained low oil prices, political pressure from environmental groups and fading industry interest, it is highly unlikely that any entity (with the exception of Russia, which is still trying hard to break the Arctic jinx) would be interested in resuming Artic drilling even if the leasing process were relaunched in coming years. As a result, the Arctic is officially out of sight.
Analysts fixate on US fracking plays but the bulk of the world’s unconventional reserves are found elsewhere: in Venezuela Orinoco bitumen, in ultra-deepwater Brazilian pre-salt … in Alberta; also from Oil Price:
Shell’s Scrapped Oil Sands Project Highlights Major Issue For Canada
It has been a brutal few weeks for Royal Dutch Shell.
On October 27, the Anglo-Dutch oil major announced that it was pulling the plug on its Carmon Creek oil sands project in Alberta, Canada. The project was expected to yield 80,000 barrels per day in oil sands production, which was originally greenlighted in 2013.
However, the markets have turned against Shell. In March, the company said that it would alter the design of the project to “take advantage of the market downturn to optimize design and retender certain contracts.” The logic was that low oil prices are forcing cost reductions up and down the supply chain, potentially allowing the company to lower construction costs.
The canceled projects represent reserves that must be taken off the books, oil that will not find its way to markets ten years from now. Shortages do not appear in the immediate term but are certain.
The country’s two biggest oil companies offered a bleak picture of demand from the world’s marginal consumer of the commodity in its latest quarterly results, out Thursday. At Sinopec, the country’s biggest refiner, officially known as China Petroleum & Chemical, total sales of refined products in the third quarter dropped 3.4% in volume from a year before. That’s a marked change from their 5.3% rise during the first half of the year.
Yet this dismal figure is bloated by Sinopec’s increasing exports of refined products, a symptom of China’s excess refining capacity. Strip those out and Sinopec’s domestic sales of gasoline, diesel and more were down 4.2% in the September quarter. At PetroChina, the nation’s second-largest refiner, product sales fell about 2% last quarter.
Time will tell how this plays out. Should prices continue to decline there will be cutbacks in petroleum output and more desperate efforts by governments to subsidize the industry. There will be a shakeout with the weaker hands being folded into larger, slightly more solvent enterprises. The media will insist that petroleum output decreases are temporary. Afterward = a run out of a (trans)national banking system (EU) or out of a major currency (yen or RMB). Possibly, not likely, prices will rise back to 2014 levels leaving the real crunch to come in a year or two.
Published on Economic Undertow on October 5, 2015
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Nietzsche once said, “when you gaze long into a computer screen the screen also gazes into you.” Maybe he didn’t put it quite that way, but he would have if his timing was better. Attempts to deflect the screen’s unrelenting gaze by deploying ranks of gray squiggles from one side to the other seems hardly worth the effort. They march, nothing changes; the screen is too stupid to reason with … If this is the end, it is boring.
The world’s product at the dawn of the millennium, at the apogee of human development and economic power is banality. “Take it to the limit … ” croons the singer, “one more time.” You have to wonder how ridiculously low that limit is? Whatever minimum is required to gain each of us that fraction of a second’s worth of notoriety the screen has allotted for all but a select few. Democracy in the Modern World gives each man the same right as every other to be a guest on Springer.
What happens when nobody watches? The Russian military just bombed targets in Syria claiming to destroy terrorist bases, instead they murdered unlucky Syrian civilians.
People ask, “Isn’t Syria a long way from the Russia?” The answer is that the Americans are even farther away and that Russians must follow the Americans closely or risk being left behind. “Behind what?” Nobody has a good answer other than Moscow wishes to be a ‘Great Power’ and Great Powers attack other countries, the farther away the better. Because the Americans are engaged in ‘humanitarian bombing’, the Russian are compelled by Christian charity to offer humanitarian assistance as well.
Russia is an ally of the Syrian government, or rather, Syria has been a long-time client- and purchaser of Russian military hardware, all of it paid for with hard-currency proceeds from oil sales. The Russians don’t want to surrender their Syrian trade so they’ve set out to out-bomb the Americans, to murder their own clients and hope for the best.
“The supreme art of war is to subdue the enemy without fighting.”
— Sun Tzu
Looked at from the Russian perspective, bombing appears to be a low-cost activity for everyone except the Syrians, whom nobody cares about. There is little to lose by bombing and potentially some gains. In today’s bereft political economy, any (potential) gain is a good one. Bombing Syria = gambling with house money!
The Russians bomb the Syrians as so many others have bombed before; ‘dehousing them’ as Lord Cherwell, Winston Churchill’s mad-science adviser liked to say. There is never any end to it; today’s bombs is followed by bombings tomorrow and the next day and the next, nothing changes except the death toll. One side wins for a minute then the other side catches up. It never ends, this maddened war of all vs. all.
At least Churchill had a plan. Such things are unfashionable these days, what matters more than anything is attitude and that we have plenty. Americans bomb because we are exceptional, we falter elsewhere but bombing is what we do better than anyone else. The Americans will bomb their mothers if there is a dollar in it. There are British bombing, Canadians, also French … the Turks have bombed and bombed and bombed some more; the Jordanians have bombed, and lost a pilot; so have the Israelis along with Qataris, Bahrainis, Emiratis and Saudis, who in addition, are bombing Yemenis. Those without bombers but with excess populations to squander such as the Iranians and Lebanese are seeding Syrian graveyards with foot soldiers. This is on top of the Syrian government which has been bombing, gassing, torturing and shooting its own citizens for years. Almost at no time since the Vietnam war has there been so much bombing — at such an exorbitant cost — to so little effect.
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
— Sun Tzu
Causes of Middle Eastern conflicts are complex and structural; they include galloping overpopulation, resource draw, drought and peak oil, the unquestioned belief in efficacy of mechanical military and reformist ideologies that have taken on lives of their own. Much of this is excluded of the conversation, instead there is purposeful ignorance: the bombing process is an end in itself, ratcheting up the violence will solve everything.
Four years of ratcheting the violence have reduced Syria to a ruin with mangy, louse-infested extremists scurrying like rats over the countryside. Assad long ago dribbled away whatever writ or political reach he might have had outside of a shrinking circus of deluded/self-interested cronies. Nobody has any idea how to win the war or how to stop it … how or even whom to negotiate with. Assad has become too weak to gain a victory, his exit would only reduce by one … the number of competing gangs of robbers and murderers who have papered themselves over with religion … who are absent any organic political capital.
The governments supplying funds and arms to the contestants — the US, Russia, Europe, Saudi Arabia, Turkey and Iran — have so- far kept themselves clear of consequences to their recklessness. So-far … yet, the Syria war spreads to Turkey and to the doorstep of Saudi Arabia; where does it stop? The warrior’s impulse is to expand the scope of the destruction until something important breaks; but everything that matters within Syria is broken already. The absence of strategy taken to its logical conclusion reduces Syria and its neighbors to uninhabitable wasteland; this isn’t policy it is insanity.
Russia Cannot Save Assad.
Russia enters with its handful of airplanes and mercenaries, bluster and threats, as if the problem is a shortage of these things. Moscow accuses the Saudis of waging a price war against the Russian oil business; the real war is to be laid at the Saudis’ feet! According to theory, magic will take place: the Russians will bomb, oil prices will rise and Western Europe will again be dependent upon high-priced Moscow fuel supplies. With the flow of fresh funds, the dilapidated Putin regime will gain a new lease on life.
What the Russian government does not understand is that prices of petroleum have declined because customers everywhere are broke, not because of the Saudis. Broke includes the Europeans, they cannot afford to borrow, as such they cannot afford to buy fuel. There is no rescue for Russia or for Putin either. Killing Syrians does nothing to solve the price problem; bankruptcy propagates stealthily in the background while Russia is on the road to becoming another scummy militant group.
