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Published on the Economic Undertow on May 2, 2016


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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 …

Triangle of Doom 042916

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

Everett Rosenfeld

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.

RE & Steve Collapse Update 2

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Published on The Doomstead Diner on April 27, 2016


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In our latest installment of the Collapse Update Report, Steve and me cover Energy Industry Bankruptcies, Mass Shootings & Suicides and trying to resolve monetary and fiscal problems utilizing Gold as Money.

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Ben Franklin’s Revenge

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Published on the Economic Undertow on February 29, 2016


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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.

Screen Shot 2016-02-23 at 12.55.57 PM

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.

limits-to-growth-forecast copy

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.

Lawrence H. Summers, Washington Post



It’s hard to know whether to laugh or cry over the absurdity of it all. Absurdity of it allAbsurdity of it all.

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.

MZM Velocity

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)


Net Interest Margin

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).

US Note

— 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.









A Market Collapse Is On The Horizon

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Published on the Oil Price on February 13, 2016


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What is ahead for 2016? Most people don’t realize how tightly the following are linked:

1. Growth in debt
2. Growth in the economy
3. Growth in cheap-to-extract energy supplies
4. Inflation in the cost of producing commodities
5. Growth in asset prices, such as the price of shares of stock and of farmland
6. Growth in wages of non-elite workers
7. Population growth

It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high a population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest. The whole system tends to collapse.

How the Economic Growth Supercycle Works, in an Ideal Situation

In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

Over time, the cost of commodity production tends to rise for several reasons:

1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.

2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.

Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.

Related: The Hidden Agenda Behind Saudi Arabia’s Market Share Strategy

4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

Figure 2. World oil supply and prices based on EIA data.

It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

Figure 5. Author’s illustration of problem we are now encountering.

Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

The U. S. Oil Storage Problem

Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

Related: Why Today’s Oil Bust Pales In Comparison To The 80’s

Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.





Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015. Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

Figure 8. Total Oil Products in Storage, based on EIA data.

EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be about 700,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

(Click to enlarge)

Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

What is Ahead for 2016?

1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.

Related: OPEC-Russia Rumors Persist After Comments From Rosneft Chief

2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.

3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.

4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.

6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.

7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.

8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.

9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.

10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.

Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.


We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

Fires Rage, Words Fail

fire rage gc2smOff the keyboard of Thomas Lewis

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fire rage

Published on The Daily Impact on February 5, 2016

The Daily Impact has been a quiet place lately, and I will tell you why: words fail me. The scale of the global crash now enveloping us, and the fecklessness of the leaders pretending to protect and defend us, exceed the vocabulary of this wretched scribe. If one manages, however briefly, to comprehend the enormity of the multiple disasters bearing down on us, then one accidentally sees part of a presidential-candidate debate and has to pick up  pieces of one’s skull all over the room again.

How bad it is in the United States:

  • One verse that has been sung for years now by the “Don’t Worry, Be Happy” Chorus is that we are converting to a service economy, in which half of us will serve meals, keep house and otherwise cater to the other half, and that will work fine. But now — just now — the malaise that has been eating at all the other economic enterprises of the country has attacked the restaurant industry. “If services stumble too,” observes a writer on David Stockman’s website, “there truly is nothing left.”
  • Another verse from the aforementioned Chorus: We may not make much anymore, but we sure move stuff around, and that employs a lot of people and keeps the economy chugging along. Not so much anymore. “The Transportation Recession Spreads,” says Wolf Richter of WolfStreet, with the subhead “Hope came unglued all over again.” Orders for new 18-wheeler trucks have been falling since September of 2015, because of declining freight volumes, and after a slight recovery in December (hence the hope), plummeted nearly 50% (year-to-year) in January. Rail freight is experiencing a similar, vertigo-inducing slump.
  • American jobs of all kinds are being vaporized at a rate not seen since the Great Recession got traction in 2009. Just in January, layoffs quadrupled.  See this partial list of job cuts so far this yearand an assessment of the mass layoffs just ahead. Every month the government issues, and the “Happy” Chorus extols, monthly reports lauding robust job-creation and the continued low (seasonally adjusted, statistically weighted, seasoned-to-taste) unemployment rate, while ignoring the gut-wrenching disappearance of hundreds of thousands of people from the job market. These people, six million or so of them now, are not unemployed. They are vanished.
  • The U.S. oil industry, which was promoting itself just a few months ago as the progenitor of a new American Revolution, of a return to American energy independence, and on, and on — is a smoking ruin. Shale drillers are in the process of reporting losses of about $15 billion for 2015; reductions of 25 per cent and more in their balance sheets because of devalued oil; and levels of debt that  forced 42 oil companies into bankruptcy last year and will drive under many more than that this year. Nor is the carnage limited to the shale patch; from Exxon down, Big Oil is experiencing shrinking profits, tumbling stock prices and credit ratings.   

As glum as the situation and the prospects are nationally, they are even worse abroad — for China, Russia, Brazil, Venezuela, Canada and much of Europe and Asia. (Please, valued commenters, find me a country that is doing well, with rising employment and wages, a stable currency, manageable debt, decent health care and security for its citizens. Let’s write about it and then move there. Assuming it’s on this planet.)

Failing that, as I survey the tides of misery rising everywhere, the Horsemen of the Apocalypse riding everywhere, the hopes and dreams and people dying everywhere — words fail me.

All of this confirms me once again as an Age Optimist — a person who, despite everything, maintains a sunny unshaken faith that before these events play themselves out, he will be dead.


Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

A Look to 2016

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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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

Triangle of Doom 123115

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

fredgraph velocity

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.

fredgraph-gasoline sales

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.





Tishrin 2

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.










Pretend to the Bitter End

mickeymouseclubgc2smFrom the keyboard of James Howard Kunstler
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Originally Published on Clusterfuck Nation January 4, 2016

Forecast 2016

There’s really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will be demoralized. Its denizens will act up and act out. Its wealth will evaporate.

Given where we are in human history — the moment of techno-industrial over-reach — this crackup will not be easy to recover from; not like, say, the rapid recoveries of Japan and Germany after the brutal fiasco of World War Two. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen.

Those terms might be somewhat negotiable if we could accept the reality of this re-set and prepare for it. But, alas, most of the people capable of thought these days prefer wishful techno-narcissistic woolgathering to a reality-based assessment of where things stand — passively awaiting technological rescue remedies (“they” will “come up with something”) that will enable all the current rackets to continue. Thus, electric cars will allow suburban sprawl to function as the preferred everyday environment; molecular medicine will eliminate the role of death in human affairs; as-yet-undiscovered energy modalities will keep all the familiar comforts and conveniences running; and financial legerdemain will marshal the capital to make it all happen.

Oh, by the way, here’s a second element of the story to stay alert to: that most of the activities on-going in the USA today have taken on the qualities of rackets, that is, dishonest schemes for money-grubbing. This is most vividly and nauseatingly on display lately in the fields of medicine and education — two realms of action that formerly embodied in their basic operating systems the most sacred virtues developed in the fairly short history of civilized human endeavor: duty, diligence, etc.

I’ve offered predictions for many a year that this consortium of rackets would enter failure mode, and so far that has seemed to not have happened, at least not to the catastrophic degree, yet. I’ve also maintained that of all the complex systems we depend on for contemporary life, finance is the most abstracted from reality and therefore the one most likely to show the earliest strains of crackup. The outstanding feature of recent times has been the ability of the banking hierarchies to employ accounting fraud to forestall any reckoning over the majestic sums of unpayable debt. The lesson for those who cheerlead the triumph of fraud is that lying works and that it can continue indefinitely — or at least until they are clear of culpability for it, either retired, dead, or safe beyond the statute of limitations for their particular crime.

Of course it says something about the kind of society we’ve become that such racketeering has become so normative and pervasive, and that evading responsibility for its consequences has been elevated to a sort of enviable skill-set. In fact, the art of evasion has taken the place of what used to be called honor. We live in a low time that honors only low men. Ironically, we affect to admire only “superheroes” because it has become impossible to imagine mere humans showing courage, fortitude, and respect for truth. All conduct is provisional and equivocal. Every law can be parsed to serve what it was created to oppose. Anything goes and nothing matters.

In this year’s go-round, I’ll try to describe what happened so far, where we stand, and where I think things are going. My method is emergent and heuristic. I’m allergic to charts and graphs, which are among the prime tools of the racketeers and the wishful thinking impresarios for bending the truth. Sadly, also, statistical analysis plays into the fantasy that if you can measure enough things you can control them. (And if you mis-measure things on purpose, you can pretend to be in control.) This illusion of control is the weakest ingredient in the financial system. When it does finally reach failure mode, it tends to produce calamity.

I’m more interested in the longer view than the moment-at-hand. The swirl of events generally includes more vectors and factors than any calculus can manage. Outcomes easily slip away from the linear. Ultimately this is a exercise that might be called a history of the future — that is, just a story.

Banking and Markets

The big event of the year past was the Federal Reserve’s Waiting for Godot act concerning the fed funds rate. When Godot finally showed up two weeks before year’s end, it was in the expected-but-pitiful form of a 25-50 basis point hike — which gives the impression of a possible 50 point rise, but with the way more likely probability of actually sticking to the lowest end of the gradient (and actual overnight lending rates were already a few basis points above zero, so the net was really less than 25 basis points.)

The background of this charade was pretty clear to anyone not brain damaged from the rigors of playing Candy Crush on their phone: the Fed was hiking rates into a wobbling global economy; they were forced to act at year’s end or surrender the last shreds of their credibility (i.e. being taken to mean what they say); and they left the door open to retreat in 2016 if necessary. But the damage to the Fed had already been done. They were unmasked as a propaganda machine powerless against the real tides of economy, creating only mischief and misunderstanding, and ultimately undermining all soundness in the relationship between money and real human activity. Anything they do in the election year ahead will be viewed with suspicion, specifically of pimping for Hillary Clinton’s coronation. And her relationship with the biggest banks is well-understood. So they had to make their grand gesture in December.

The stock markets skidded a little below sideways this year (except for the Nasdaq) which glided up more than 5 percent (techno-grandiosity rules!) — with one upchuck at the end of the summer that was remedied by China bailing out its own janky stock markets and playing games with its currency.

Gold and silver continued their four-year swoon thanks to repeated massive wee hour dumps of futures contracts before the traders in New York even got out of bed. The charts conclusively show this shady activity, raising the question: why would any seller want to hugely undercut the price of what he seeks to sell by selling into a market where no buyers are present… or even awake? The answer seems to be: to make the dollar appear more firm than it really is.

The many years of ZIRP (zero interest rate policy), combined with the previous accumulation of debt unlikely to be paid back has made it ever more difficult to issue new debt with any likelihood of being paid back. But ZIRP has also nullified the relationship between interest rates and risk. In a system unencumbered by central bank interventions, interest rates would have to go a whole lot higher on instruments with such poor prospects. Of course, higher interest rates would only make new bonds that much less likely to be serviced by their issuers, especially governments laboring under Himalayan-scale debt loads. The tension in this equation has been provisionally papered over by the use of interest rate swaps, reverse repos, and other abstruse machinations and derivatives aimed at suppressing true price discovery.

The corporate stock buyback fiesta of 2015 was the perfect example of an anything goes and nothing matters ethos. It happened in full view of everyone, and it happened solely to assure corporate executives that they would enjoy their bonuses and fringe benefits and nobody complained about it. Even so, it barely accomplished anything index-wise. The markets went sideways even with all that insider action because the fundamentals suck and the global economy was obviously sinking into a deflationary contraction.

My auditors derive no end of mirth from my attempts to predict the stock markets each year. So, to add to their enjoyment, I’ll be even more precise this time around. I predict that the S & P will top on January 15, 2016, at 2142, and then crumple below 1000 by June. Carnage at the margins of the bond market — high yield paper — will spread to the center and we’ll finally see the re-pricing of risk back in the European sovereign market. French, Spanish, UK, and Italian 10-year paper below 2.0 percent? What a colossal joke that’s been! Fasten your seat belts and check your pension funds.

Oil and Deflation

The oil picture has bamboozled both the broad public and the smaller cohort of supposedly sentient observers. I maintain that the deflationary contraction underway worldwide is largely due to the fact that the world has run out of a particular form of oil: affordable oil. Turns out the peak oil story is still true, just playing out differently than a lot folks predicted. We’re at the mercy of a pretty basic equation: oil over $75-a-barrel destroys industrial economies; oil under $75-a-barrel destroys oil companies. There is no “just right” Goldilocks place on the gradient.

The public got bamboozled by the Ponzi scheme of shale oil. It seemed like a fabulous techno-rescue: the “fracking miracle!” It operated by converting mountains of cheap leveraged capital into a very rapid bump-up in US oil production. It got full traction after a couple of years of $100 oil squashed economic activity — and then squashed demand for oil. Whoops. The problem was that shale oil was very expensive to produce even if reduced demand drove the market price very low. Back at $100-plus a barrel, hardly anyone made any profit on shale. At $40 a barrel shale was a laughable loser. So, in 2015, the shale oil companies laid off thousands of workers, idled the drilling rigs, and kicked back to pray that the price would go back up. Which it didn’t. Incidentally, all kinds of associated ventures went bust with that. The landscape of North Dakota is littered with unfinished garden apartment complexes that may never be completed, and the discharged construction carpenters and roofers drove back to Minnesota ahead of the re-po men coming for their Ford F-110s. Sad, I know….