The Russians can die in Syria and spirit Assad out of the country and nothing else. Russia will not win because they do not know themselves; they believe in fairies, in the demeanor of the their dictator, in the efficacy of Sukhoi 24s and vacuum bombs. They do not understand an enemy they dehumanized before they even arrived, reduced them to spots on a map. They cannot win because there is almost nothing left to win … perhaps a neighborhood or two in Damascus and resorts on the coast. Russian outrages cannot exceed what the Syrian army- and security forces have already inflicted on a far greater scale. If nothing else, Assad has been the Kremlin’s most assiduous student in cruelty. Four years of unrelenting combat have bled out Assad’s army; casualties are replaced by Hezbollah militiamen, Shiite Iraqis and Iranians. These mercenaries have nothing in common with Syrians; nor can they can gain anything from whatever transitory success they might win. Despite Hezbollah’s formidable reputation, the group has been modestly effective against their irregular adversaries and only in the territory immediately adjacent to their home bases in Lebanon. The Iranians are despised as carpetbaggers by Assad’s officers. The Russians are riding on the coattails of the Iranians; Like the Americans, British and the rest, the Iranians do not know much about either their allies or enemies and cannot be bothered to care.
The war is of a piece with decline and collapse. Syria’s demise is little different from that of an Alzheimer’s patient, the end is a matter of time. The agony is one unwinding among many others, with more to come; the refugees are the first of many more to come; the counterpoints of the droughts and floods with more to come, the unwinding of foreign exchange- and credit marketplaces … the decay of politics into factionalism, of ‘liberty’ becoming license; all of this and more to come. Syria is what collapse looks like, what our post- Peak Oil ‘World of Less’ will be unless we wake up right away and become lucky.
In a sensible world, the fighting would end with negotiations and power sharing. Patrons would withdraw and exiled Syrians would return to rebuild their homes. This is not a sensible world: ending this war requires facing reality about limits and jettisoning defective geopolitical narratives and outdated, malfunctioning ideology. The likely outcome is for fighting to continue to a logical conclusion and impose its own reality. The danger is that nobody can outline the absolute limits to the conflict, there could end in a nuclear exchange or decades of grinding cruelty and destruction spreading from Syria-Middle East to the rest of Asia including Russia, then China, Africa and the rest of the world.
Wars and militants are externalities of our Western lifestyle, no different from air pollution and credit exhaustion: costs are shifted to ‘others’ such as Syrians who have their own costs to shift. Westerers refuse to connect the dots between our toys, our resource waste and our conflicts. When you drive a car, you are funding Islamic militants by way of the agents such as Saudi Arabia that support them. Wars are expensive, combatants need funds, cutting them off by using less fuel puts militants out of business. A ray of hope is the ongoing collapse of oil prices. The price decline since last summer has slashed combatants’ budgets in half. As prices decline further the ability of countries to engage in expensive ‘hobby wars’ will fade. Both Russia and America wobble at the lip of economic ruin, not much more is needed to send them over the edge.
Countries today are saddled with obsolete economic ideology that intends to manage the costs of surpluses. The industrial-capitalist economic system cannot manage shortages: in our new world of less, industrial governments have become obsolete because they are disconnected from reality. Like the militaries they command they do not know themselves. Actual work is left to technicians making use of fossil fuels providing the service platform upon which the ideologues dance. They deny fuel- and other resource constraints; deny climate change, deny the effects of pollution, the contamination of food supply, they deny the loss of habitat and the extinction of millions of plants and animals; the effects of overpopulation on resource provender, credit costs and more. Managers insist that the hair-brained ideas of long dead economists can pull value out of thin air like rabbits out of a hat … out of borrowed money or from the barrel of a gun. Citizens look to the governments with fluttering upward-turned hearts … they see malfunction, murder, incompetence, lies and corruption. Governments repeat errors because they succeeded once upon a time. Fast forward to the present and nobody knows what to do.
We have less in the way of resources, we must learn how to cope. The Syrians are teaching us the consequences of denial. Syria’s cupboard has been stripped bare. The survivors are left to cobble together the political arrangements needed to make do = ‘Conservation by Other Means™’. One way or the other our politics must change, the question is how difficult the transition will be. From here on out there is no growth to allow recovery from wars or other disasters, destroyed countries will remain so, it is important to not destroy in the first place.
Published on Economic Undertow on August 30, 2015
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Around the world, markets have taken a hit and the establishment responds as best it can; liberal applications of happy talk and cheap credit along with promises of a lot more where that came from.
Much of our finance problem has been caused by the costs associated with a surplus of cheap credit. This conforms to the First Law of Economics which states the costs of managing any surplus increase along with the surplus until at some point they exceed it. Adding more credit cannot provide a solution as it adds to already- breaking costs at the same time. We cannot borrow our way out of debt even as it is the only means industrialization has left to us. Cracks are widening, the credit structure will fail, it isn’t a matter of ‘if’ but ‘when’.
As per usual, the bosses rush to prop up finance key men. This is the only thing they know. The bosses are creatures of the key men, when these stumble so do the bosses. Each groups aims to hold the other along with the rest of the economies hostage. Sending in the clowns on suicide missions is how economies work in the New Millennium. The Chinese government directs the retirement accounts of ordinary Chinese into the stock market furnace. They fear that the plunge in China issues is not an ordinary asset market correction but the end of the entire Chinese industrial enterprise as we know it. The government does not dare utter these terms but they don’t have to, their actions speak for themselves.
China follows the rest of the world in tapping its retirement accounts. We are in the middle of a crisis that has been steadily intensifying since 2007. Managers demand the economic system be bailed out; instead of tapping entrepreneurs and technology, the finest minds of a generation rob from pensioners.
The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Russia, France, in the US … in cities and states pensions everywhere are under attack. Now, add China.
Public sector pensions in the US are looted to support stock buybacks which keep US stock markets afloat, (Financial Sense):
Massively underfunded public pensions are driving an epic credit boom in the corporate bond market that will likely accelerate in the coming years.
Lawrence McQuillan of the Independent Institute explained on Financial Sense Newshour this week how public pensions are being operated under rules and assumptions that would be considered criminal under Federal law if operated similarly in the private sector.
We spoke with him about his very important book, California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, where he said that in order to meet their funding requirements the Big Three pension funds in California (CalPERS, CalSTRS, and UCRP) assume that “they will outperform the average portfolio return…by 21 percent every year for decades.”
That never happens, the idea is ridiculous. Instead the retirees’ funds support the stock market price-inflation regime; when that market falters and prices decline the funds vanish into the pockets of well-positioned elites … just as they are set to vanish in China.
Bosses insist deploying more- and fancier machines will solve our economic problems; this presumes machines are productive. Technology is endlessly advertised as saving us but the raiding of pensions indicates otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology doesn’t and can’t work, from the people who are in a position to know.
What happens after the retirements are pilfered? Who knows? Nobody has a plan. The elites have no choice but to reside on the same broken planet as the rest of us, using the same (diminished) services. There is nowhere to hide, no place to escape from what are fast becoming universal consequences.
Here you go way too fast,
Don’t slow down, you’re gonna crash.
You should watch, watch your step …
Don’t lookout, gonna break your neck.
So shut, shut your mouth,
‘Cause I’m not listening anyhow.
I’ve had enough, enough of you,
You know to last a lifetime through …
The Federal Reserve offers to reconsider raising interest rates next month as if this was a thing seriously considered in the first place. The fact of ongoing zero-percent interest rates speaks louder than any words. The fact of it reveals that the doctrine upon which American-style ‘prosperity’ is erected is false. Each succeeding unit of business activity requires ever-greater amounts of credit to produce; finance productivity, like the machine variety, turns out to be a fairy tale:
Figure 1: Total US credit market debt including US government versus US nominal GDP by way of FRED. Credit expands exponentially but business activity never catches up. Credit is a necessary subsidy for all industrial activity, we are now past the point of diminished marginal returns, where each additional borrowed dollar offers only a few well-pinched pennies in return.
Na nana na na na nana na na-aaaa
Na nana na na na nana na na-aaaa
Here you go, way too fast.
Don’t slow down, you’re gonna crash.
You don’t know what’s been going down,
You’ve been running all over town.
So shut, shut your mouth …
‘Cause I’m not listening anyhow
I’ve had enough, enough of you,
You know to last a lifetime through …
The ‘Great Trade’ since the emergence of Southeast Asian manufacturing ‘tiger economies’ has been the short-dollar carry; this is this trade that is unwinding right now around the world. Dollars are borrowed from New York finance and swapped overseas for higher-yielding investments denominated in non-dollar currencies. The tigers grow and the currencies strengthen vs. the dollar. Direct yield is added to currency appreciation. This carry trade is one reason why so many US corporations have set up shop overseas, to capture currency appreciation. The dollars lent overseas become collateral for new forex issue in the target countries, this is then spent on infrastructure which amplifies the entire process in a virtuous cycle.
Dollars are also sold short into various asset markets with the same intent, to capture ‘currency’ (share price) appreciation. Asset- and currency investment ‘bubbles’ since 1973 have been a kind of petroleum price hedge, where the fuel and other investments are treated as if they are the same. Appreciation of assets such as stocks or real estate is intended to exceed appreciation of the fuel ‘asset’. With time fuel users become rich enough to afford fuel at any price. This works in theory but fails in practice because of the need to unwind the carry trade — to sell the asset and buy back the dollar — to capture the appreciation and apply it to the fuel. As with other Ponzi schemes, only a relative handful of shills are able to exit the trade with gains in hand. The schemes only work as long as (borrowed) funds are flowing in, as long as each succeeding round of funding is cheaper than those ‘invested’ before … and as long as all participants in the trade don’t try to exit at once. When any of these trends shift into reverse the scheme collapses.
Just as real estate- or oil prices have been expected to continually rise in price, the dollar is expected to continually cheapen relative to other currencies; to ‘go down’. As such the dollar trade is subject to the ‘Paradox of Thrift’, when too many interests are on the same side of a trade. Having all investors on the short side means a market ultimately deprived of sellers, where everyone has sold out: eventually nobody is left to ‘sell to the sellers’. At this point there is nothing for the dollar but to defy conventional wisdom and ‘go up’.
If economists paid attention to ‘inputs’ rather than dissing them, they would acknowledge that billions of dollars and other currencies are swapped on demand for a valuable physical good at gas stations around the world every single day. It is this exchange- on the global scale, rather than the forward pricing of credit by central banks and finance lenders that determines the price of money. As such there is no independent monetary policy, anywhere; central banks are irrelevant. Priced in oil, ‘commodity’ dollars have worth. Instead of being a proxy for the waste-extravaganza we call ‘commerce’, the dollar becomes a proxy for scarce and valuable petroleum, just like the dollar was a proxy for scarce and valuable gold during the early 1930s. As fuel vanishes forever out of a billion tailpipes, dollars become precious, then hoarded; leaving fewer dollars for drillers which in turn amplifies fuel scarcity in a vicious, self-reinforcing cycle.
So what do you want of me,
Got no cure for misery.
And if I go about with you,
You know that I’ll get messed up too with you …
Na nana na na na nana na na-aaaa
Na nana na na na nana na na-aaaa
Increased dollar demand is best evidence for fuel scarcity rather than the non-stop media bawling about a glut. Users are voting with their wallets, spurning ‘Brand X’ currencies and other assets, scrambling to gain cash dollars. The increased worth of once-blighted buck becomes a dagger to the heart of the short-dollar carry and its variations in other asset classes.
Those who have borrowed dollars are now just now finding out how expensive it is to repay: costly to the point of national ruin. China is dumping billions in Treasury securities every month in order to gain dollars. Once spent these dollars never return: this turns out to be the First Law cost of China’s vast dollar reserve surplus. China’s resource providers are likewise seeing runs out of their own currencies. Businesses and governments borrowed billions from Wall Street lenders, they all need cheap bucks to service their debts and can’t get them. The flood of easy money to the rest of the world to support miniature versions of the US ‘growth story’ has been replaced by a dollar ebb and so-called ‘capital flight’, (Don Quijones/Wolfstreet):
With Friends Like These…
It doesn’t help when your own national investors and corporations are offloading the domestic currency (Mexican peso) as fast as they can. As Jorge Gordillo, chief analyst at Grupo Finaniero CI Banco, told the Mexican daily El Excelsior, as confidence in Mexico’s economic fortunes wanes, more and more Mexican banks and businesses are exchanging their pesos for dollars, fueling further demand for the world’s reserve currency.
It is the worst of vicious circles: the stronger the dollar gets, the more the locals want it. The more the locals want it, the weaker the peso becomes. Rinse and repeat …
It isn’t just carry traders desperately seeking dollars. The gigantic fuel industry itself is left to grope beneath the cushions for spare change, (Bloomberg):
Oil Industry Needs Half a Trillion Dollars to Endure Price Slump
Luca Casiraghi and Rakteem Katakey (Bloomberg)
At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it.
The number of oil and gas company bonds with yields of 10 percent or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades.
If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood, a partner for oil mergers and acquisitions at Norton Rose Fulbright LLP in London.
Five hundred billion is a lot of money. That is the amount needed to roll over maturing debts and pay interest on ‘junk’ loans; it does not include fresh funds needed to keep drilling. This amount does not include national oil drillers indirect costs, the amount needed is likely to be much larger, (Reuters):
The speed of decline in Saudi Arabia’s foreign reserves slowed in July after the government began issuing domestic debt to cover part of a budget deficit created by low oil prices, central bank data showed on Thursday.
The world’s largest oil exporter has been drawing down its reserves to cover the deficit. Net foreign assets at the central bank, which acts as the kingdom’s sovereign wealth fund, have been sliding since they reached a $737 billion peak last August.
But the latest data showed net foreign assets shrank only 0.5 percent from the previous month to 2.480 trillion riyals ($661 billion) in July, their lowest level since early 2013. They had dropped 1.2 percent month-on-month in June and at faster rates early this year.
Indirect costs include defending the domestic currencies of oil exporting countries. Where this money is going to come from is problematic because of the low fuel prices. The borrowed funds that have been supporting drillers are now stranded because the customers are unable to borrow … in a market made up entirely of (insolvent) borrowers there is nobody left who is able to repay!
Nouriel Roubini suggests a finance-system early warning system, (Project Syndicate):
A Financial Early-Warning System
Recent market volatility – in emerging and developed economies alike – is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities. Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears abruptly and causing exaggerated market swings.
Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create; but the world needs one today more than ever. Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide. Fingers have been pointed at politicians, banks, and supranational institutions. But ratings agencies and analysts who misjudged the repayment ability of debtors – including governments – have gotten off too lightly.
Currency depreciation, national bankruptcies, non-stop wars, sacrifice of pensioners and fuel price crash, what sort of warning does Roubini & Company need? Every sort of alarm is going off and has been for years! Nobody pays attention. There have been climate warnings, bank insolvency warnings (little different from what Roubini proposes), resource depletion warnings, corruption- and cartelization warnings; warnings about pollution, overpopulation, consumption, exhaustion of topsoil, proliferation of nuclear weapons, rising militarism … over-dependence upon finance and central banks, etc. Economies are fragile, they are built on a foundation of lies, they cannot bear the weight of the truth so it is swept under the rug. Markets which are seen to measure the worth of information are institutionally incapable of measuring the same markets’ willingness to guzzle the Kool-Aid: the Paradox of Grift.
To Roubini, the only alerts that seem to matter can only come from economists themselves … the enterprise is painted into a corner.
Na nana na na na nana na-aaaa
Slow down, you’re gonna crash.
Even though unraveling is well underway, the various media components of big business are busy informing the proletariat (and each other) that everything is just fine and that ‘sustainable growth’ is right around the corner. Meanwhile, the markets around the corner grind relentlessly lower.
Warnings — early and otherwise — are seen to trigger the events that managers are desperate to avoid. This leaves no place for prudence. The central banker can never say there is an asset bubble or that the bankers are helpless to affect outcomes or admit a mistake. Central Banker-speak is carefully calibrated and purposefully innocuous. Should it be otherwise, a money-panic is certain to occur. This reveals the extent to which market capitalism is dependent upon fraud and participants eagerness to embrace it. As with much else in our benighted nonsense world we’ve built for ourselves, we and our leading characters are happy to follow the script … right off the edge of the cliff.