The rapid ramp-up in shale oil production from 2010 to 2014 was intended as a demonstration project to convince Wall Street to stuff ever more investment capital into oil companies. It was also part of an enormous PR campaign to allow the people running things in business and government to pretend that America’s oil problems were behind us. The “shale miracle” was going to make us “Saudi America,” It was going to boost us into “energy independence.” It played into the Master Wish beneath all the wishful thinking in America: Please, God, let us be able to drive to WalMart forever. It wasn’t so much an evil conspiracy as a feckless collective effort in denial and self-delusion

It happened that a lot of that Wall Street finance came in the form of high-yield (junk) bonds issued by the oil companies — with fat commissions for the big banks to cream off in creating the bonds. So when the price of oil crashed below $50, a lot of oil companies — especially the smaller ones with no cash flow — couldn’t service the interest payments. What lies ahead in 2016 is a debacle of bond defaults and corporate bankruptcies in the US oil patches. What’s more, because of the peculiar geology of shale oil and the rapid depletion of the fracked wells, it is necessary to incessantly drill and frack new wells to keep production even level, let alone rising. That calls for evermore rounds of new financing. But since the current financial obligations can’t be serviced, new financing will not be not forthcoming. And so neither will additional production. All of which means that shale oil production is going to crash in 2016 when the backlog of previously-drilled but untapped wells runs out. I’ll predict that US oil production will go down a million barrels a day before 2017. That includes the roughly 5 percent annual decline of conventional oil.

Some might suppose that such a crash would drive prices back up again as the supply necks down. There are a couple of problems with that supposition. One is that the previous round of $100-plus oil did a lot of permanent damage to the economy, in particular to small businesses and households (i.e. middle-class workers). That damage looks more and more permanent, meaning a smaller aggregate economy and still-shrinking demand base as businesses and citizens go broke and stay broke. If oil prices do return to a level that would justify exploration and production of expensive, hard-to-get oil, (probably north of $110) it will only crash industrial economies again — and there are only so many times this can happen before the system is so damaged recovery is no longer possible. Another problem is that the oil price crash has done significant damage to the oil industry itself, including its credibility as a viable target for investment. Contrary to hopes and expectations, current low oil prices are doing nothing to re-stimulate economic activity. It all has the look of a self-reinforcing feedback loop, a downward spiral in a global complex networked system getting clobbered by the diminishing returns of its principal activities.

Hence I would predict that the price of oil will fall further in 2016, below the $30 mark, and that it will lead to more carnage in the oil industry, in banking and debt defaults, and to new manifestations of geopolitical trouble that could lead to profound oil scarcities and rationing. We can’t seem to face the fact that our techno-industrial paradigm was designed to run on cheap oil, which is just no longer available.


People are getting very nervous. They can’t help harking back a hundred years to the mysterious lead-up of the First World War, which brought an end to the first iteration of globalism with a bang. The great nations of 1914 just seemed to get haplessly drawn into a debacle that no one had bargained for — the slaughter of the trenches, bankrupted national treasuries, the fall of three dynasties, the rise of the fascists and Bolsheviks… ugh!

Many people with more than half a brain are seeing similar motifs today — a general movement toward major war by way of sheer fecklessness. For instance, the ongoing effort led by the USA to antagonize Russia for no apparent good reason, dragging the dupes of NATO along with it. I won’t rehash our stupid operation to destabilize Ukraine. David Stockman covered that so nicely last week in his blog. Anyway, that Ukraine action was all back in 2013-14. Ukraine is now a failed state. I predict that in 2016 Ukraine will beg Russia to take it back into the Russian sovereign fold, to become once again a province of greater Russia. However, Russia will demur. Russia actually can’t afford such a woebegone, unreliable, and expensive ward. So Ukraine will then go begging back to the US and NATO to dole out financial life-support. By that time, the US and western Europe will be so economically distressed that they will only pretend to bail out Ukraine, just as they pretend to bolster their own economies via smoke-and-mirrors central bank shenanigans. Ukraine will sink into a World Made By Hand level of neo-medievalism, blazing the trail for everybody else in the world. Think: lawlessness, banditry, gangster autarky, neo-serfdom. Sounds harsh, I know, but it is what it is.

In 2015 the action between the US and Russia shifted to Syria. Our monumental blunderings in the Middle East, which included enabling the creation of ISIS, left us bereft of any coherent way to counter the barbarism and animus of radical Islam. So, our “adversary” Mr. Putin stepped in, on the premise that destabilizing what remains of the Syrian government under Mr. Assad was not such a good idea — as he explained very clearly to the UN General Assembly. It remains to be seen whether Russia will be able to pacify Syria, much of which lies in ruins now. But unlike the USA, Russia doesn’t have ambivalent intentions where ISIS is concerned. We’ve pretended that any old freelance gang opposing Assad is our friend. Russia’s aims are pretty straightforward: prop up Assad, rescue whatever governing institutions remain in Syria, and smash ISIS. In exchange they get a warm-water naval base on the Mediterranean. That’s supposed to be an existential threat to the USA.

The basic regional beef there, anyway, is between the Sunni and the Shi’ite, which is to say Arabian-sponsored Islamic maniacs versus Persian-sponsored Islamic maniacs. Unfortunately, that translates into the Saudi Arabia / USA and Iran / Russia contest of wills. Throw in some league wild-card players like Hezbollah and Israel and you have a pretty yeasty mix for rising animosities. Sadly, the US can’t seem to formulate a strategy that doesn’t make things worse for people in the region or for the US homeland (or for our allies in Europe, plagued by refugees they cannot comfortably absorb and the awful threat of terror events).

I expect in 2016 that Obama’s policy will be to just get out of the way of Putin and see what happens. He doesn’t have much left in the kit-bag for now. The worst thing to come out of this for Obama, really, is if Putin can succeed in pacifying Syria, America’s leaders will look bad — incompetent and foolish — which is the actual case, of course. Maybe sometimes you just have suck up your mistakes. Much as Obama dislikes Hillary, I doubt he wants to upend the whole groaning Democratic Party Washington DC patronage pyramid, so he might be careful to not start World War Three during the election year. He can leave that to Hillary, should her coronation actually occur on Jan 20, 2017.

Anything might happen across the Islamic world in 2016. Every Islamic nation is grossly overpopulated, given the poor quality of the terrain. Most of them occupy territory that has been horribly degraded during the population explosion of the past hundred years, and stand to suffer hugely from climate and weather abnormalities ahead. Governments will fall and may not be replaced by anything resembling a coherent polity. Algeria, Libya, Egypt, Iraq (fuggeddabowdit), Pakistan, Malaysia, Indonesia are all only marginally stable for now. Afghanistan is hopeless. We will never control the terrain or the people who live there. But we will continue to maintain a garrison to defend Kabul, pretending that control of the capital city is enough.

And then there is the Big Kahuna: Saudi Arabia, with its dwindling oil income and growing multitude of dependant layabouts. King Salman’s misadventure in Yemen’s civil war has birthed another failed state and dented Saudi Arabia’s resources. If the other clans of Arabia, whoever they turn out to be, overthrow Salman, they will also create an opening for ISIS-flavored non-royals to incite a multi-dimensional civil war. An upheaval in KSA would surely produce profound disorder in the oil markets. The USA would get suckered into this tar-pit wrestling match. The attempt to stabilize our old “ally” with troops on the ground would probably work out about as well as our adventure next door in Iraq did. The further result will be more conflict in this broad swathe of the world over remaining scarce resources, especially water, along with hot war at various scales, and ever more massive movements of populations fleeing the turmoil. If they journey to Europe, they will be turned away. The Camp of the Saints becomes a reality show.

Turkey, with the second-largest military in NATO, could have been a force for stability in the Middle East, but strongman President Recep Tayyip Erdo?an can’t get out of his own way. He can’t decide whether he’s on the side of the Islamists or the West and his attempts to play footsie with both, while piling up private booty, have left him suspect among both camps. Lately he has ventured into such misadventures as shooting down a Russian warplane and receiving stolen goods in the form of ISIS oil shipments from Syrian and Iraqi wells. He was unable to enlist NATO into joining the argument over Turkish airspace and has fatally alienated his western auditors by his actions. He’s lucky that Putin didn’t turn Ankara into an ashtray. The Kurds on Turkey’s southern border threaten to start a civil war by asserting their own nationhood, now just de facto. Meanwhile, the Turkish economy is faltering again, reinforcing its longtime status as “the sick man of Europe.”

Europe’s decades as the West’s delightful tourist theme park are over. The continent is back to being a dangerous free-for-all of nations, tribes, and factions, with the overlay of alien Islamic intruders making things worse. Who knows who or what will blow up next over there. When it becomes obvious in 2016 that the 2015 refugee influx was not a one-off that the Eurozone could comfortably absorb, the individual nations will commence the deportations. Getting to that has been a difficult road, with the headwind of the memory of the Holocaust. But then, unlike the Jews of the 1930s, the Islamists are slaughtering concert-goers, booby-trapping subways, shooting civilians in restaurants, beheading journalists, and explicitly threatening the existence of European society. This business with Islam is different and we are now four generations past Auschwitz. Europeans may just have to get real about defending their respective and collective cultures.

2016 will be the lead-up to the French presidential election of 2017. François Hollande has the whole of the coming year to demonstrate his weakness. But can the French stomach Marine Le Pen’s demi-fascist National Front. The French right wing is not for reduced government, just for pushing people around differently. As 2016 goes on, look for good ole Sarko (Nicolas Sarkozy) to flank them both. Sarko is a bit crooked, but as strong-willed as Le Pen, and not as crazy. French voters will be fed up Hollande-style squishiness, but unready for a female Hitler. Sarko is the Devil they know and they will want him back.

The same election time-line goes for Germany. Voters there will increasingly revolt against what Mutti Merkel represents: how she jammed a million Islamic refugees down Europe’s craw. They’re not shopping for another Hitler, either, but they will be looking for a strong-willed someone to protect the volk against the foreign hordes, of whom they are getting good and goddam sick. There is also the matter of Germany baby-sitting all the bankrupt nations to the south.

As 2016 unfurls, the PIIGS will spin back into financial intensive care. Spain, Italy, Portugal, Greece will eventually have to face the absence of buyers for their bonds and the falsity of their low interest rates. Spain, for one, is not finished with the Catalonian secession problem. Portugal needs to return to the 18th century. The clowns in Brussels have no plan to repair the finances of Euroland beyond massive QE that cannot be endless. Whoever replaces Merkel as chancellor may be the one who senses that Germany ought to lead the way out of the Euro currency fantasy and all the awful liabilities it entails.

Great Britain is a basketcase in search of a basket to land in. It has no economy left besides the swindlers of “the City,” its version of Wall Street, and that janky establishment is losing its grip as a desirable financial capital after years of sharp practice, with much of its action moving to Shanghai. Conservative Prime Minister David Cameron is a catamite for the big banks. The Labour Party leader, Jeremy Corbyn is an old-school romantic unionist Leftie in a nation with little remaining industrial workforce. Unlike France or Germany, Britain’s parliamentary system can route a government on short notice. The debt implosion of 2016 and rescheduled Great Depression 2.0 will thrust UK Independence Party’s Nigel Farage into the spotlight to salvage what remains of Old Blighty.

The big question around Asia is whether China can navigate its way out of the blind alley it’s trapped in: a banking system steeped in crony corruption, bad debt everywhere, and malinvestment like unto nothing the world has ever seen before. The country is choking on excess industrial capacity just as the world enters its epic Peak Everything contraction. Can they keep on pumping out salad shooters and Han Solo dolls to a world drowning in plastic crap and too broke to buy more of it? They still have $3.4 trillion in foreign exchange reserves to theoretically bail themselves out. But that starts affecting the value of their pegged currency, and their main trading partner (us) can play endless currency war games with them to dissuade them from dumping the rest of their accumulated US treasury paper, which, of course, only pisses them off more and makes them look for surreptitious ways to fight back — which is what currency war is all about. Which is also exactly why China (with Russia and others) has started up its own Asian version of the IMF, the BRICs Development Bank, and an alternative to the SWIFT international clearing system.

Chinese economic and financial statistics are even less reliable than the overcooked sludge offered up by the US agencies, but the tanking of commodity prices worldwide tells enough of a story: China is sure not expanding as much as the good old days, if at all. It’s been a great ride, but it was super-quick, and it happened just prior to the world reaching the bona fide limits to growth. China’s contraction may be as quick as its rise, and if that is the case, it will be rough ride into the same vortex of contraction that everybody else is entering.

My one wild-hair prediction about China for 2016: after Kim Jong-Un pulls some bonehead move against his neighbor to the south, China invades North Korea and installs a more rational management regime there. Kim Jong-Un ends up as a lounge singer in Macao. Lucky boy.

Homeland Frolics

            Be very afraid. Donald Trump isn’t funny anymore. He’s Hitler without the brains and the charm. But he’s gotten where he is for a reason. He expresses perfectly the depravity of the culture he springs from: narcissistic, morally rudderless, vulgar, shameless, lost in fantasy, and sadistic. Hillary (last name unnecessary) is not much better, but she’s not nearly as dumb, only more thoroughly corrupt. These are the avatars of our two major political parties. Be very afraid and weep!

The good news is that political parties do occasionally blow up and vanish from the scene, and that would be an interesting possible outcome of the 2016 national elections. Trump could accomplish this much more briskly with the Republicans. He’s made it clear already that he feels zero loyalty to the Red Team, and noises offstage can be heard that the party faithful would find some way to either expel or end-run the Donald Creature. Given our litigious society, one outcome of this would be an election held hostage by the courts. Oy vey is mir. Another possibility is that a message would be transmitted to the Trump Team from some combination of rogue elements in the NSA and the US Military that he’d better drop out or else. It would be done in such a way that Trump would not be able to use it for further narcissistic grandstanding. Were that not to happen, and were Trump somehow able to get elected, I predict there will be a coup d’état against him inside of April 2017. Hello constitutional crisis. Where it might go from there, no one can say.

Of Trump’s opponents for the Republican nomination, the only one I can grudge up any interest for is Rand Paul, who is a truly disruptive figure without being a maniac. In fact, I think he would make a good president, sober, thoughtful, unencumbered by obligation to the forces of racketeering. But he appears to have a near-zero chance of winning the party’s nomination.