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash.
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash!
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash.
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash!
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash.
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash!
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash.
Na nana na na na nana na na-aaaa,
Slow down, you’re gonna crash!
— The Primitives “Crash” (Paul Court, Steve Dullaghan, Tracy Spencer)
Off the keyboard of Steve Ludlum
Published on Economic Undertow on August 13, 2015
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Since last summer oil prices have crashed 50% (in dollars). The media fairy tale suggests an output contest between Saudi Arabia and US oil drillers with the resulting glut overwhelming demand. This is yet another reprise of the modern myth of plenty and prosperity, eternally bountiful supply enabling bottomless demand in a consumption paradise. Indeed, demand exists everywhere there is a TV set and paper money; it is the ability to exercise demand that is slipping away.
The Undertow story is of an unacknowledged energy shortage leading to exclusion of less-solvent customers from petroleum markets world-wide. Instead of odd-even days or gas lines, fuel is rationed by way of access to credit. As the fuel shortage propagates, the number of solvent customers declines. This is natural and should not need explanation: oil prices fall because customers are broke. There is the illusion of excess supply because the number of solvent customers falls faster than extraction rates. Attempts by drillers to lift more petroleum exaggerates the illusion of excess supply; prices fall which strangles drillers in a vicious cycle.
Low prices are unable to stimulate consumption, instead, they illuminate the failure of consumption to earn anything … that the economy itself is bankrupt-by-design rather than mismanaged.
The absence of real earnings means all returns must be borrowed. Debt is expensive, the costs are added to those of extracting- and distributing fuel. The marginal consumer is excluded from fuel markets because he cannot afford to borrow or the lender rations credit for solvency reasons. The outcome is a margin call across the economy leading to bankruptcies that ration credit further. Ultimately, credit becomes unavailable and fuel is allocated to those who can earn an actual return on its use … provided there are any real returns to be had. If the returns are not sufficient to support energy extraction there is no energy. This is the outcome of energy deflation, why every effort must be made to keep from slipping into it.
Just as leverage amplifies itself in a virtuous cycle during the expansion period, leverage works violently ‘the other way’ as credit contracts. Self-amplification of customer insolvency is the point of no-return. When low prices strangle- rather than enable consumption, there is no way to reverse the process. If relative solvency cannot enable output then neither will insolvency. If governments cannot enable output by way of subsidies during a period of credit expansion they certainly cannot do so when credit is contracting. Governments must borrow the subsidies they offer to drillers, in doing so they ultimately borrow from the same customers who cannot meet the drillers’ costs; as such governments are no more solvent than their bankrupt citizens.
The great post- World War Two buildout of American style suburbs in the US and elsewhere has succeeded in devouring its resource base and replacing it with claims against what (little) resource capital remains. We are certain to fail spectacularly because we have succeeded at our fools’ errand so spectacularly.
When Is the Crash Coming?
The usual finance suspects are queuing up to predict an imminent market crash, aome have been predicting one for twenty years. They don’t want to be seen as missing the Titanic, others have proven to be prescient: Jeremy Grantham, Nouriel Roubini, Professor Steve Keen. Robert Shiller warns investors to beware the ‘New Normal Bubble'; Dean Baker … well, maybe not this time. Martin Armstrong suggests October this year for the big bang (slump). Nicole Foss suggests that the unraveling is already underway as does Economic Undertow. The problem is most economists view the problem as confined to finance and interest rate policy. This misses the point, monetary- and financial adjustments are irrelevant to an outcome that is driven by resource depletion. Finance difficulties are symptoms of the disease not the cause; we are undergoing a self-propelled regime of hard rationing that is taking shape under everyone’s nose.
Recent China currency depreciation (vs. dollars) puts more downward pressure on fuel prices even as OPEC drillers Iran and Iraq send more crude to the markets, currency depreciation (vs. dollars) in Japan and Europe reduces the overall bid for crude; demand in countries that supply China such as Brazil are likewise blowing up due to ripple effects and unwinding carry trades.
U.S. stocks fell in early trading on Tuesday in a broad-based retreat as China’s surprise devaluation of the yuan pushed the dollar higher and pressured commodity-related shares.
Oil erased most of its gains from Monday following the devaluation by the world’s top energy consumer. Other commodities such as copper, aluminum, nickel and zinc also fell.
Concerns around the health of the second-largest economy in the world also weighed on shares of U.S. automakers and industrials. General Motors was down nearly 3 percent, while Caterpillar was down 2.4 percent.
The yuan fell to its lowest against the dollar in almost three years following what the country’s central bank described as a “one-off depreciation”.
Stock prices are variable, what matters is the price trend (in dollars) relative to the trends of other currencies. Dollar-preference can be seen at work: China needs dollars to import fuel, so do other fuel importers. China also needs dollars to prop up its gargantuan stock- and real estate swindles – slash – Ponzi schemes. To gain dollars it must offer more RMB to foreign exchange holders than it did the day previously. This becomes a sort of dog-chasing-his-tail process where every depreciation gives cause for further depreciations down the road. The name of the game is to trade the ‘Brand X’ currencies including RMB at any price to gain dollars; as these are bought up becoming scarce and more desirable the trade amplifies itself.
With time, the causes that propel depreciation become indistinguishable from effects. China depreciates because of the flight of dollars overseas represents shrinking demand for its own currency. Yet, the depreciation itself is incentive to ditch the currency! Over the span of two days China and everything that it contains is today worth five- percent less than it was, previously. Out of $6.8 trillion in GDP, $340 billion has vanished without a trace, in the blink of an eye: whatever increase the country expected to gain this year is lost by way of its depreciation.
Whatever China seeks to gain by way of cheaper exports is lost due to higher import prices (in dollars):
Figure 2: China net petroleum exports by Mazama Science (click for big). The gap between what China extracts domestically and what it must import is financed with borrowed dollars and euros. China turns out to be another energy deadbeat little different from Greece, Argentina or Spain. While China domestic crude output is significant, it cannot keep pace with the country’s galloping consumption.
As China property- and stock markets crash, China aims to dump its deflation onto its trading partners … who are all trying to do the same thing. Like Germany within the eurozone, China has its bunch of captive punching bags to which it can export its misery: Australia, Peru, Myanmar, Brazil, Canada among others. For China’s largest trade partner the US, depreciating RMB is a defacto interest rate increase whether it is considered as such or not. This renders irrelevant whether the Federal Reserve raises policy rates later this fall or not … the result is deflation for the US leading to recession.
Economies are nothing more than fuel wasting enterprises, with the financing edifice erected upon this scaffold. Because fuel itself is hard to hold and store (without a tank farm), ‘money’ is held instead of fuel. With the passage of time, the dollar becomes preferred over other currencies as a fuel carrier. This is because there are plenty of dollars, because Wall Street produces the bulk of the world’s credit; because the US has been the ‘consumer of last resort’, because so many countries export goods or workers to the US that dollars are in wide circulation in these countries … because the dollar is proxy for the American hyper-wasteful lifestyle that almost everyone on Planet Earth aspires to.
Dollar preference turns this last dynamic on its head: instead of being a proxy for waste, the dollar becomes a proxy for what is being wasted. Once that point is reached it becomes a hard currency like the gold-backed dollar of 1932, the same dollar that was hoarded out of circulation causing most of the banks and businesses in the country to fail. The difference was that going ‘off gold’ did not affect how the US consumed energy, going ‘off oil’ would mean just that: switching from a non-functioning industrial economy to a non-industrial version that uses little or no oil at all.
Figure 3: The Canadian loonie (in dollars); Forex charts by XE.com, (click for big). China exports deflation: the loss of crude oil customers in China and elsewhere leaves Canada at the brink of a recession.
Figure 4: The US dollar — Australian dollar cross; like Canada, Australia bought the ‘it’s different this time’ hype about China resource capital consumption. As it turns out, Australia, like China, is worth a less today than it was over several years of yesterdays. Its reliance on China manufacturing leaves it with assets that have become liabilities.