Hillary is the opposite of a disrupter; she is the racketeer Godmother. As things proceed, however, she would merely preside over Great Depression 2.0. Unlike FDR in GD 1.0, Hillary would inspire no trust among a fractious population out for revenge against the very enablers of Hillary’s election, namely the Wall Street bankers. The nation would fall into factional fighting and possibly even regional breakup under Miz It’s-My-Turn. But I get ahead of myself…. The question at hand for 2016 is: Can Hillary be stopped. At this point, I don’t see how, given all the weight of the party machinery calibrated in her favor by the equally odious National Party Chairperson, Congressperson Debbie Wasserman Schultz.

Bernie Sanders mounted a noble opposition campaign, and perhaps it is too early to write him off here before the Iowa caucuses and the New Hampshire primary. Perhaps something can happen and he can at least slay the candidacy of Rodan the Flying Reptile – my other nickname for the Hillary Creature. Apart from that is my basic aversion to Bernie’s political philosophy as a self-proclaimed “socialist.” I know it sounds like a glib dismissal of a cartoonish political label, but Bernie’s self-applied label implies ever more intrusion by ever bigger government into the life of this nation. History wants to take us in another direction now, away from so much hyper-centralized control, and we go against the flow at our peril. While I admire Bernie’s presence as a vocal opposition to Hillary, I’m not keen on what he’s actually selling.

I know that Martin O’Malley is still “out there,” but he appears to be a blank cartridge, or a six-pack in search of worldview, and I don’t believe as some observers have averred that this is the fault of the media. In the few Democratic “debates” held last fall he offered next to nothing outside a conventional punch-list of shopworn center-left ideology — that is, no recognition of the extraordinary problems this country faces in the climax of the techno-industrial idyll, and the long emergency that is following it.

And that’s all you get on the Democratic side for the moment: a powerful sense that the fix is in. Yet there is the very real problem of Hillary’s loathsomeness and how that would go down at the polls. There’s even a pretty good chance that many women would vote against her. So my provisional conclusion / prediction for the November contest is that Hillary runs and loses against some as-yet-unknown un-Trump person. President Cruz? Ach! Rubio? Back in the playpen! Christie? Leave the body, take the canoli…! Jeb? El pendejo supremo! To be continued….

Race Relations and the Cowardice of the Thinking Classes

2015 was sure a bad year for different groups of Americans trying (or not) to get along, especially black people and white people. American society is feeling the full force of the identity ideologies cooked up on the college campuses over the past several decades, now boiling over into an orgy of victim-pleading, identity grandstanding, sexual hysteria, scapegoating, intellectual despotism, juridical blackmail, and (let’s not forget) careerist posturing. The more irrelevant higher education gets, the more strenuously the social justice inquisitors mount their persecutions against those who don’t buy the race-gender-privilege party line. In 2015 it has morphed into a campaign against free speech and free inquiry. The “diversity” deans multiply like fruit flies.

I made the “error” last year of suggesting that black Americans would benefit if the teaching of spoken English were made a high priority of primary and secondary schooling — and I was vilified for saying that. My opponents have not offered any useful counter-ideas beyond name-calling. I suspect that many people of good intentions are running out patience with this racket — and it is a racket for extorting preferential treatment and money from guilt-tripped white people.

In the arena of crime and policing, the situation is especially bad. Black lives matter, but not so much for black people themselves, who are ardently slaughtering each other in places like Baltimore, St. Louis, Detroit, Milwaukee, and “Chi-raq” at a rate proportionately much greater than other ethnic groups in the land. The martyrs of the movement act in ways likely to get them in trouble, for instance the hapless 12-year-old Tamir Rice, shot brandishing a BB gun designed to look exactly like the US Army 1911 issue .45 caliber ACP, Michael Brown thugging out on officer Darren Wilson, Trayvon Martin beating down George Zimmerman. The cops present at several notorious incidents include black officers; a black female sergeant who was supervising the action on the sidewalk in Staten Island when her colleagues choked Eric Garner. (she did nothing to intervene); the several black policemen in Baltimore who took Freddy Gray on his fatal ride in the paddy wagon. It’s a scene fraught with ambiguity, to be generous.

Where are we going with race relations in this country? For now, not in a favorable direction. The trend will be for police to regard certain neighborhoods as “no-go” areas — if only to avoid the gigantic multi-million dollar litigations that grow out of these ambiguous confrontations. Some may view that as a good thing, but it will only play into the decadent ethos that anything goes and nothing matters in this country. The larger question going forward is whether Black America will continue to insist on being an oppositional culture. That is what it has become, though the cowed thinking classes will not acknowledge it. They also will not recognize the need for a common culture in this nation, a set of truly shared values and standards of conduct.

Climate Change

This is the underlayment of despair that reflective persons cannot avoid thinking about when all the other petty issues of human relations and the project of civilization are disposed of. Weird weather? Biblical Floods? Melting icecaps? Sea level creep? It was 70 degrees on Christmas Eve here in upstate New York, dandelions blooming in the yard, just a week or so ago. Some people I know can’t stop thinking about climate change. Somehow I manage to put it out of mind and ruminate on other things, or even feel good about something that is happening in the present — a good meal, a gathering of friends, an evening of live music…. but it’s always lurking there in the background like some hooded reaper in a New Yorker cartoon.

Despite the hoopla of the Paris climate change talks, I’m not persuaded that national governments will really do anything, or even that anything they might do would avail to make things better. I’m not even so concerned about whether climate change is man-made or not. I just accept that something is up and that as things change, we will have to adjust. It seems to me that the adjustment will not be easy and five hundred years from now there will be far fewer human beings, if any, around. From the point of view of the planet’s well-being, that is probably a good thing.

In the mean time, let’s do the best we can to carry on and be as kind as possible to one another. Good luck in 2016!


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

Commodity Complex Crash Commences

 Deflation-problemgc2reddit-logoOff the keyboard of Michael Snyder

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Published on the The Economic Collapse on December 8, 2015

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The Global Commodity Crash Tells Us That A Major Deflationary Financial Crisis Is Imminent

If we really are plunging into a deflationary global financial crisis, we would expect to see commodity prices crash hard.  That happened just before the great stock market crash of 2008, and that is precisely what is happening once again right now.  On Thursday, the Bloomberg Commodity Index closed at 79.1544.  The last time that it closed this low was 16 years ago.  Not even during the worst moments of the last recession did it ever get so low.  Overall, the Bloomberg Commodity Index is down more than 28 percent over the past 12 months, and it has plummeted by more than half since mid-2011.  As a result of this stunning commodity collapse, extremely large mining companies such as Anglo American are imploding, giant commodity trading firms such as Glencore and Trafigura are in full-blown crisis mode, and huge portions of the global financial system are in danger of utterly collapsing.

In recent days, I have been trying to stress that many of the exact same patterns that we witnessed just prior to the great stock market crash of 2008 are happening once again.  This includes the staggering crash of commodity prices that we are currently witnessing, and even CNN acknowledges that there are parallels to what we experienced seven years ago…

The last time raw materials like copper and oil were this cheap, an economic depression loomed just around the corner.

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry.

But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days.

As I mentioned above, this crash in prices is hitting mining companies really hard.  Just this week, the fifth largest mining company in the entire world announced a massive restructuring and will be laying off tens of thousands of workers…

In the latest example of just how bad things have gotten, Anglo American–the world’s fifth largest miner–just kitchen sink-ed it, announcing a sweeping restructuring, a massive round of layoffs, and a dividend cut. The company will reduce its assets by some 60% while headcount will be cut by a whopping 85,000 or, nearly two-thirds. 

Overall, the U.S. has lost approximately 123,000 good paying jobs from the mining sector since the end of 2014.  And if commodity prices stay low, this sector is going to continue to bleed good paying jobs.

Meanwhile, investors have been dumping the debt of any companies that have anything to do with commodities.  This has significantly contributed to the emerging junk bond crisis that I discussed in my last article.  As I write this, a high yield bond ETF known as JNK has fallen all the way down to 34.31, which is the lowest that it has been since the last recession.  For much more on the junk bond implosion, I would encourage you to read an article that Wolf Richter just put out entitled “Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck“.

So why are commodity prices falling so rapidly?

Many analysts are pointing to the economic slowdown in China as the primary reason.  For years, the Chinese economy voraciously gobbled up commodities from sources all over the planet, but now things are changing.  The Chinese economy is really, really slowing down, and some recently released numbers give us some clues as to the true extent of that slowdown…

-Chinese exports fell 6.8 percent in November on a year over year basis after being down 6.9 percent on a year over year basis in October.

-Chinese imports were down 8.7 percent in November on a year over year basis.

-Chinese manufacturing activity has been contracting for nine months in a row.

-Last week, the China Containerized Freight Index plummeted to 718.58 – the lowest level ever recorded.

And of course it isn’t just China.  Goldman Sachs says that the seventh largest economy on the entire planet, Brazil, has plunged into a “depression“.  And as I pointed out the other day, of the 93 largest stock market indexes in the entire world, an astonishing 47 of them (more than half) are down at least 10 percent year to date.

Even though stocks slid in the U.S. this week, the major indexes still seem somewhat stable.  But this is a bit of an illusion.  Yes, the biggest names on Wall Street are still flying high for the moment, but shares of a multitude of smaller and mid-size firms have been plummeting.  At this point, nearly 70 percent of all U.S. stocks are already below their 200 day moving averages.  This is yet another thing that we would expect to see just before the bottom falls out for stocks.

Everything that I have been writing about this week (see here and here) is perfectly consistent with all of my warnings from earlier this year.

We are plunging into a deflationary financial crisis in textbook fashion.  And if the Federal Reserve actually does decide to go ahead with an interest rate hike next week that is just going to make things even worse.

But most people are not patient enough to watch a process play out.  Most people that write about “the coming economic collapse” hype it up like it is going to be some sort of big Hollywood blockbuster that is going to happen over a week or a month and then be over.  That is definitely not the way that I see things.

To me, “the economic collapse” is something that has been happening for decades, that is still in the process of happening right now, and that will continue to happen as we move forward into the future.  The long-term trends that are ripping our economy to shreds continue to intensify, and our leaders are not doing anything to fix our underlying fundamental problems.

And the financial crisis that I warned would start during 2015 and accelerate in 2016 has already begun.  More than half of all major global stock market indexes are down by at least 10 percent year to date, and some of them have plummeted by more than 30 or 40 percent.  Trillions of dollars of wealth has been wiped out around the globe, and this is just the beginning.

All of the numbers tell us the same thing.

Big trouble is ahead.

My job is to inform you of these things.  What you choose to do with this information is up to you.


TriangleofDoomgc2reddit-logoOff the keyboard of Geoffrey Chia

Charting by Steve Ludlum

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Published on the Doomstead Diner on November 14, 2015


Triangle of Doom from Steve Ludlum at Economic Undertow

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PEAK OIL REVISITED PART 1a: The Triangle of Doom and the Failure of Price as a Metric


Geoffrey Chia is an Australian physician with a long standing interest in Peak Oil. This essay on oil prices is a necessary prelude to Peak Oil Revisited Part 1b: Is an International Standardised Energy Dollar feasible? followed by Peak Oil Revisited Part 2: Why business as usual guarantees that global industrial collapse will be complete by 2030.


Is Peak Oil dead?


Quote:Reports of my death have been greatly exaggerated” – attributed to Samuel Clemens AKA Mark Twain, upon reading his own obituary in a newspaper


The delusionists who declared that the “theory” of Peak Oil is dead are simply demonstrating their profound ignorance, if not downright duplicity. Peak Oil is not a theory, it is an observation of a physical fact. It is a simple fact that this world has finite supplies of oil. It is a simple fact that every oil well has finite recoverable oil and will go through phases of rising production, peaking of production and terminal decline. Peak Oil refers to (and has always referred to) the maximum rate of production of conventional oil (applied in particular contexts to either a well, a field, a country or the entire world). Global conventional oil output hit a plateau around 2006 and is now on an inexorable downward trend and even the cornucopian EIA admit this.

Fudging current data by adding gas condensates (which cannot be used to derive diesel or kerosene) or other unconventional oils to the total liquid hydrocarbon output does not change the fact that the world is now well past the peak rate of production of conventional oil and we are entering terminal decline soon.

As an alternative tactic, the denialists have tried to change the definition of Peak Oil. They declared that since oil prices are now low, we cannot have gone past Peak Oil, which has therefore been disproved. They ignore the fact that Peak Oil is and was always defined as the peaking of the rate of production of conventional oil i.e. the maximum volume output per unit time (usually over a year) and was not and was never defined by price.


The triangle of doom


As many readers will be aware, Steve Ludlum's triangle of doom refers to the post Peak Oil fluctuation of oil prices, which as time goes by is hypothetically expected to converge to a particular oil price (of say, US$100/- per barrel), above which customers cannot afford the oil, and below which it is uneconomic for vendors to produce the oil (they cannot recuperate their investment costs). In other words, oil which is too expensive leads to destruction of demand (or "demand destruction") and oil which is too cheap leads to destruction of production (or "production destruction"). If $100 per barrel oil is too much for customers to afford but is also too low to meet the cost of production, then in theory, market forces dictate that both oil consumption and production will cease, petroleum will no longer be available and industrial civilisation will collapse. One projection suggested this convergence would occur sometime in 2015 (see graph) however this has obviously not happened for a few reasons:

Firstly, not all oils are the same. Current low oil prices are certainly accelerating "production destruction" of expensive low EROEI oil. However, as long as substantial cheap-to-produce high EROEI oils remain, the latter will continue to supply the market until that high net energy source (Hi-NES) itself eventually transforms into Lo-NES (see explanation below).

Secondly, we have a fair way to go before all discretionary (or non-essential) oil consumption is eliminated from our bloated and wasteful system. Once that occurs, we are in for big trouble.