Figure 5: The US dollar — Brazilian real cross. Sez Bloomberg:
Investors are concerned that the political instability (in Brazil) will push the country into a deeper recession and make it increasingly vulnerable to a sovereign-credit downgrade. The real has depreciated 8.1 percent in the last month, the biggest decline among 16 major currencies tracked by Bloomberg.
Currency depreciation is a dynamic that drives itself. Monetary- and fiscal policy is irrelevant: the worst-case scenario is well- meaning policy blunders amplifying dollar preference unintentionally. As with debt, once on the depreciation treadmill it is almost impossible to get off; this offers a continuum of opportunities for errors, these tend to be self-amplifying as well.
Figure 6: Welcome to Eurolandia, the home of self-propagating policy errors (in dollars). Turns out Germany beating its trading partners to a pulp is not good for business. Who could have guessed? As the fuel buying power of dollars increases, they flow toward the highest bidders, out of Europe, China, Japan and elsewhere toward Wall Street … and offshore tax havens. The outcome is a margin call against leveraged assets. Credit flows are never one- way. After flooding into a country, credit reverses and the funds that are necessary to support leveraged assets are withdrawn. This results in deflation. The same credit rationing underway in Greece is scaled up monumentally in China … with the same outcome!
Figure 7: China’s problem takes the form of a giant pink arrow: China’s finance structure is like Argentina’s because China is dependent upon dollar- and other hard currency inflows as collateral for domestic loans. This contradicts conventional analysis which has China as a US creditor. China cannot create dollars or dollar credit; China ‘lends’ energy (coal) and human labor to the US in the form of manufactured goods, these cost the country very little to produce. Repayment is in the form of dollar loans which cost Wall Street almost nothing to produce.
Within China there are two parallel dollar economies. Dollars flow by way of US customers and retailers to Chinese manufacturers. Some are forwarded to the Peoples Bank of China at the official exchange rate where purchasing power is replicated in the form of secured RMB loans into the Chinese economy. The balance are diverted by manufacturers into the loan shark economy where they become quasi-collateral for as many RMB loans as the market will bear. This lending is universally unsecured: when there is no collateral to seize in the place of circulating money, both borrower and lender are ruined.
In China, the shadow banks are very strong, they have distributed losses into the economy a long time ago; these losses have simply not been recognized. Deflation occurs when these losses are finally measured, when inflated Chinese assets are marked to market.
Analysts insist that Chinese dollar reserves can be deployed to bailout its shadow lending business. This is not possible because there is no refunding channel between the central bank and shadow finance. Lenders are simply shells erected to enable the theft of Forex reserves. Any redeployed reserves would be stolen as well. This in turn starves manufacturers of customers who lack vendor credit with which to purchase Chinese goods. Because shadow banks are strong, any unsecured central bank lending would be distributed into the Chinese economy as more unrecognized losses. Attempts to bail out shadow banks precipitates the deflation crisis the Chinese establishment is desperate to avoid: flight of dollar collateral => decline in RMB purchasing power => recognition of losses => bank insolvency and runs out of banks.
Credit cannot expand forever; the ‘Minsky Moment’ occurs when the cost of servicing (unsecured) debt plus the cost of running the actual economy exceeds the cash flow that can be generated by more borrowing.
Figure 8: The yen (in dollars). The Japanese government purposefully aimed to depreciate the yen and monetize government spending at the same time. The outcome has been higher import prices and less consumption, “Conservation by Other MeansTM“.
Figure 9: Argentina would rather not depreciate but it has little choice. The country is desperate to develop even as it becomes another economic road kill. Argentina shares with Brazil, Canada and Australia a dependence upon Chinese purchase of commodity goods; as China falters so does the peso. Sadly, Argentina’s plight does not offer it any relief from its overseas creditors …
Figure 10: Even oil producing giants such as Russia are not immune to dollar preference. Like other countries, Russia uses foreign exchange dollars, euros and sterling as collateral for its own lending. As a result, it is in trouble when the Forex starts flowing out of the country; there is nothing supporting the ruble. Russia’s fortunes have not been helped by its sclerotic ruling cadre and military adventures; Russia is only a powerhouse in the history books.
Figure 11: US dollar – Iranian rial. The chart clearly indicates when Western sanctions were applied in 2012 and later in 2013. Iranians were desperate to swap whatever rials they could get their hands on to gain precious dollars. Oil exports do not give any country wealth, instead the wealth is pumped onto ships and sent away to be annihilated somewhere else. Sadly, our economists don’t see things this way, they call the parasitic claims on wealth ‘capital’ and the wealth that is destroyed … ‘inputs'; they whine when the inputs can’t be had cheaply, they whine louder when they are too cheap. Because of economists’ blindness, it is always a surprise when countries like Iran, Russia, Brazil and Mexico find themselves in hot water; economists refer to the ‘Dutch disease’. These countries are hollowing themselves out as fast as they possibly can. What might save some of them is the ruin of their customers; a bit of oil might remain in the ground until some day in the future when someone can figure out what to do with oil besides burn it up for nothing!
Figure 12: Mexican peso (in dollars). Another petroleum exporter facing the hardest of times: the government is incompetent and corrupt, the countryside is overrun with violent bandits, its largest oil field is in terminal decline … the peso is worth less every minute. Checking through other currencies and countries the indicators are much the same. Save for UK sterling and a few others, the world’s currencies are worth much less — over a considerable period of time — relative to the dollar.
Regarding what can be done, vs. what will be done: consider the role of crashes within debtonomies (click on thumbnail then look to the far right):
Technology and institutions are suggested as change-agents by conventional analysts. Within Debtonomics, the change agent is the process itself. Increasing the capital burn-through rate results in more changes which in turn serve to amplify capital exhaustion. Technology is the instrument of waste, institutions take form to rationalize the use of technology and to provide credit to enable more waste.
Crashes are the consequence of resource depletion (Great Finance Crisis) or aggregated surplus-related costs that cannot be shifted. The outcome is that costs rebound against the aggregators themselves; (Great Depression, Long Depression, ongoing Great Finance Crisis). In advance of a crash there is no general incentive to make management changes so as to reduce risks … even as risks compound. Crashes result in mass bankruptcy and obvious changes including public demand for accountability. Crashing is the hardest way to change but seemingly the only way for Debtonomies.
It is hard to say right now whether the depreciation seen worldwide represents dollar preference or something else. It is possible that currency movements are marketplace phenomena that will revert to some sort of mean over time. In any event, the time to take steps to avoid this problem and energy deflation … is slipping away. Obviously, the most important step is to stop wasting resource capital. Because one way or the other, like it or not, capital is going to be conserved.
“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”
— John Maynard Keynes,
© Copyright Steve Ludlum 2015
Off the keyboard of Steve Ludlum
Published on Economic Undertow on July 15, 2015
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Happy families are all alike; every unhappy family is unhappy in its own way.
— Leo Tolstoy, ‘Anna Karenina’
It is hard to keep up with events.
The current, non-Varoufakis Greek government has surrendered to German austerity demands. How this turns out is anyone’s guess … except for the big picture. At the beginning of the day, Greece and the rest of Europe were broke. At the end of the day, regardless of policy or direction, Europa and Greece will still be broke.
Figure 1: US total credit market liabilities compared to US GDP, chart by @FRED. At the foundation of the crisis in Europe is a false narrative; that countries- or firms can retire their debts by way of labor. Those who do not do so are lazy or thieves. This US chart indicates that economic activity (GDP) by itself cannot retire the debts that are taken on to subsidize it. Maturing debts- plus accrued interest are rolled over into larger loans, debts are diluted over time — inflation — but never repaid.
Greece and the European Union are unhappy families right now but their misery is common. Greeks cannot repay … neither can the Spanish, Irish or Italians. Argentines cannot pay, neither can Puerto Ricans … or Chinese manufacturers. Energy companies whether in Canada, Australia, North Dakota or Brazil cannot pay, neither can citizens/governments/firms in Venezuela, Egypt, Ukraine, etc. All are broke, their pockets are turned out; unhappiness — along with total debt — expands exponentially.
The problem really isn’t so much a credit shortage but energy- and resource crisis coupled with political denial. Energy crisis does not take the form of physical shortages; there are no gas lines, coupon rationing or odd-even days. Instead, oil is depleted and credit breaks down at the margins … Since 1973, world governments have erected every sort of fuel price hedge, all of them make use of credit in some form or other to allocate fuel. What is underway the credit allocation taken to its logical conclusion, where for increasing numbers there is no more credit: ‘Conservation by Other MeansTM
The shortage of fuel => higher prices due to supply and demand => greater need for loans as the use of the fuel is non-remunerative => the combined cost of fuel + credit becomes breaking => insolvent customers can no longer borrow or repay => as credit unravels the fuel bid declines. Within this dynamic, the two larger themes are energy deflation and dollar preference:
– Energy deflation; which occurs when the real price of fuel — its price relative to other goods and services — remains unaffordable even as the nominal price declines.
– Currency preference; takes hold when one currency such as the dollar becomes a proxy for fuel rather than a proxy for commerce: both credit and foreign exchange are discounted against preferred currency, which is hoarded.
During energy deflation, fuel price declines become self-reinforcing: lower prices lead to shortages that adversely affect end users who are unable buy … this leads to even lower prices and more shortages in a vicious cycle. At the same time, the absence of solvent customers offers the appearance of a fuel supply glut. When one currency becomes dominant, fuel becomes scarce due to lack of investment. The price then falls to reflect actual return on use of fuel rather than false returns offered by way of credit — which vanishes. Because the actual return on fuel use is small- or negative, the ultimate fuel price is very low.
As with debt-deflation, the energy scarcity premium is levied against the economy as a whole, it can take any form including decreased employment or solvency, diminished reserve holdings and tax revenues, etc. Keep in mind, when fuel becomes unavailable due to its unaffordability it tends to remain so indefinitely. Fuel shortages do not make the oil users wealthier- or more credit worthy, the driller does not become wealthier by way of reduced output, either.
In order to promote commerce, currency is continually depreciated … as an outgrowth of policy- credit expansion. Because money is continually worth less, the incentive exists for citizens to spend it rather than hold it. Money becomes a proxy for commerce which is always worth more than money is by itself.
Trend price declines in fuel markets indicate currency appreciation; at some point the money as a proxy for fuel is worth more than anything that can be done with the fuel. As a component of energy deflation, currency preference is self-amplifying as commerce is starved of funds and worth less over time compared to holding (a particular kind of) money … which is always good for that last, emergency tankful of gas.
Leadership refuses to discuss energy and the ongoing consequences of wasting energy for lifestyle purposes. It isn’t just Europe: differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the euro other than a defective, failure-prone managing regime. Debt and waste ultimately condemns all currencies as all of them represent the elusive promises of a (low-cost) fill-up at the pump …
Energy deflation and currency preference are headwinds being faced by Greece and the other countries in the eurozone. But that’s not all. European lenders and their clients along with conniving politicians have erected a conduit scheme that is right now breaking down under the weight of its own costs.
Figure 2: The euro is a conduit scheme whereby contributors and the promoters/final recipients work together to take advantage of the conduits — the persons in the middle who are the promoters’ unwitting victims.
Conduit schemes are similar to Ponzis in that recipients gain unearned funds from others by guile and misrepresentation. Whereas Ponzis involve the transfer of savings/’investment funds’, conduits are debt transfer machines. Loans flow from contributors (banks) to recipients/beneficiaries who are often investors or clients of the same banks. The conduits are ordinary citizens who are offered vague abstractions with negligible- or negative worth that nevertheless are part of the ongoing progress sales’ pitch. The conduits are on the hook for the ongoing cost of the borrowed funds; fees, interest costs and repayment of principal: it’s his debt, someone else’s benefit.
Conduit schemes are highly leveraged. Because they are criminal enterprises there is little relationship- and much less concern regarding the ballooning cost of the funds lent to the schemes’ beneficiaries … or the conduits’ ability to meet these costs. As such, the scheme falls apart when conduits are unable to service the beneficiaries’ debts.
Conduit schemes have certain characteristics:
– Conduits are coercive, gate-keeping regimes unlike Ponzis which require voluntary participation. Whether the participant borrows from the contributor or not, the costs to access the scheme’s services are set by the scheme itself, the conduit has no ‘bargaining power’.
– The benefit promised to the conduit is an abstraction: a ‘common good’ such as ‘European Unity’ … or a bailout. The abstract goods are unrelated to the actual funds-transfer.
– The transfer from the contributor to the recipient is always money, in staggeringly large amounts.
– The contributors are always entities with large capacity to generate funds; finance. The recipients are manufacturers, banking system creditors and tycoons.
– Both lender-contributors and recipients are aware of the scheme at hand and both actively promote it: falsely to the conduit (and the public), accurately to each other.
– The recipients who are part of the scam have no investment ‘method’, they simply accept the free money offered in the conduit’s name.
– The hapless conduit is incapable of acting in any interest other than those of the contributor/recipient. Taking on loans and accompanying repayment obligations are conditions of using the system in question! The process is self-limiting: those unwilling or unable to act in the scam promoter’s interest exclude themselves. The recipients gain enormous amounts of money, what the conduits receive has no worth outside of what they brought to the scam in the first place. Like the rest of the world’s industrial economy, the product of the eurozone is waste.
Greece has been rendered insolvent by the euro-scheme’s cost and its fantasy product. Every other EU country faces the same consequences because the relationship between sovereigns-and-scheme is no different from Greece. When enough conduits become insolvent, the euro regime will fall apart. Bailouts fail because they only add to the conduits’ burden.
Best thing to do is to walk away from the scheme and its false promises, to start thinking and acting independently. If enough people escape the outcome is the same as insolvency, the conduit racket unravels. Every ‘investment’ scheme requires a constant flow of new funds/credit; conduit schemes require gullible recruits willing to accept the scheme’s carrying costs. The euro racket insists its product has value … the Europeans can see the absence of value for themselves and come to their own conclusions.
Exiting the euro or introducing alternative currency.
– Because exit by any conduit would require beneficiaries to retire and service their own debts, almost every form of coercion is brought to bear to enforce the scheme. Coercion vs Greece takes the form of a ‘bankers’ strike’ depriving Greece of liquidity. Without swift, sensible action the Greek, and European economies will entirely collapse.
– The introduction of an alternative or parallel currency (unit of account) would bypass the conduit by allowing for internal Greek commerce. Information on an alternative and particulars can be found in papers by Trond Andresen – Robert W. Parenteau as well as Alan Harvey.
Alexis Tsipras; “Greece does not have the required currency reserves to support a return to the drachma.” That is, Greece cannot borrow, under any debt-money regime the country would still require external credit as it cannot provide for itself. Meanwhile, the minutes tick by, the Greek financial position deteriorates as banks remain closed and the government continues to miss interest payments.
On Greece issuing greenback euros.
Figure 3: Chart by Deutsche Bank/Zero Hedge with addendum by Steve Ludlum (2015). Note outcomes in Greece and euro area. Original chart does not show introduction of Greek fiat ‘Greenback’ euros.
– In a fiat scheme, the Greek government would issue funds denominated in euros to repay debts to Greek businesses and banks as well as individuals. This ‘money’ would have no liability attached, it is not debt-money, it would not be loaned into existence. A notable example of sovereign issue money is US Demand Notes introduced during the Civil War during the Lincoln administration by Edmund Dick Taylor. The notes were necessary because big Philadelphia- and New York banks would not lend the the government at reasonable rates.
– The current government in Greece has played into the hands of forces intent on consuming it as if Greece was itself a form of capital. Greece has become pathetic: even as it defaults it begs for more loans. Greece needs to do for itself rather than beg. The Greek government can do so by issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.