Furthermore, price is not an accurate predictor of collapse of the oil industry because it is not a reliable marker of whether, where, when and how oil will be produced or consumed, as price can be grossly distorted and manipulated by non-market forces to create perverse incentives.

In the longer term, price as a number is meaningless, unless corrected for inflation/deflation and related to a reference date, or related to a standard basket of goods and services.

The major concern about the current low oil price is that it is strangling upstream funding for oil production in the near future (even for conventional wells) which will eventually cause severe supply constraints in the near term. This will undoubtedly cause another oil price spike and even though restoration of production will take time and effort, it will eventually be done, albeit not to the same previous level. Petroleum will still continue to be produced and consumed in a fluctuating manner, irrespective of the hypothetical triangle of doom, until we run out of easy oil. Going by current trends however, oil will become completely unavailable to the vast majority of humanity within 15 years according to analysis of other parameters (not price) which we will discuss in part 2.


Production issues: Easy and Difficult oil:
The monetary price of a barrel of crude (whether WTI, Brent or Tapis) depends on a large number of factors which may partly be related to genuine physical and chemical issues (eg ease of extraction, ease of refinement) and partly related to genuine supply and demand issues. However price is also prone to all sorts of political and fraudulent distortions and manipulations. Consequently, the adjectives “cheap” and “expensive” are unhelpful and inaccurate, indeed they can lead to great confusion.

Whereas demand destruction in recent times has led to a fall in global oil prices1 , another major contributing factor was the US instructing their proxy Saudi Arabia to maintain maximum oil production2 regardless of reduced global demand, in an aggressive act of predatory pricing which is damaging the economies of Russia and Iran (who face higher production costs than the Saudis). Furthermore unconventional oil producers have been forced to sell at prices below their production costs, accelerating their demise (which was inevitable anyway), to the delight of the Saudis. This “expensive” oil is being sold artificially cheaply, hence the adjectives “expensive” and “cheap” have lost all meaning.

I propose we instead use the terms “easy” and “difficult” oil instead, the difference between them being the ENERGY costs of extracting and processing these types of oil.

Hence easy oil refers to oil from a conventional field of light sweet crude before (and shortly after) production peaks (when EROEI is high). Ultimately this easy oil will become progressively more difficult to extract (because oil extraction from a depleting well requires ever more energy). Even the Peak Oil deniers concede that the days of easy oil are over, however they refuse to acknowledge the underlying reason for this.

Difficult oil refers to low net energy or low EROEI oil, either:

– Unconventional oil of any sort (tar sands, ultra-deep oceanic oil, shale oil, Fischer-Tropf oil, biofuels etc.) or

– Conventional oil from a depleting field well past peak production.

Please note that the terms Easy oil and High EROEI oil are interchangeable, as are the terms Difficult oil and Low EROEI oil. However the adjectives “easy” and “difficult” are simpler and more intuitive to adopt and less of a mouthful.

My term “Hi-NES” is a general term for a high net energy source (or sources). Hi-NES embraces high EROEI conventional oil, high EROEI conventional natural gas and other high EROEI sources. In theory, wind generated electricity in a location where the wind blows strongly and continuously (e.g. the Antarctic coast) may offer an EROEI of more than 10:1 and is therefore potentially a hi-NES. However in practice that is seldom achievable.

The term Conventional oil (i.e. petroleum derived from a conventional oilfield) is not necessarily interchangeable with Easy oil for reasons explained above.

Use of the terms “easy” and “difficult”, rather than “cheap” and “expensive” helps to clarify our thought processes, but remains inadequate to enable deeper understanding of what is happening. Orwell, through the voice of Napoleon the pig, famously said that all animals are equal, but some animals are more equal than others. Accordingly we must appreciate that among difficult oils, some are more difficult than others, which is related to their EROEI. Similarly, among easy oils, some are easier than others, which is also related to their EROEI. Here is an example: Saudi Arabia and Russia as nations are both past Peak Oil, but Russia is further down the curve. Nevertheless both can still be said to possess easy oil, the difference being that the EROEI for Saudi Arabia may be (for example) 20:1 but the EROEI for Russia may be (for example) 18:1. This difference means that Saudi production costs are cheaper than Russia and enables the Saudis to engage in short term predatory pricing which causes trouble for the Russian economy.

The astute reader will naturally ask this question: what is the numerical dividing line between easy/high EROEI oils and difficult/low EROEI oils? We need to invoke the thoughts of Hall, Lambert and Murphy to help us answer this question in Part 2.


Consumption issues: demand destruction:

The confusing terms “cheap” and “expensive” oil will unfortunately continue to be used in common parlance. Most people will continue to focus on price as it can be a useful comparator when considering short term trends.

However even if we were to focus microscopically on just one household budget, price is not the important consideration, it is affordability. Affordability is related to one's income balanced against one's expenditure. Expenditure can be divided into discretionary or non-essential spending (which defines one's disposable income) and non-discretionary or essential spending (food, housing, utilities, transport for work/study, health expenses etc).

Similarly we can adopt the concept of discretionary and non-discretionary petroleum use. Discretionary use refers to frivolous or non-essential consumption of petroleum e.g. jet travel for overseas holidays, running a power boat on weekends etc. Non-discretionary use refers to essential use.

Let us take the example of a tradesman who must drive his pick-up truck (containing his heavy power tools, ladders, trestles, materials etc.) to his clients' locations to perform his work (he cannot use a bicycle or public transport for this purpose). Let us say he is just making ends meet. If two thirds of his petroleum use is discretionary and one third non-discretionary, then when faced with oil escalating in price from, say, $33 per barrel to $100 per barrel, he can initially cope by eliminating 2/3 of his total consumption to keep his petrol bill unchanged. If however the price then exceeds $100 per barrel, he cannot now afford to run his vehicle for work. Continuing work will mean he loses money. After losing money for a few months he is forced to stop work, sell his pick-up (then uses that capital to pay debts incurred when he lost money and for ongoing living expenses) and he drops out of the oil market completely. The latter represents demand destruction. Loss of his job releases the oil he previously consumed into the market. Widespread demand destruction in the general population "frees up" considerable oil supply into the market. Overall oil supply now exceeds demand and leads to a drop in the oil price. However the former tradesman cannot now afford to buy another vehicle to resume his old work. He cannot consume oil again as he did previously and the market price of oil stays low for the time being. Repeat this poor tradesman's story a million fold and you will get an idea of how depletion of the easy (high EROEI) oil will lead to the impoverishment of nations and why low oil prices will not necessarily reinvigorate economic activity3.

Eventually all discretionary oil use will be eliminated from all sectors of all economies, all around the world. All the fat will be cut from the system, leaving only absolutely essential oil use remaining (e.g. petroleum to run ambulances, to produce and distribute food etc.). Demand is now inflexible. As global conventional oil depletes further, oil supply will once again fall behind this fixed, inflexible demand and the oil price will escalate. Hyperinflation will now ensue. This will be the terminal phase of the industrial economy.


Prospects for future resurrection of low EROEI oil production:

The first flurry of low net energy oil production is all but over now. Many ultra deep water projects were shelved after Macondo blew up. The US tight oil producers in particular are now collapsing in droves, their investors, AKA suckers, are losing their shirts. Shell has pulled out of investing in Canadian tar sands. Other potential start-up low EROEI projects are being suppressed by the current low oil price as they need a price of at least $60 (more like $80 to $100) per barrel to get off the ground (price of WTI at the time this article is written is around $44 per barrel)

However in the future, after the eventual elimination of discretionary oil use from the global economy and with subsequent permanent escalation of oil prices, will low EROEI projects be attempted once again? It has been calculated that an EROEI of around 10:1 is required to run basic industrial civilisation and when EROEI drops under 5:1 our net energy availability falls off a cliff4, hence physical laws dictate that very low EROEI projects (especially unconventional oil projects which tend to have an EROEI of 3:1 or less) are for practical purposes useless (not to mention extremely harmful to the environment) and are extremely stupid. For Ponzi purposes however, lo-NES projects are useful scams for fraudsters to promote. We can never underestimate the stupidity of human beings. Hence it seems likely that stupid fucking fracking projects in new locations and other lo-NES projects will arise again, zombie-like in the future, funded by yet another cohort of greedy suckers with goldfish memories.


The failure of price as a metric:

You will note that the idea of the "triangle of doom" alluded to the post Peak oscillating price of oil (as a result of fluctuating supply and demand) which would progressively diminish in amplitude and eventually converge to the point where demand destruction meets production destruction, then the whole oil industry would vanish in a puff of smoke (at least in theory). Price on its own however can be extremely rubbery and is prone to all sorts of manipulation (e.g. inappropriate government subsidies for biofuels from grain) and distortion (e.g. speculation by futures traders). Hence oil prices consistently above $100 per barrel may still be possible in the future, particularly if there is government subsidy (AKA misappropriation of taxpayers money) to favour certain sectors. Expensive oil will not be affordable to all, but it will be affordable to a chosen few, enabling some (albeit diminished) part of the oil production system to continue functioning.

Prices in theory should reflect the simple interaction between supply and demand. Prices in a sane and rational market should be an honest representation of true cost and true value. Proper pricing should stimulate healthy (as opposed to harmful) economic activities. However in reality our markets are insane, irrational and dishonest. In reality prices are frequently distorted by TPTB to create perverse stimuli in the service of vested interests eg the fossil fuel industry or the corn lobby, irrespective of harm caused to ordinary people or the environment. Furthermore price comparisons between different years require corrections for inflationary or deflationary trends. Price as a number is an extremely noisy signal and interpreting circumstances or trends according to price is prone to all sorts of pitfalls.

Forces other than a "sane" market will guarantee future delivery of oil to certain favoured sectors, come hell or high water. The American military is one such sector, and the production and supply of oil to them will be given priority over, say, the allocation of petroleum to produce food for the poor5.This will be one way by which the US military will promote general population die-off, apart from the fact that they will kill poor people directly. When chaos on the streets ensues as a result of the limits to growth, the National Guard will be called in and will start shooting people.

Here is another reason why price, as a number, is essentially meaningless and must be related to some other objective index: any sum of money, say $100, must be related to the goods and services it can buy at that time. We know that $100 could go a lot further a hundred years ago than $100 today because of inflation, which is defined as the expansion of money supply relative to the available pool of goods and services. Accordingly if there is contraction of money supply in the future due to collapse of yet more debt bubbles, deflation will occur and $100 in that future will buy more than the $100 of today (at least until the pool of goods and services also contracts, which will lag behind the money supply contraction). In other words, quoted price must be referenced to a particular year (e.g. 2015) and price must always be corrected for purchasing power (i.e. corrected for inflation or deflation) to have any meaning.

Perhaps a better way to ascribe objective meaning to price is to relate it to a standard basket of goods and services. To simplify things further, the Economist magazine, originally as a joke, decided to relate price to one particular standardised product, the MacDonald's Big Mac burger, which is made to identical specifications in almost all locations around the world (although in India beef is not used). This was in fact found to be a useful means of comparing the true values of different currencies, such that the Economist now publishes its "Big Mac index" twice a year.

The "triangle of doom", being based on price (a variable which can be immensely rubbery), is not an accurate predictor for the global collapse of the oil industry although it does highlight industry difficulties. It was nevertheless an interesting concept because low oil prices can certainly destroy production in many (but not all) instances and high oil prices can certainly destroy demand in many (but not all) instances, however we must also take many other factors into consideration.


Energy as the “gold standard” for money

I previously wrote that money represents the promise of delivery of future useful goods and services. However FUGS can only be created and delivered through the application of energy. I also previously wrote that if Greece had their own hi-NES (such as a Leviathan gas field), they would have no problem leaving the Eurozone to print their own Drachma, which would then be backed up by their hi-NES.

Can we thus say that money is a proxy for energy? Well, yes and no. It is probably too simplistic a paradigm. If money was a true proxy for energy then net oil importing countries with low oil reserves such as the USA should have low currency values, and net oil exporting countries with high oil reserves such as Russia should have high currency values, however in real life the opposite is the case, for many economic and political reasons. Furthermore, it is impossible to accurately value a particular country's currency against its national energy reserves because it may be impossible to accurately estimate the recoverable energy reserves, which may be wrongly declared by that country for various economic and political reasons. For example we know the sudden escalation (on paper) of purported oil reserves in the OPEC countries in the 1980s had nothing to do with discovery of new oil resources but had everything to do with their greed (it was prompted by the then new OPEC oil exporting policy based on stated reserves).

Despite those shortcomings, will it still be worthwhile to use energy as the standard index for money? Should energy be the "gold standard" for money and not gold?

One may argue that this has already been attempted in the form of the US Petrodollar, which from the point of view of the USA has been a massive economic windfall, but from the point of view of the rest of the world has enabled America to become a global parasite, to leech oil and high value products from other countries for free. The Petrodollar scheme has also incentivised the US to keep the Middle East politically unstable, in order to perpetuate this military protection racket. The explanation for this has been previously detailed in this essay:

As a thought experiment however, can we conceive of a global system in which we index money to energy in a more objective fashion? When all its ramifications are explored, such a system seems unlikely to be workable in practice. Even if potentially feasible however, it will almost certainly be sabotaged and violently opposed by the USA as it will threaten their Petrodollar status. (see Part 1b which discusses the ISED, to follow soon).


The Ehrlich-Simon wager:

On a slight tangent, let us briefly mention the famous bet in 1980 between the environmentalist Paul Ehrlich and economist Julian Simon regarding the future prices of five selected minerals. After ten years it was found that all the prices had fallen, hence Simon was declared "winner" and economists around the world trumpeted their triumph over the scientists. Ehrlich's error was to make the bet on the basis of price, which as we mentioned is a rubbery variable prone to all sorts of fluctuations, distortions and manipulations. The point Ehrlich wanted to make was that as time goes by, it becomes progressively more difficult for us to harvest, process and deliver the same amount of product (e.g. metal ingots). This is because we would have previously harvested all the "low hanging fruit", the easy pickings, ab initio. We always transition from initially easily scooping up high concentration ores to eventually scrounging the depths for low grade dregs. If Ehrlich had bet that the ENERGY costs of delivering the same amount of product would be higher after ten years (actually a fifteen or twenty year bet would have been preferable), he would have made a better wager6. This is an example of how even the smartest of scientists can run into trouble when trying to extrapolate the future on the basis of that most unreliable of variables, price.

On the other hand, was Simon's victory a result of greater wisdom or intelligence with regard to how prices work? Actually, no, he was just lucky, as was explained in David Murphy's 2011 post in TOD:

Moral of this story? Making judgements and predictions based on price is prone to all sorts of pitfalls.



Making judgements and predictions about oil availability on the basis of price, is like trying to make sense of a conversation between two people at the far end of a crowded room during a noisy party, with music blaring at full volume. The voices are there, but they are drowned out by too much extra noise. If one has a parabolic microphone and electronic audio filtering mechanisms however, it may be possible to achieve clarity and eliminate the background noise. We may be able to do so with regard to petroleum availability issues by looking at parameters other than the extremely noisy variable of price. This is discussed in Part 2.


Geoffrey Chia, November 2015




1. Another factor contributing to low oil prices is economic deflation. Default of irredeemable debt in many sectors, due to the failure of real economic growth as a result of Peak Oil, has resulted in a contraction of the money supply relative to the pool of goods and services available ie deflation. This results in a fall in commodity prices across the board, oil included.


2. Please note this does not refer to Saudi Arabia increasing their oil output (which they cannot significantly do in a post Peak Oil situation with limited spare capacity), it refers to them refusing to substantially reduce their oil output in an atmosphere of global demand destruction. A sane exporter would reduce oil output in order to preserve high prices for this non-renewable finite resource, to maximise their long term sovereign earning capacity. Indications are that this Saudi insanity was pursued at the behest of the USA Like most of America's foreign policy dirty tricks, this tactic will result in future unintended consequences which will return to bite them. The current predatory low oil pricing is based on the US gamble that loss of foreign revenue by Russia and Iran will lead to their economic collapse and chaos in the short term, which will enhance Washington's ability to covertly implement “regime change” – to appoint US friendly administrations – in those countries. There are numerous examples in history of this US modus operandi, including regime change inflicted by the CIA on Iran itself in 1953. This time it will fail because the world is now wise to their tactics. The other “benefit” of flooding the market with cheaper Saudi oil is this: either Saudi oil will be preferentially purchased over Russian oil by Europe or it will force Russia to sell their oil cheaply to Europe. Either way it will diminish Russia's leverage over Europe, at least in the short term. What the US/Saudi axis is now unintentionally doing is forcing the Russians and Iranians to conserve their petroleum reserves while Saudi Arabia depletes theirs, for a price lower than the Saudi's would otherwise earn if they were not insane. In due course when the Saudi oil becomes more difficult (and hence more expensive) to extract, as it inevitably will, the Russians and Iranians will then, with their huge remaining quantities of (relatively) easy oil, gain the upper hand and be able to dictate the terms of the Great Game in the future. Blowback yet again. Americans see the eclipse of their empire looming and are adopting all sorts of short term desperate measures to forestall the inevitable.


3. Admittedly, this simple story of a struggling tradesman is prone to many "what ifs". Let us ignore the fact that in a deflationary environment, credit usually dries up and obtaining a bank loan may be impossible for a small business such as his. What if he does manage to get a bank loan to purchase another pick-up truck? Even with temporarily low oil prices, resuming work in a new environment of economic contraction with fewer clients, who themselves are under financial stress (and may go bankrupt and default on their payments to this tradesman) is likely to render resumption of his work unviable, apart from the fact he will probably never earn enough to pay back the bank loan for his new pick-up, in which case he will become a permanent debt slave. Much better if the tradie sells all his assets and moves to an off-grid rural community where he can grow his own food and offer his handyman services to his neighbours in an exchange economy.




5. At almost $600 billion per year, the US government spends more on its military than the next eight ranked countries in the world spend on their military combined.

Just diverting 2% of the US military budget per year to feed the poor over 5 years will be sufficient to completely solve world poverty. (Estimated cost to solve global poverty today is $58 billion ) This situation was as true a decade ago as it is today. Why was this not done and why is it not being done and why will it never be done? Because US military expenditure is given priority over saving lives of the poor.


6. The situation is more complicated however. Just like petroleum, minerals go through a phase of rising extraction, a peak of extraction then terminal decline. Even if extraction of a particular ore is entering terminal decline, if that time period coincides with increasing energy availability (as was the case around 1990 with abundant petroleum available pre Peak Oil), then even though ore extraction and processing require more energy, the product may be cheaper due to energy being cheap at the time.


Global Recession Accelerating toward Depression

storm-cloudsgc2smOff the keyboard of Thomas Lewis

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The weather forecast says sunny and mild. Let’s go shopping. (Wikipedia Photo)

Published on The Daily Impact on October 21, 2015

With the mainstream media devoting 80% of their time covering the contest to see what color uniform the captain of the USS Titanic will be wearing in 2017; with the Tea Party Taliban — 40 fundamentalist members of the House of Representatives — bringing the federal government to its knees; the storm clouds of a great global depression are building into our skies from all directions, largely unacknowledged even as they begin to blot out the sun.

Any economy is a pyramid whose broad base is comprised of the middle class — people who have enough money to provide a decent life for themselves. They do this by spending their money on the necessities of life, thus giving life to businesses organized to provide them with those necessities. This activity is called trade, and where there is no trade, there is no economic life.

Even as recession looms there is plenty of trade going on. But it’s not so much trade in the necessities of life, but gambles on the future value of necessities, on short positions and leveraged positions and junk debt and derivatives and indexes, indulged in by riverboat gamblers throwing around other peoples’ money. The one percent of the world’s population who own 50% of the world’s wealth are having a wonderful time at the casino, they’re getting richer by the minute and will tell you that everything is wonderful.

But the trade in the necessities of life, the trade that sustains economies instead of blowing them up, as the gamblers always do, is in desperate trouble, for one overwhelming reason. In most of the world today, the people who must buy the necessities of life don’t have the money to do so. Or to put it another way, the broad foundation of the pyramid is collapsing.

According to one of the world’s largest banks, Britain’s HSBC, global trade volume was down 8.4% in the first half of this year (the latest numbers are for June). That means, sayeth the bankers, that we — all of us, the whole world — are already in a dollar recession.

For decades, the driver of the world economy has been China, as it flooded the world with cheap exports and feverishly imported oil, coal, concrete, steel and dollars.  Now the driver is coasting, rapidly losing power: imports to China were down 20% in September (year-to-year) and exports were off 3.7%. The China Containerized Freight Index, which has been tracking shipping volumes for 17 years, has been dropping precipitously for over a year and has just hit an all time low.

The Masters of the Universe (irony alert: this is the term of art used here to denote the class of hedge fund, equity management shadow bankers who routinely blow up the world for profit) who saw the Chinese decline coming assumed that the world’s other emerging markets, such as Brazil, Turkey, India, Russia and the like, would pick up the slack. Indeed, the Masters turned firehoses of capital on the emerging markets for the past several years, inflating bubble after bubble after bubble in their frantic rush to realize the returns on investment of their dreams.

The dreams have turned to nightmares. The collapse in commodity prices (a consequence of the slowing of the developed economies), among other things, has wrecked the frail emerging markets, and the firehoses of capital are pointing the other way. The International Monetary Fundand the Bank of England, among many others, are warning that the billions of dollars of investment capital now being sucked out of the emerging economies, and trillions of dollars in loans that can never be repaid, pose an existential threat to the economies of the world.

If you think the U.S. is immune from these raging financial fires, think again. Debt, like dry tinder, is everywhere and the hot winds are spreading and fanning embers everywhere:

  • American retail giants that once dominated the world — McDonald’s, Walmart, Sears, Microsoft, Hewlett-Packard, even Facebook and Twitter — are sick and dying, their revenue, profit and stock vital signs weak and thready, as they say in the ICU. The surgeons are hacking off limbs — closing stores and firing people — as fast as they can, trying to save the organism.
  • The shipping of goods within the U.S. — the bedrock measure of buying and selling, has declined every month (year-to-year) since February, and that includes September, the peak month for shipping holiday merchandise to stores for selling in the season in which many stores make their profit for the year.
  • A report from CNBC showing both retail sales and wages flatlining was headlined: “Consumers shutting down as US economy deflates.”

It’s happening all over the world.

This has been a bulletin from The Daily Impact. We now return you to our regular programs: financial advice from Don “I’m really, really rich” Trump and self-defense classes from Dr. Ben “shoot that guy behind the counter” Carson.

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

Low Oil Prices – Why Worry?

oilwellgc2Off the keyboard of Gail Tverberg

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Published on Our Finite World on September 29, 2015


Discuss this article at the Economics Table inside the Diner

Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit.

In fact, nothing could be further from the truth. The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high. If oil prices or prices of other commodities are too low, production will slow and eventually stop. Growth in the world economy will slow, lowering inflation rates as well as economic growth rates. We encountered this kind of the problem in the 1930s. We seem to be headed in the same direction today. Figure 1, used by Janet Yellen in her September 24 speech, shows a slowing inflation rate for Personal Consumption Expenditures (PCE), thanks to lower energy prices, lower relative import prices, and general “slack” in the economy.

Figure 1. Why has PCE Inflation fallen below 2%? from Janet Yellen speech, September 24, 2015.




Figure 1. “Why has PCE Inflation fallen below 2%?” from Janet Yellen speech, September 24, 2015.

What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated. Currency relativities have also readjusted, leading to lower prices of imported goods for the United States. Both lower energy prices and lower prices of imported goods contribute to lower inflation rates.

Instead of reaching “Peak Oil” through the limit of high oil prices, we are reaching the opposite limit, sometimes called “Limits to Growth.” Limits to Growth describes the situation when an economy stops growing because the economy cannot handle high energy prices. In many ways, Limits to Growth with low oil prices is worse than Peak Oil with high oil prices. Slowing economic growth leads to commodity prices that can never rebound by very much, or for very long. Thus, this economic malaise leads to a fairly fast cutback in commodity production. It can also lead to massive debt defaults.

Let’s look at some of the pieces of our current predicament.

Part 1. Getting oil prices to rise again to a high level, and stay there, is likely to be difficult. High oil prices tend to lead to economic contraction.  

Figure 2 shows an illustration I made over five years ago:

Figure 1. Chart I made in Feb. 2010, for an article I wrote called, Peak Oil: Looking for the Wrong Symptoms.




Figure 2. Chart made by author in Feb. 2010, for an article called Peak Oil: Looking for the Wrong Symptoms.

Clearly Figure 2 exaggerates some aspects of an oil price change, but it makes an important point. If oil prices rise–even if it is after prices have fallen from a higher level–there is likely to be an adverse impact on our pocketbooks. Our wages (represented by the size of the circles) don’t increase. Fixed expenses, including mortgages and other debt payments, don’t change either. The expenses that do increase in price are oil products, such as gasoline and diesel, and food, since oil is used to create and transport food. When the cost of food and gasoline rises, discretionary spending (in other words, “everything else”) shrinks.

When discretionary spending gets squeezed, layoffs are likely. Waitresses at restaurants may get laid off; workers in the home building and auto manufacturing industries may find their jobs eliminated. Some workers who get laid off from their jobs may default on their loans causing problems for banks as well. We start the cycle of recession and falling oil prices that we should be familiar with, after the crash in oil prices in 2008.

So instead of getting oil prices to rise permanently, at most we get a zigzag effect. Oil prices rise for a while, become hard to maintain, and then fall back again, as recessionary influences tend to reduce the demand for oil and bring the price of oil back down again.

Part 2. The world economy has been held together by increasing debt at ever-lower interest rates for many years. We are reaching limits on this process.

Back in the second half of 2008, oil prices dropped sharply. A number of steps were taken to get the world economy working better again. The US began Quantitative Easing (QE) in late 2008. This helped reduce longer-term interest rates, allowing consumers to better afford homes and cars. Since building cars and homes requires oil (and cars require oil to operate as well), their greater sales could stimulate the economy, and thus help raise demand for oil and other commodities.

Figure 2. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.




Figure 3. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Following the 2008 crash, there were other stimulus efforts as well. China, in particular, ramped up its debt after 2008, as did many governments around the world. This additional governmental debt led to increased spending on roads and homes. This spending thus added to the demand for oil and helped bring the price of oil back up.

These stimulus effects gradually brought prices up to the $120 per barrel level in 2011. After this, stimulus efforts gradually tapered. Oil prices gradually slid down between 2011 and 2014, as the push for ever-higher debt levels faded. When the US discontinued its QE and China started scaling back on the amount of debt it added in 2014, oil prices began a severe drop, not too different from the way they dropped in 2008.

I reported earlier that the July 2008 crash corresponded with a reduction in debt levels. Both US credit card debt (Fig. 4) and mortgage debt (Fig. 5) decreased at precisely the time of the 2008 price crash.

Figure 3. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.




Figure 4. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data from the Federal Reserve.

Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.




Figure 5. US Mortgage Debt Outstanding, based on the Federal Reserve Z1 Report.

At this point, interest rates are at record low levels; they are even negative in some parts of Europe. Interest rates have been falling since 1981.

Figure 6. Chart prepared by St. Louis Fed using data through July 20, 2015.




Figure 6. Chart prepared by the St. Louis Fed using data through July 20, 2015.

I showed in a recent post (How our energy problem leads to a debt collapse problem) that when the cost of oil production is over $20 per barrel, we need ever-higher debt ratios to GDP to produce economic growth. This need for ever-rising debt contributes to our inability to keep commodity prices high enough to satisfy the needs of commodity producers.

Part 3. We are reaching a demographic bottleneck with the “baby boomers” retiring. This demographic bottleneck causes an adverse impact on the demand for commodities.