– Payments would be made electronically, out of ‘thin air’, the same way loans are made by banks … out of thin air. Payments would be made both inside- and outside the country.
– Issuance of drachmas or any parallel currency would still require Greek repayment of €320+ billion of euro-denominated debts in a state where Greece could not hope to borrow. Greenbacks would offer means for repayment … possibly even across Europe. Whereas repudiation and insolvency will break down the euro conduit scheme; issuance of electronic greenbacks would render the scheme irrelevant. Euros are fungible: Cyprus notwithstanding, each euro is the same as all others. Fiat issuance by a government is the same as fiat issuance by a private sector bank, however, there is no liability to the government issue. The government can issue without digging itself deeper into the debt hole.
– Loans made to Greece are simply issued by banks as credits on a spreadsheet. This ‘bank money’ does not exist until a loan is made. The gain from lending is the requirement on the part of the borrower to repay with money that is more costly to him than the loan is to the lender. Bank money costs the lender almost nothing to create as it requires only keyboard entries. The borrower must repay with circulating money; he cannot create repayment on his keyboard but must beg, steal or more likely borrow repayment- or have it borrowed by others in his name (bailout). Whereas interest cost tends to be a small fixed percentage of the principal payable over time, the expense of circulating money is determined by its availability in the marketplace, by supply and demand. When circulating money is scarce the real worth of repayment can be much greater than the nominal balance due, yet this is invariably when the demand to repay is fiercest, as during a margin call. If the loan is secured and the borrower cannot repay, he must surrender collateral along with other rights. These are always worth more than a keyboard entry.
The point of greenback euros is to give the government the ability to make keyboard repayments, to pay lenders ‘in kind’.
– Money created by lending is extinguished when the loan is repaid. What makes up the supply of circulating money is unpaid debts. Ironically, these are funds that are out of circulation, largely overseas or hoarded. When the sovereign issues fiat to retire debts, the borrowers’ liability is extinguished. There is no net increase in the amount of funds in circulation, which can only occur if funds are repatriated or dis-hoarded which would only take place if there is demand for them that the sovereign could not satisfy.
– By creating ‘greenback’ euros, the Greek government can recapitalize its banks directly, rather than by bailing in depositors. Over time, the flow of liquidity would temper the shortage of funds outside of Greece. A Greek repayment agency would act as ‘lender of last resort’ in place of- or alongside the (worthless) ECB.
– Issuing greenback euros would re-balance the relationship between banks and sovereigns. Creditors have gained power at the expense of sovereigns and the citizens. Greenback euros would represent power to render irrelevant the private creditors and their schemes.
– Location, location, location: Greece will always be a part of Europe. Greek exports and tourism will bring in euros and other hard currencies. Foreign exchange can be leveraged or merged with greenback issue. What would keep fiat issue local is inefficiencies of Greek transfer mechanism. Fiat euros would be more effective if issued by Italy or another, larger European country.
– The euro is the official currency of Greece, it has the same natural right to issue as does a private — crooked — bank in Frankfurt.
– External lenders would not be able to hold countries hostage by withholding funds, should they do so, the government would issue in the banks’ place.
– Whereas drachmas or a parallel currency would allow Greece to leverage its euro purchasing power by way of foreign exchange, fiat greenback euros would render such leverage unnecessary. More on this later …
– Article 124 of the Lisbon Treaty does not specifically prohibit greenback euros. The Greek government would have to repeal the (pro-banking) 1927 Statute of the Bank of Greece which prohibits the government from issuing ‘money’ of any kind.
Any fiat regime would require stringent energy conservation as the external flows of borrowed euros to purchase fuel are what bankrupted the Continent in the first place.
economy energy, stupid!
– The current bailout proposal does not address any of the eurozone structural defects particularly its fuel waste and diminishing purchasing power.
– Spain, Portugal, Ireland and Italy are in the same situation as Greece. What befalls Greece will befall them. They are conduits, their debts cannot be retired, the waste of fuel-capital for lifestyle purposes provides no means to do so.
– The foregoing countries’ debts are currently assets to German firms, the benefits of the European conduit. When the debts are unpaid these assets become instant liabilities, when that occurs Germany must exit the euro or follow the others into destitution.
– Austerity is a permanent condition arising from the ongoing annihilation of irreplaceable capital. Managers need to address the resource issue directly rather than pretending it does not exist. The euro conduit scheme turns out to be a ‘blunt instrument with which to ration capital. Ironically, so also is a breakdown of the scheme! Adjustments to interest rates or bailouts will never return Europe to the ‘good old days’ of American suburban-style waste. Modernity advertises itself as a provider of abundance and prosperity, in our onrushing ‘Age of Less’ modernity becomes increasingly a harsh form of rationing and social control. What is poorly understood is the inevitability of this process.
What ties energy deflation, conduit schemes and currency preference together is credit/loans and debt. The banks have a death grip on us and our life-support system. The mechanism of funds’ dilution as debt repayment is incentive to strip-mine our entire capital base. The credit regime is falling apart under the weight of its own costs, not just in Europe. Government issue money ends a monopoly over a vital private good so that it becomes a public good, in this way the power of the banks to run our affairs is reduced. As a necessary component of this effort, the establishment must hold the financiers accountable for their crimes and negligence. The present conditions and schemes cannot be endured any longer. If the establishment refuses to act the citizens will take matters into their own hands, there will be revolutions.
Outmoded sovereignty- and policy fantasies must be thrown into the trash. The time for posturing is past, nobody is in a separate boat, there is not one labeled for Germans or Italians or ‘others only’. Like it or not every European country is a part of the world, each must carry its own burden of responsibility, which some countries such as Germany currently refuses to do.
Germany — and the rest of the world — must do with its auto tycoons what Germany has done with its nuclear variety and put them out of business. No country or economist acknowledges the ongoing drain of European credit overseas in an endless stream for petroleum energy to run the Continent’s toys. Running out is running out: as the EU runs out of credit, it runs out of petroleum at the same time … once energy deflation takes hold … it is permanent.
Voluntary conservation by way of policy is ‘friendlier’ than the alternative. Left to the status quo in Europe is nationalism and war.
Conservation by other means = Syria.
Off the keyboard of Steve Ludlum
Published on Economic Undertow on July 5, 2015
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Figure 1: Triangle of you-know-what, continuous WTI futures contracts, chart by TFC Charts, (click for big). Petroleum price decline is just one piece of evidence for credit distress; another is the steady increase in bond yields which reflects the anxiety on the part of lenders that they might not be repaid.
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It is difficult to make heads-or-tails out of the Greek melodrama playing out at this moment. To default or not default, in the eurozone or out. Who knows? Observers are confused and so are the participants, what is clear is that the stakes are very high. The group designated to absorb the hardest blows cling to the bottom of the economic mast; workers, pensioners, students and suckers lured into investing in countries like Greece … then again, maybe not. There is the chance of contagion, anything is possible including the chance that some tycoons might lose their fortunes.
Regardless of outcome, the politicians are winners. Even as their follies multiply they meet nothing in the way of discomfort. Walking on gilded splinters, they spend every moment within settings as extravagant as Hollywood sets, fawned over by hordes of lackeys. Stuffed like geese for foix-gras on mysterious ‘luxury food’, their greatest hazard is that they might get too fat … or that they might be revealed as libertines. When their crimes and blunders have ripened they retire with their fortunes; enormous (borrowed) pensions, favorable (borrowed) business arrangements, excessive (borrowed) speaking fees and … (borrowed) … consulting jobs even as their constituents are hounded into penury so as to make the interest payments.
Other winners include the ordinary ‘Brand X’ criminals who take advantage of the vacuum that is the natural outcome of their betters’ ineptitude. Misery multiplies … none of this is new. The die for the current round of crises was cast long before the turn of the millennium … there has been that long to do something about it.