Demand represents the amount of goods customers can afford. The amount consumers can afford doesn’t necessarily rise endlessly. One of the problems leading to falling demand is falling inflation-adjusted median wages. I have written about this issue previously in How Economic Growth Fails.

Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by Federal Reserve of St. Louis.




Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by the Federal Reserve of St. Louis.

Another part of the problem of falling demand is a falling number of working-age individuals–something I approximate by using estimates of the population aged 20 to 64. Figure 8 shows how the population of these working-age individuals has been changing for the United States, Europe, and Japan.

Figure 8. Annual percentage growth in population aged 20 - 64, based on UN 2015 population estimates.




Figure 8. Annual percentage growth in population aged 20 – 64, based on UN 2015 population estimates.

Figure 8 indicates that Japan’s working age population started shrinking in 1998 and now is shrinking by more than 1.0% per year. Europe’s working age population started shrinking in 2012. The United States’ working age population hasn’t started shrinking, but its rate of growth started slowing in 1999. This slowdown in growth rate is likely part of the reason that labor force participation rates have been falling in the United States since about 1999.

Figure 9. US Labor force participation rate. Chart prepared by Federal Reserve of St. Louis.




Figure 9. US Labor force participation rate. Chart prepared by the Federal Reserve of St. Louis.

When there are fewer workers, the economy has a tendency to shrink. Tax levels to pay for retirees are likely to start increasing. As the ratio of retirees rises, those still working find it increasingly difficult to afford new homes and cars. In fact, if the population of workers aged 20 to 64 is shrinking, there is little need to add new homes for this group; all that is needed is repairs for existing homes. Many retirees aged 65 and over would like their own homes, but providing separate living quarters for this population becomes increasingly unaffordable, as the elderly population becomes greater and greater, relative to the working age population.

Figure 10 shows that the population aged 65 and over already equals 47% of Japan’s working age population. (This fact no doubt explains some of Japan’s recent financial difficulties.) The ratios of the elderly to the working age population are lower for Europe and the United States, but are trending higher. This may be a reason why Germany has been open to adding new immigrants to its population.

Figure 9. Ratio of elderly (age 65+) to working age population (ages 20 to 64) based on UN 2015 population estimates.




Figure 10. Ratio of elderly (age 65+) to working age population (aged 20 to 64) based on UN 2015 population estimates.

For the Most Developed Regions in total (which includes US, Europe, and Japan), the UN projects that those aged 65 and over will equal 50% of those aged 20 to 64 by 2050. China is expected to have a similar percentage of elderly, relative to working age (51%), by 2050. With such a large elderly population, every two people aged 20 to 64 (not all of whom may be working) need to be supporting one person over 65, in addition to the children whom they are supporting.

Demand for commodities comes from workers having income to purchase goods that are made using commodities–things like roads, new houses, new schools, and new factories. Economies that are trying to care for an increasingly large percentage of elderly citizens don’t need a lot of new houses, roads and factories. This lower demand is part of what tends to hold commodity prices down, including oil prices.

Part 4. World oil demand, and in fact, energy demand in general, is now slowing.

If we calculate energy demand based on changes in world consumption, we see a definite pattern of slowing growth (Fig.11). I commented on this slowing growth in my recent post, BP Data Suggests We Are Reaching Peak Energy Demand.

Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.




Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.

The pattern we are seeing is the one to be expected if the world is entering another recession. Economists may miss this point if they are focused primarily on the GDP indications of the United States.

World economic growth rates are not easily measured. China’s economic growth seems to be slowing now, but this change does not seem to be fully reflected in its recently reported GDP. Rapidly changing financial exchange rates also make the true world economic growth rate harder to discern. Countries whose currencies have dropped relative to the dollar are now less able to buy our goods and services, and are less able to repay dollar denominated debts.

Part 5. The low price problem is now affecting many commodities besides oil. The widespread nature of the problem suggests that the issue is a demand (affordability) problem–something that is hard to fix.

Many people focus only on oil, believing that it is in some way different from other commodities. Unfortunately, nearly all commodities are showing falling prices:

Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.




Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.

Energy prices stayed high longer than other prices, perhaps because they were in some sense more essential. But now, they have fallen as much as other prices. The fact that commodities tend to move together tends to hold over the longer term, suggesting that demand (driven by growth in debt, working age population, and other factors) underlies many commodity price trends simultaneously.

Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank




Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank “Pink Sheet” data.

The pattern of many commodities moving together is what we would expect if there were a demand problem leading to low prices. This demand problem would likely reflect several issues:

  • The world economy cannot tolerate high priced energy because of the problem shown in Figure 2. We have increasingly used cheaper debt and larger quantities of debt to cover this basic problem, but are running out of fixes.
  • The cost of producing energy products keeps trending upward, because we extracted the cheap-to-produce oil (and coal and natural gas) first. We have no alternative but to use more expensive-to-produce energy products.
  • Many costs other than energy costs have been trending upward in inflation-adjusted terms, as well. These include fresh water costs, the cost of metal extraction, the cost of mitigating pollution, and the cost of advanced education. All of these tend to squeeze discretionary income in a pattern similar to the problem indicated in Figure 2. Thus, they tend to add to recessionary influences.
  • We are now reaching a working population bottleneck as well, as described in Part 4.

Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan. 

If we look at the historical impact of oil prices on consumption for the US, Europe, and Japan combined, we find that whenever oil prices are above $60 per barrel in inflation-adjusted prices, consumption tends to fall. Consumption tends to be flat in the $40 to $60 per barrel range. It is only when prices are in the under $40 per barrel range that consumption has generally risen.

Figure 8. Historical consumption vs price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.




Figure 14. Historical consumption vs. price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.

There is virtually no oil that can be produced in the under $40 barrel range–or even in the under $60 barrel a range, if tax needs of governments are included. Thus, we end up with non-overlapping ranges:

  1. The amount that consumers in advanced economies can afford.
  2. The amount the producers, with their current high-cost structure, actually need.

One issue, with lower oil prices, is, “What kinds of uses do the lower oil prices encourage?” Clearly, no one will build a new factory using oil, unless the price of oil is expected to be sufficiently low over the long-term for this use. Thus, adding industry will likely be difficult, even if the price of oil drops for a few years. We also note that the United States seems to have started losing its industrial production in the 1970s (Fig. 15), as its own oil production fell. Apart from the temporarily greater use of oil in shale drilling, the trend toward off-shoring industrial production will likely continue, regardless of the price of oil.

Figure 15. US per capita energy consumption by sector, based on EIA data.




Figure 15. US per capita energy consumption by sector, based on EIA data. Includes all types of energy, including the amount of fossil fuels that would need to be burned to produce electricity.

If we cannot expect low oil prices to favorably affect the industrial sector, the primary impact of lower oil prices will likely be on the transportation sector. (Little oil is used in the residential and commercial sectors.) Goods shipped by truck will be cheaper to ship. This will make imported goods, which are already cheap (thanks to the rising dollar), cheaper yet. Airlines may be able to add more flights, and this may add some jobs. But more than anything else, lower oil prices will encourage people to drive more miles in personal automobiles and will encourage the use of larger, less fuel-efficient vehicles. These uses are much less beneficial to the economy than adding high-paid industrial jobs.

Part 7. Saudi Arabia is not in a position to help the world with its low price oil problem, even if it wanted to. 

Many of the common beliefs about Saudi Arabia’s oil capacity are of doubtful validity. Saudi Arabia claims to have huge oil reserves, but as a practical matter, its growth in oil production has been modest. Its oil exports are actually down relative to its exports in the 1970s, and relative to the 2005-2006 period.

Figure 16. Saudi Arabia oil production, consumption, and exports, based on BP Statistical Review of World Energy 2015 data.




Figure 16. Saudi Arabia’s oil production, consumption, and exports based on BP Statistical Review of World Energy 2015 data.

Low oil prices are having an adverse impact on the revenues that Saudi Arabia receives for exporting oil. In 2015, Saudi Arabia has so far issued bonds worth $5 billion US$, and plans to issue more to fill the gap in its budget caused by falling oil prices. Saudi Arabia really needs $100+ per barrel oil prices to fund its budget. In fact, nearly all of the other OPEC countries also need $100+ prices to fund their budgets. Saudi Arabia also has a growing population, so it needs rising oil exports just to maintain its 2014 level of exports per capita. Saudi Arabia cannot reduce its exports by 10% to 25% to help the rest of the world. It would lose market share and likely not get it back. Losing market share would permanently leave a “hole” in its budget that could never be refilled.

Saudi Arabia and a number of the other OPEC countries have published “proven reserve” numbers that are widely believed to be inflated. Even if the reserves represent a reasonable outlook for very long term production, there is no way that Saudi oil production can be ramped up greatly, without a large investment of capital–something that is likely not to be available in a low price environment.

In the United States, there is an expectation that when estimates are published, the authors will do their best to produce correct amounts. In the real world, there is a lot of exaggeration that takes place. Most of us have heard about the recent Volkswagen emissions scandal and the uncertainty regarding China’s GDP growth rates. Saudi Arabia, on a monthly basis, does not give truthful oil production numbers to OPEC–OPEC regularly publishes “third party estimates” which are considered more reliable. If Saudi Arabia cannot be trusted to give accurate monthly oil production amounts, why should we believe any other unaudited amounts that it provides?

Part 8. We seem to be at a point where major debt defaults will soon start for oil and other commodities. Once this happens, the resulting layoffs and bank problems will put even more downward pressure on commodity prices.

Wolf Richter has recently written about huge jumps in interest rates that are being forced on some borrowers. Olin Corp., a manufacture of chlor-alkali products, recently attempted to sell $1.5 billion in eight and ten year bonds with yields of 6.5% and 6.75% respectively. Instead, it ended up selling $1.22 billion of bonds with the same maturities, with yields of 9.75% and 10.0% respectively.

Richter also mentions existing bonds of energy companies that are trading at big discounts, indicating that buyers have substantial questions regarding whether the bonds will pay off as expected. Chesapeake Energy, the second largest natural gas driller in the US, has 7% notes due in 2023 that are now trading at 67 cent on the dollar. Halcon Resources has 8.875% notes due in 2021 that are trading at 33.5 cents on the dollar. Lynn Energy has 6.5% notes due in 2021 that are trading at 23 cents on the dollar. Clearly, bond investors think that debt defaults are not far away.

Bloomberg reports:

The latest round of twice-yearly reevaluations is under way, and almost 80 percent of oil and natural gas producers will see a reduction in the maximum amount they can borrow, according to a survey by Haynes and Boone LLP, a law firm with offices in Houston, New York and other cities. Companies’ credit lines will be cut by an average of 39 percent, the survey showed.

Debts of mining companies are also being affected with today’s low prices of metals. Thus, we can expect defaults and cutbacks in areas other than oil and gas, too.

There is a widespread belief that if prices remain low, someone will come along, buy the distressed assets at low prices, and ramp up production as soon as prices rise again. If prices never rise for very long, though, this won’t happen. The bankruptcies that occur will mean the end for that particular resource play. We won’t really be able to get prices back up to where they need to be to extract the resources.

Thus low prices, with no way to get them back up, and no hope of making a profit on extraction, are likely the way we reach limits in a finite world. Because low demand affects all commodities simultaneously, “Limits to Growth” equates to what might be called “Peak Resources” of all kinds, at approximately the same time.

Early Warning

gc2smOff the keyboard of Steve Ludlum

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Published on Economic Undertow on August 30, 2015


Discuss this article at the Economics Table inside the Diner

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:

Fred GDP-debt 061515

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)






Deflationary Collapse Ahead?

gc2smOff the keyboard of Gail Tverberg

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Published on Our Finite World on August 26, 2015


Discuss this article at the Economics Table inside the Diner

Both the stock market and oil prices have been plunging. Is this “just another cycle,” or is it something much worse? I think it is something much worse.

Back in January, I wrote a post called Oil and the Economy: Where are We Headed in 2015-16? In it, I said that persistent very low prices could be a sign that we are reaching limits of a finite world. In fact, the scenario that is playing out matches up with what I expected to happen in my January post. In that post, I said

Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:

  • The amount consumers can afford for oil
  • The cost of oil, if oil price matches the cost of production

This mismatch between rising costs of oil production and stagnating wages is what has been happening. The unaffordability problem can be hidden by a rising amount of debt for a while (since adding cheap debt helps make unaffordable big items seem affordable), but this scheme cannot go on forever.

Eventually, even at near zero interest rates, the amount of debt becomes too high, relative to income. Governments become afraid of adding more debt. Young people find student loans so burdensome that they put off buying homes and cars. The economic “pump” that used to result from rising wages and rising debt slows, slowing the growth of the world economy. With slow economic growth comes low demand for commodities that are used to make homes, cars, factories, and other goods. This slow economic growth is what brings the persistent trend toward low commodity prices experienced in recent years.

A chart I showed in my January post was this one:

Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.




Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

The price of oil dropped dramatically in the latter half of 2008, partly because of the adverse impact high oil prices had on the economy, and partly because of a contraction in debt amounts at that time. It was only when banks were bailed out and the United States began its first round of Quantitative Easing (QE) to get longer term interest rates down even further that energy prices began to rise. Furthermore, China ramped up its debt in this time period, using its additional debt to build new homes, roads, and factories. This also helped pump energy prices back up again.

The price of oil was trending slightly downward between 2011 and 2014, suggesting that even then, prices were subject to an underlying downward trend. In mid-2014, there was a big downdraft in prices, which coincided with the end of US QE3 and with slower growth in debt in China. Prices rose for a time, but have recently dropped again, related to slowing Chinese, and thus world, economic growth. In part, China’s slowdown is occurring because it has reached limits regarding how many homes, roads and factories it needs.

I gave a list of likely changes to expect in my January post. These haven’t changed. I won’t repeat them all here. Instead, I will give an overview of what is going wrong and offer some thoughts regarding why others are not pointing out this same problem.

Overview of What is Going Wrong


  1. The big thing that is happening is that the world financial system is likely to collapse. Back in 2008, the world financial system almost collapsed. This time, our chances of avoiding collapse are very slim.
  2. Without the financial system, pretty much nothing else works: the oil extraction system, the electricity delivery system, the pension system, the ability of the stock market to hold its value. The change we are encountering is similar to losing the operating system on a computer, or unplugging a refrigerator from the wall.
  3. We don’t know how fast things will unravel, but things are likely to be quite different in as short a time as a year. World financial leaders are likely to “pull out the stops,” trying to keep things together. A big part of our problem is too much debt. This is hard to fix, because reducing debt reduces demand and makes commodity prices fall further. With low prices, production of commodities is likely to fall. For example, food production using fossil fuel inputs is likely to greatly decline over time, as is oil, gas, and coal production.
  4. The electricity system, as delivered by the grid, is likely to fail in approximately the same timeframe as our oil-based system. Nothing will fail overnight, but it seems highly unlikely that electricity will outlast oil by more than a year or two. All systems are dependent on the financial system. If the oil system cannot pay its workers and get replacement parts because of a collapse in the financial system, the same is likely to be true of the electrical grid system.
  5. Our economy is a self-organized networked system that continuously dissipates energy, known in physics as a dissipative structureOther examples of dissipative structures include all plants and animals (including humans) and hurricanes. All of these grow from small beginnings, gradually plateau in size, and eventually collapse and die. We know of a huge number of prior civilizations that have collapsed. This appears to have happened when the return on human labor has fallen too low. This is much like the after-tax wages of non-elite workers falling too low. Wages reflect not only the workers’ own energy (gained from eating food), but any supplemental energy used, such as from draft animals, wind-powered boats, or electricity. Falling median wages, especially of young people, are one of the indications that our economy is headed toward collapse, just like the other economies.
  6. The reason that collapse happens quickly has to do with debt and derivatives. Our networked economy requires debt in order to extract fossil fuels from the ground and to create renewable energy sources, for several reasons: (a) Producers don’t have to save up as much money in advance, (b) Middle-men making products that use energy products (such cars and refrigerators) can “finance” their factories, so they don’t have to save up as much, (c) Consumers can afford to buy “big-ticket” items like homes and cars, with the use of plans that allow monthly payments, so they don’t have to save up as much, and (d) Most importantly, debt helps raise the price of commodities of all sorts (including oil and electricity), because it allows more customers to afford products that use them. The problem as the economy slows, and as we add more and more debt, is that eventually debt collapses. This happens because the economy fails to grow enough to allow the economy to generate sufficient goods and services to keep the system going–that is, pay adequate wages, even to non-elite workers; pay growing government and corporate overhead; and repay debt with interest, all at the same time. Figure 2 is an illustration of the problem with the debt component.





    Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.




    Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.




Where Did Modeling of Energy and the Economy Go Wrong?

  1. Today’s general level of understanding about how the economy works, and energy’s relationship to the economy, is dismally low. Economics has generally denied that energy has more than a very indirect relationship to the economy. Since 1800, world population has grown from 1 billion to more than 7 billion, thanks to the use of fossil fuels for increased food production and medicines, among other things. Yet environmentalists often believe that the world economy can somehow continue as today, without fossil fuels. There is a possibility that with a financial crash, we will need to start over, with new local economies based on the use of local resources. In such a scenario, it is doubtful that we can maintain a world population of even 1 billion.
  2. Economics modeling is based on observations of how the economy worked when we were far from limits of a finite world. The indications from this modeling are not at all generalizable to the situation when we are reaching limits of a finite world. The expectation of economists, based on past situations, is that prices will rise when there is scarcity. This expectation is completely wrong when the basic problem is lack of adequate wages for non-elite workers. When the problem is a lack of wages, workers find it impossible to purchase high-priced goods like homes, cars, and refrigerators. All of these products are created using commodities, so a lack of adequate wages tends to “feed back” through the system as low commodity prices. This is exactly the opposite of what standard economic models predict.
  3. M. King Hubbert’s “peak oil” analysis provided a best-case scenario that was clearly unrealistic, but it was taken literally by his followers. One of Hubbert’s sources of optimism was to assume that another energy product, such as nuclear, would arise in huge quantity, prior to the time when a decline in fossil fuels would become a problem.




    Figure 2. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.




    Figure 3. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.




    The way nuclear energy operates in Figure 2 seems to me to be pretty much equivalent to the output of a perpetual motion machine, adding an endless amount of cheap energy that can be substituted for fossil fuels. A related source of optimism has to do with the shape of a curve that is created by the sum of curves of a given type. There is no reason to expect that the “total” curve will be of the same shape as the underlying curves, unless a perfect substitute (that is, having low price, unlimited quantity, and the ability to work directly in current devices) is available for what is being modeled–here fossil fuels. When the amount of extraction is determined by price, and price can quickly swing from high to low, there is good reason to believe that the shape of the sum curve will be quite pointed, rather than rounded. For example we know that a square wave can be approximated using the sum of sine functions, using Fourier Series (Figure 4).


    Figure 3. Source: Wolfram Mathworld.




    Figure 4. Sum of sine waves converging to a square wave. Source: Wolfram Mathworld.




  4. The world economy operates on energy flows in a given year, even though most analysts today are accustomed to thinking on a discounted cash flow basis.  You and I eat food that was grown very recently. A model of food potentially available in the future is interesting, but it doesn’t satisfy our need for food when we are hungry. Similarly, our vehicles run on oil that has recently been extracted; our electrical system operates on electricity that has been produced, essentially simultaneously. The very close relationship in time between production and consumption of energy products is in sharp contrast to the way the financial system works. It makes promises, such as the availability of bank deposits, the amounts of pension payments, and the continuing value of corporate stocks, far out into the future. When these promises are made, there is no check made that goods and services will actually be available to repay these promises. We end up with a system that has promised very many more goods and services in the future than the real world will actually be able to produce. A break is inevitable; it looks like the break will be happening in the near future.
  5. Changes in the financial system have huge potential to disrupt the operation of the energy flow system. Demand in a given year comes from a combination of (wages and other income streams in a given year) plus the (change in debt in a given year). Historically, the (change in debt) has been positive. This has helped raise commodity prices. As soon as we start getting large defaults on debt, the (change in debt) component turns negative, and tends to bring down the price of commodities. (Note Point 6 in the previous section.) Once this happens, it is virtually impossible to keep prices up high enough to extract oil, coal and natural gas. This is a major reason why the system tends to crash.
  6. Researchers are expected to follow in the steps of researchers before them, rather than starting from a basic understudying of the whole problem. Trying to understand the whole problem, rather than simply trying to look at a small segment of a problem is difficult, especially if a researcher is expected to churn out a large number of peer reviewed academic articles each year. Unfortunately, there is a huge amount of research that might have seemed correct when it was written, but which is really wrong, if viewed through a broader lens. Churning out a high volume of articles based on past research tends to simply repeat past errors. This problem is hard to correct, because the field of energy and the economy cuts across many areas of study. It is hard for anyone to understand the full picture.
  7. In the area of energy and the economy, it is very tempting to tell people what they want to hear. If a researcher doesn’t understand how the system of energy and the economy works, and needs to guess, the guesses that are most likely to be favorably received when it comes time for publication are the ones that say, “All is well. Innovation will save the day.” Or, “Substitution will save the day.” This tends to bias research toward saying, “All is well.” The availability of financial grants on topics that appear hopeful adds to this effect.
  8. Energy Returned on Energy Investment (EROEI) analysis doesn’t really get to the point of today’s problems. Many people have high hopes for EROEI analysis, and indeed, it does make some progress in figuring out what is happening. But it misses many important points. One of them is that there are many different kinds of EROEI. The kind that matters, in terms of keeping the economy from collapsing, is the return on human labor. This type of EROEI is equivalent to after-tax wages of non-elite workers. This kind of return tends to drop too low if the total quantity of energy being used to leverage human labor is too low. We would expect a drop to occur in the quantity of energy used, if energy prices are too high, or if the quantity of energy products available is restricted.
  9. Instead of looking at wages of workers, most EROEI analyses consider returns on fossil fuel energy–something that is at least part of the puzzle, but is far from the whole picture. Returns on fossil fuel energy can be done either on a cash flow (energy flow) basis or on a “model” basis, similar to discounted cash flow. The two are not at all equivalent. What the economy needs is cash flow energy now, not modeled energy production in the future. Cash flow analyses probably need to be performed on an industry-wide basis; direct and indirect inputs in a given calendar year would be compared with energy outputs in the same calendar year. Man-made renewables will tend to do badly in such analyses, because considerable energy is used in making them, but the energy provided is primarily modeled future energy production, assuming that the current economy can continue to operate as today–something that seems increasingly unlikely.
  10. If we are headed for a near term sharp break in the economy, there is no point in trying to add man-made renewables to the electric grid. The whole point of adding man-made renewables is to try to keep what we have today longer. But if the system is collapsing, the whole plan is futile. We end up extracting more coal and oil today, in order to add wind or solar PV to what will soon become a useless grid electric system. The grid system will not last long, because we cannot pay workers and we cannot maintain the grid without a financial system. So if we add man-made renewables, most of what we get is their short-term disadvantages, with few of their hoped-for long-term advantages.


The analysis that comes closest to the situation we are reaching today is the 1972 analysis of limits of a finite world, published in the book “The Limits to Growth” by Donella Meadows and others. It models what can be expected to happen, if population and resource extraction grow as expected, gradually tapering off as diminishing returns are encountered. The base model seems to indicate that a collapse will happen about now.

Figure 5. Base scenario from 1972 Limits to Growth, printed using today's graphics by Charles Hall and John Day in "Revisiting Limits to Growth After Peak Oil"




Figure 5. Base scenario from 1972 Limits to Growth, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil”

The shape of the downturn is not likely to be correct in Figure 5.  One reason is that the model was put together based on physical quantities of goods and people, without considering the role the financial system, particularly debt, plays. I expect that debt would tend to make collapse quicker. Also, the modelers had no experience with interactions in a contracting world economy, so had no idea regarding what adjustments to make. The authors have even said that the shapes of the curves, after the initial downturn, cannot be relied on. So we end up with something like Figure 6, as about all that we can rely on.

Figure 6. Figure 5, truncated shortly after production turns down, since modeled amounts are unreliable after that date.




Figure 6. Figure 5, truncated shortly after industrial output per capita (grey) and food per capita turns down, since modeled amounts are unreliable after that date.

If we are indeed facing the downturn forecast by Limits to Growth modeling, we are facing  a predicament that doesn’t have a real solution. We can make the best of what we have today, and we can try to strengthen bonds with family and friends. We can try to diversify our financial resources, so if one bank encounters problems early on, it won’t be a huge problem. We can perhaps keep a little food and water on hand, to tide us over a temporary shortage. We can study our religious beliefs for guidance.

Some people believe that it is possible for groups of survivalists to continue, given adequate preparation. This may or may not be true. The only kind of renewables that we can truly count on for the long term are those used by our forefathers, such as wood, draft animals, and wind-driven boats. Anyone who decides to use today’s technology, such as solar panels and a pump adapted for use with solar panels, needs to plan for the day when that technology fails. At that point, hard decisions will need to be made regarding how the group will live without the technology.

We can’t say that no one warned us about the predicament we are facing. Instead, we chose not to listen. Public officials gave a further push in this direction, by channeling research funds toward distant theoretically solvable problems, instead of understanding the true nature of what we are up against. Too many people took what Hubbert said literally, without understanding that what he offered was a best-case scenario, if we could find something equivalent to a perpetual motion machine to help us out of our predicament.

Approaching a Deflationary Crisis?

collapse-global-logo-3Off the keyboard of Brian Davey

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Published on the FEASTA on August 15, 2015

Discuss this article at the Economics Table inside the Diner

Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.

So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.

A more adequate story is needed than this – and it is one that needs to focus on global trends not just in Europe but in the USA, the so-called developing world and above all in China. This story has a number of different plots and sub plots, not one. We need to understand how the sub plots interweave. The story is one of debt, competitive imbalances and an energy crisis and all need to be told. To make the story even more complicated we need to keep in mind too that an even more important story, that of climate change, has to be held in our minds too. If and when humanity has any chance of resolving these crises it will have to resolve that one at the same time. Will this be possible? I don’t know – what I do know is that there is a theory, by archeologist Joseph Tainter, that humanities’ problem solving capacities are limited by complexity. A friend is currently trying to get me to use twitter. However I am daunted by reducing complex situations to short simple messages. Understanding the global economy is like entering a labyrinth. As I get older I notice that some people become famous because of the clarity in the way that they write. What may not be noticed is that the apparent clarity in a political economic message is often the result of simplification. The popularity of neo-liberal economcs is like that.
So lets look at the ways of describing the crisis. In summary this can be described as the interrelationship between 4 processes.

(1) Structural policy stupidity – policy governance cannot cope with the complexity of the crisis. Politicians cannot cope with communicating complex messages to their peoples nor find the mechanisms to cope with the complexity of the issues.
(2) Problems are also caused by uneven development between countries and sectors which cannot be sustained without methods for recycling purchasing power from the more competitive countries to the less competitive ones. These imbalances become most problematic when capital export from surplus to deficit countries slows which happens when growth slows in the deficit countries.
(3) The crisis is both cause and effect of a rising amount of debt – personal, corporate, state and financial sector – which has acted as a drag on growth. As growth falls all kinds of debt become more difficult to service so the monetary authorities have tried to push interest rates down. Nevertheless the finance sector has tended to become both more speculative and more predatory as there is a “hunt for yield”. Interest rates rise when risk premiums are imposed on distressed borrowers (including states), money making occurs through financing arrangements based on “passing the risk parcel” exploiting the naivety of lenders about complex financial arrangements and by the promotion of asset price bubbles. The bigger players are rescued during crises but the smaller players (including tax payers and those who lose their state benefits) are made to pay.
(4) The crisis is the result of reaching “the limits of economic growth” and, in particular, because of resource depletion in the energy sector. This is less obvious because of currently low and falling energy and commodity prices but we need to study the experience of the energy sector over last few years, not just the immediate situation. The immediate fall in commodity and energy prices is a result of the onset of the crisis – a crisis which very high and rising energy prices up until recently helped bring on. The high energy prices have been compatible with a high level of debt only because interest rates have been so low and because there has been a “hunt for yield”, something that would pay more than leaving money on deposit paying very little.