One thing is clear; that the brouhaha in credit markets is a symptom, not the disease. Analysts must observe carefully the larger trends and connect the dots. The problem is not a matter of adjusting the model but with the model itself. Industrial enterprise does not offer a return. Capital and value — and purchasing power — are converted into waste, what stands for ‘wealth’ is a measurement of the wasting process. Our economy has bloated into a monstrous organism that consumes everything and puts nothing back. The disease is the reaching of planetary limits; access to water, fuel, minerals, soil fertility, waste-carrying capacity and credit. Capital resources are being allocated by rationing access to loans. No credit = no resources, taking place under everyone’s nose is ‘Conservation by Other MeansTM‘.
This is a nasty and unpredictable process, what connects the dots together is the common outcome: ‘less’.
The one fact about parties is that they all end. The cocaine runs out. Everyone has to go home.
In the Eurozone and elsewhere, the cocaine — cheap credit — is running out. What remains is the hangover and daunting task of sobriety. Along with the credit, going is the gasoline. Things will never be the same.
‘Never be the same’ are fighting words for the Establishment which entrenches itself more deeply into the present even as both it and establishment become less relevant. Because it has lost the ability to reform itself, the establishment lashes out in a reflexive attempt to preserve its vanishing prerogatives. This is self-evident: if reform was possible it would have already taken place, the reforms would have prevented the crises.
Managers do not grasp the currency risk that emerges from both continued austerity programs or default. Economies are containers of social- and political values, shared understanding built upon edifices of trust. Within economies a collective suspension of disbelief takes place that insists bits of colored paper or electronic data are worth something. The trust emerges as more people share the same ‘worth’ idea and gain benefits from it.
Germany is Europe’s responsible party, it is EU’s paymaster and the long-time primary beneficiary of the Euro-economic activity. Mercantile Germany sits at the center of Continental trade; German euro surpluses are the consequence of its partners’ deficits. Ironically, German currency risk is no different from Greek risk, because both countries do business in what amounts to a foreign currency. Germany holds a borrowing advantage at the moment but both are built with the same financial armature, the defects of one country are the defects of all the others. The idea that Germany can integrate Europe around its economy … then somehow pull up the ladder when convenient is a hallucination.
Presently, managers carelessly discount one group’s sense of worth then another’s. Today is Greece, tomorrow is another country. Trust wavers then evaporates, at that point the economy is junk and the money is worthless, even if ‘the numbers’ indicate otherwise.
Reckless Germany gambles with euro risk even as it cannot afford to do so. It holds trillions of EU liabilities both in the form of currency and credits in its banking system along with ongoing business relationships with companies outside of Germany and the Eurozone. German wealth is nothing other than the trust earned over the entire post-WWII period. The ideal is that each European will engage profitably with others; not as slaves, some paying while others collect. Germany pretends it controls its destiny but this is something it cannot guarantee. Trust cannot be directly inserted into the minds of others: what Germany has cultivated carefully with one hand it casually undermines with the other.
Right now Germany plays the part of enforcer for Europe’s criminal banks. The blows it levels against its neighbors rebound against itself; the outcome of this is slow suicide. The impaired assets on European balance sheets outweigh investor equity and bondholder credit together. Europe is insolvent, liabilities are looking for a place to hide. The logical destination is Germany whether there is a euro or not. Within the euro, Germany cannot escape the full weight of its neighbors’ liabilities. Consequently, it has no choice but to succeed at its unification endeavor … otherwise, the worthlessness of the others’ balance sheets will be marked up against its own.
German banks and industry are right now stuffed with euros but this is momentary. There is no way possible for the current conditions within German finance to survive the demise of the currency. Germany cannot simply pick up its luggage and move itself away from Europe taking its ‘wealth’ with it. There is no road map for Germany to get from the euro to a substitute currency space The Germans and other creditor countries frozen to the spot: any sign that the Germans might abandon the euro would be the alarm for the others to do the same, to the instant ruin of German creditors, who are owed tens of trillions of euros.
The end of the euro anywhere within the Eurozone would also cast into doubt the security of Germany’s bank deposits. Uncertainty would trigger a run on German banks just as there is a run on Greek banks today. Germany would find itself bound by domestic politics to defend the euro to the bitter end, to protect its depositors. By doing so, Germany would become the fool of the market, the dumping ground for all European liabilities. This is a fate it cannot avoid, because of its long-running success it is the only European country with money!
The alternative strategy would have Germany racing Greece and Italy out the door. The survivor would be the first to grab a lifeboat on the Titanic. This is the nature of unraveling Ponzi schemes where the few winners get out early.
Add the currency trap to Keynes’ liquidity trap amplified by the political expediency trap. In its desire to party forever Europe is confronted with the persistence of liabilities that are generated along the way. These liabilities pitch Germany’s tent on the lip of the abyss. With the passage of time and accumulating mis-management, holders question whether euros are ‘worth the hassle’ and ‘worth the risk’ or not. This is not the proper sort of inner dialog to have about any currency.
With a non-euro currency, Germany’s option would be to depreciate. Doing so at a scale that would ‘manage’ liabilities would be default by another name with the costs falling on German depositors. To choose otherwise and not depreciate would leave Germany facing the same ruin as Greece faces right now; it would ‘become’ Greece, with massive and unsupportable demands for repayments in a foreign currency, a shortage of money, the absence of liquidity and a breakdown of export trade.
The only way for Germany to manage EU-legacy repayment claims would be to re-denominate them from euro to d-mark and then somehow inflate them away against a background of economic growth. However, jettisoning the euro would cut Germany off from its now-captive European markets. This would eliminate the growth potential; Germany would be crushed by its debts in a deflationary environment.
As bad as conditions would be for Germany, they would be worse for the other European countries. There would be a scramble for hard currency: everyone for themselves. If this is to be a hard German currency there would be a shortage much worse than there is today. The Europeans would be faced with the task of cobbling together a monetary system while the rubble of the current regime collapses on its head. Constructing a new model would require enormous investment of funds and good will that the Continent does not now possess; a breakdown would remove any possibility of either, there would be insufficient capital with which to (re)build anything.
The euro monetary union has had obvious structural defects from the get-go as admitted to by the Euromasters themselves. Now there is resolute refusal to address these defects even as the entire European enterprise accelerates to destruction. If not now, when? Does Angela Merkel or Wolfgang Schäuble honestly believe the Greeks will ever trust the Germans again after such rough treatment at the hands of faceless Troika functionaries? What good can this portend for German business? How do German businessmen expect their enterprises to succeed, on what alternative planet?
Dire times are when political instincts abandon professional politicians at a moment when these instincts are necessary. The Germans refuse to share any of the hardships their policies inflict upon their neighbors. Germans whine but their finance industry underwrote the bad loans, with eyes wide open, for the benefit of German manufacturers … whose ‘goods’ cannibalize the trading partners’ capital. German finance ignored the risks as it ignores currency risk today.
There are depositors run from Greek- and other banks into Northern Europe. The run itself is a part of the long-standing flow of funds from the rest of Europe into Germany’s national account. The ‘First Law’ states that as surpluses increase, the cost of managing them becomes greater than the surpluses’ worth. This can be seen in Europe where cost of Germany’s current account surplus is a shortage of liquidity and broken markets. Germany must unwind its surpluses, reducing the costs to both its customers and itself. It can unwind its smug sense of institutional superiority at the same time.
Europe has been in a finance crisis for years, there has been plenty of time to ‘innovate’ solutions. Sadly for the Euros, all of the real solutions require giving up something … which nobody wants to do. Instead there is punishment for those tied to the mast; the workers, pensioners, students and suckers lured into investing in countries like Greece. The best the bosses have come up with so far is bailouts for giant banks, ‘appropriation’ of depositor funds and (incoherent) public relations.
Europe needs debt relief and stringent energy conservation. Finance collapse turns out to be the implement of conservation as bankrupt Europeans cannot drive, small countries with nothing to offer but their own worthless currencies cannot import fuel. Finance dares not risk relief to Greece because it cannot withstand the losses. Relief to Greece means granting relief to other Euro-deadbeats France and Italy (Germany). What is taking place right now is a margin call against the euro. The absence of relief insures the collapse of the entire finance edifice as defaults proliferate and distrust propagates.
In Part II we will look at some of the steps that can be taken including The Greek government issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.