Depletion of resources in the energy and mining sector means that it is taking more energy than before to extract energy (and other mined resources) and this has pushed up the costs of extraction of energy and other minerals. High energy costs act as a drag on the growth of the economy as a whole – because energy costs, like interest rates, enter into the production of virtually everything else. This is particularly acute problem in the energy sector itself as the energy sector is such a huge user of energy. The energy companies need a high price for energy otherwise they cannot actually make a profit. However, if energy prices are high for too long the economy wilts.

The development of unconventional oil and gas has been possible because quantitative easing has made a large amount of money to Wall Street at a low interest rate and they have been “searching for yield” – looking for somewhere to put this money to earn a high rate of interest. This funded the voracious capital expenditure needs of the industry with its high drilling intensity. However it pre-supposed that prices would remain high enough for long enough to cover costs and this has not happened. The problem is set to get a lot worse as depletion speeds up.

So, to repeat, the best way to tell the story of this crisis needs to relate ALL of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.

“Stanley Fischer, vice-chairman of the US Federal Reserve, has laid out the predicament that forecasters face. Half way through each year, economists have had to explain why their global growth forecasts were too optimistic, he said, and this has happened “year after year”. While growth rates have been falling across the world, it’s not yet clear whether this is all a hangover from the 2008 crash or something more fundamental.”[1]

In my view it is “something more fundamental”. It is related to reaching the limits to growth – and this has to do with fossil fuel and materials depletion and the end of cheap energy. However, this does not exclude a partial truth in the other narratives that economists are using to explain low growth.

In the reminder of this article I run through each of these themes in more depth.

Explanation number one: “structural policy stupidity”

First of all structural policy stupidity – all politics must be sold in one way or another to the governed. Even autocrats strive to govern with ideas as well as through simple fear. The rhetoric of politicians must to some degree match the way people think about things – that means one ingredient for successful politics is where politicians succeed in appealing to popular illusions embodied in “common sense”. One such popular illusion is that states have to arrange their finances using the same principles that ordinary households use to run their personal finances. Never mind that this is not true – the politicians who pursue policies and use a rhetoric that appeals to the “person in the street” viewpoint have a head start. As a number of economists have noted these politicians work with an ultra simple (and wrong) model of economic reality – that if governments follow rules and don’t borrow excessively this will inspire confidence and trust and economies will grow, spurred on by competition. It does not matter that this idea may actually be self defeating when an economy is slipping into recession – the important point is that collective illusions persist when they fulfil a collective purpose for those that hold them. In this case a key collective purpose of “the balanced budget illusion” is that it makes communicating with electorates so much easier. It enables a message of “we cannot afford” and “being cruel to be kind” to be directed against vulnerable groups who can be more easily scapegoated.

Complex messages are not popular and don’t sell well even if they more accurately reflect reality. Please note here that I am saying something more than politicians are mistaken – my argument is that ideas like the balanced budget illusion is more than “a mistake”. It is an illusion that has a structural function in the political process. It is not an accident that this particular theme repeats itself in history again and again. There is no reason to believe that once an idea has been rejected by one generation after a bitter learning experience, that a subsequent generation that have not been through the same learning experience will not have to learn it the hard way all over again.

One of the sayings of the management theorist Stafford Beer was that “the purpose of a system is what it does”. I really like this because it cuts through all the rhetorical justifications and excuses. If a system like the Eurozone is ruining its less competitive members in favour of the more competitive ones then this is the purpose of the system. Were it not the purpose of the system most powerful players in it would change it.

In this regard the very structure of the Eurozone has proved ideal for putting the banking and financial elite of Europe out of reach of democratic political processes. The currency is managed at a level out of the reach of any one state with the finances of each state disciplined by a set of rules that enforces close to a balanced budget. Given the inevitable crises each government that becomes vulnerable then has to cede more and more economic policy to financial interests who are free to impose neo-liberal policies like privatisation quasi automatically. The “coup” against Greece was a design feature of the Euro and delivers the primacy of finance over any pretence of democratic politics.

Given the complexity of eurozone governance, in which every state is supposed to have a say and decisions must be passed back to all of these governments, it seems as if governance requires a set of rules that governments adhere to, otherwise there would be endless re-negotiations for each new situation, and for each state, that would go on forever. In an interview in the New Statesman Yanis Varoufakis explained this when he described the viewpoint of Wolfgang Schaueble.

“Schäuble was consistent throughout. His view was ‘I’m not discussing the programme – this was accepted by the previous government and we can’t possibly allow an election to change anything. Because we have elections all the time, there are 19 of us, if every time there was an election and something changed, the contracts between us wouldn’t mean anything.’”

If you think about it this is not only a recipe for the negation of democracy it is the negation of any kind of economic policy discussion or policy variability. A common currency zone cannot work in these circumstances because it is paralysed by its complexity into ever being unable to adapt its economic policy. The default is then to a neo-liberal assumption of a balanced budget (or budget surplus, free market rules and privatisation). All it can do is to follow a set of pre-determined rules. In this case the policy that destroys economies like that of Greece appears as the price paid to avoid endless renegotiations.
The problem for the Eurozone and the global economy is that this is leading to a massive deflation….or maybe from an elite viewpoint this is not so negative. Maybe this is not “policy stupidity” but a cunning plan???

In a massive crisis in which only the super elite are rescued and everyone else ruined there would be a further massive concentration of wealth and power. Perhaps members of the super elite – the 1% of the 1% – think in this way. Or maybe I am paranoid.

Explanation number two – too much debt

Global stock of debt outstanding

Some economists think that that somehow debt doesn’t matter since, supposedly, debt transfers purchasing power from debtors to creditors who will spent it instead so debt is not supposed to affect “aggregate demand”. Alas this misunderstands the mechanisms of bank credit creation. In order for money creation and demand expansion to occur in the current system there is a requirement that more bank credit creation – i.e. more borrowing from banks – takes place. If individuals and companies are maxed out (“peak debt”) and if they are reluctant to take on more debt then aggregate demand cannot be increased. In fact, even if the central bank pumps out more money through “quantitative easing” this will do little or nothing to increase demand. The central bank will create money to buy bonds from banks but the money created and paid over will remain unused by the banks and the velocity of circulation will fall. The single demand expansion influence is that interest rates are lower and this is supposed to encourage investment – something that does not happen if the conditions for expansion do not otherwise exist. What happens instead is that money goes into speculation.

Meanwhile if companies and individuals are maxed out they will be making an effort to pay back their debts to the banks. When this happens money is destroyed and goes out of circulation. More particularly chain reactions from defaults and collapsing confidence destroys the trust and confidence on which the financial system works and leads to massive deflation. Now this situation of collapsing purchasing power in the private economy could in theory be balanced out by government spending leading to the governments running deficits – but that’s against the eurozone rules.

Explanation number three – global imbalances/failing mechanisms to recycle purchasing power

Another explanation for current stagnation is the breakdown of mechanisms for dealing with international trade and financial imbalances. In his book The Global Minotaur Yanis Varoufakis, describes the history of the post war economy by focusing on the story of how trade and financial imbalances were managed – particularly the imbalances between the USA and the rest of the world, but also imbalances in the Eurozone. As he explains, unless there is a mechanism for recycling surpluses from countries in trade surplus back to countries in trade deficit then purchasing power drains away from the deficit countries who are put in a deflationary squeeze as is happening to Greece currently. In the initial period after world war two the USA was dominant in the global economy and was in trade surplus to the rest of the world. It used the financial flows into America that were generated by its surplus of exports over imports by investing back into the rebuilding of countries like Germany and Japan and more generally into the American design for the postwar economy as bulwark against communism. The recycling of surpluses back into deficit countries kept the boom going. But you won’t catch Germany recycling its surpluses back into Greece now.

The answer to an export surplus in one country which occurs over and against import surpluses in other countries is for the countries with the export surplus to use the money that they earn in capital export back to the deficit countries. They invest in those countries. However, that implies that there is something in the deficit countries that is an attractive focus for investment. It implies that those countries are growing – which brings the argument round full circle. For decades the USA was the largest economy in the world and a growing economy. This meant that when the US first went into what was to be a long running trade deficit it was still worth Germans, Japanese or Chinese parking their dollar earnings as deposits into Wall Street banks or using them to lend to the US government. The dollars earned by Germany, Japan and later by China could be invested in the US economy or they could be used to buy oil. This was also because, by agreement with countries like Saudi Arabia, oil had to be purchased in dollars. This arrangement partly broke down however when Wall Street crashed in 2007 – in large part because it was operating a criminal business model. Loans were made to people who it was known would never be able to pay them back and packaged up with other assets and then sold on across the world to pension funds and other financial institutions who picked up the risk parcel, misled by ratings agencies. The ratings agencies were paid to say that the “toxic trash” was AAA grade.

Turning the finance explanation upside down

So, to come back to the story – yes the current problems are due to too much debt. Yes, mechanisms for recycling global financial flows arising out of trade imbalances no longer work so well after Wall Street and other banksters in London and Frankfurt are seen to be run by crooks….but one can argue that these two phenomena are also the result of the failure to grow, as much as the cause. You can turn at least a part of the argument on its head.

What I mean by that is that a rising amount of debt in general and troubled debt in particular is not just a cause of faltering growth – the faltering growth is a cause of the increasing amount of troubled debt.

Debt is not usually seen to be a problem for companies and individuals where their income is rising and sufficiently secure for people to pay the interest. It is when people find that their real income is stagnating or falling that more debt becomes distressed debt and distressed debt becomes the lender business model. Prudential lending pays in a growing economy with growing investment opportunities – but the temptation to resort to predatory lending occurs when there is an awareness of, even a decision to exploit, the desperation of people in trouble. This becomes part of the model. What happens when a country, or a company, or an individual, cannot pay? The answer is that the interest rate that they are supposed to pay for any new credit rises dramatically because they are now supposed to pay the lender “a risk premium”. This is the last stage of a process of debt accumulation. When a debt pyramid comes crashing down it does so because, just before it crashes, debt servicing costs get dramatically worse as “risk premiums” are loaded onto borrowers.

This “risk premium” might lead one to suppose that lenders actually are tolerating a higher level of risk for which they must be compensated – however this is only partly true for the biggest players. When the biggest players are deemed “too big to fail” they get backed by politicians so the “risk” is taken off – that is, after all, what happened to the German and French banks that lent to Greece. The deal stitched up by the IMF and the ECB meant that they got bailed out and the debt loaded onto the Greek people. So while risk premiums allow banks to increase their take the real risks do not rise commensurately.

The temptation to borrow under increasingly unfavourable conditions is not like borrowing to invest or to buy an asset with the secure expectation of a rising income. As debt increases the business model for lenders becomes more and more making money with distressed debt, vulture funds, passing the risk parcel and toxic trash. It occurs because borrowing states, institutions and individuals resort to what becomes a kind of gambling considered as a last resort, as an attempt at a way out of a desperate situation. That’s one of the ideas of Prospect Theory. Normally people are risk averse, they don’t risk what little they still have if they have anything left – however they do gamble when all of their other options seem hopeless anyway. Underlying all of this is that the rising incomes are no longer there. By way of contrast the institutions lending are not taking real risks because they have friends in very high places.

Turning the imbalance argument around

One can turn the idea about imbalances the other way round too. In one way of looking at the situation it seems that growth falters because the mechanisms to handle imbalances by recycling surpluses break down. No doubt there is truth in this but you can turn that idea round – i.e. it is when growth falters that the mechanisms to handle imbalances by recycling surpluses dry up. As we have argued the way to recycle surpluses is through capital export – the purchasing power flows back to the deficit countries not as money to purchase their goods as imports into the surplus countries but rather as money to buy into the industries and economies of the deficit countries, as investment. But who is going to invest into a stagnant or contracting economy?

Look what happened to the German privatisation of East Germany. The institution that was entrusted to sell off East German industry, the Treuehand, made a big loss. How could that be? When the East German economy was merged with the West German economy it was at the rate of one East German mark for one West German mark. This was an early lesson of what would happen in the eurozone except that it all happened inside Germany itself. The East Germans could not compete after reunification, just like the Greeks cannot compete now. So most East German businesses were making huge losses. However, if you want to sell off companies then you have to sell them as going concerns. You have to keep them going before you sell them….which often meant making huge losses. What they got for the sale of these companies never covered these losses.

Wolfgang Schaueble knows this – he was involved. They will not make any money selling Greek assets either. When the Austrian Railways considered a takeover of the Greek railways they said they would only do this if the Greek railways were given away. Unless Greece is growing and prospering there will be very little capital export into Greece to actually buy privatised assets.

So, to summarise the argument so far: slowing growth can be explained by increasing debt reaching its limits and the breakdown of mechanisms to even imbalances by recycling purchasing power from surplus to deficit countries. On the other hand the fact that debt is reaching its limits and surplus recycling limits are breaking down can be explained by slowing growth. Both are true in both directions of causation and what we are seeing here is a “vicious cycle” in operation.

Explanation number four – the energy crisis

Now let’s add the fourth way of looking at the issues. Let us start by making a distinction between growth of production and growth of production capacity. Growth of production can occur if there is spare capacity in an economy in the form of unemployed resources which can be brought back into utilisation – but for growth to be long term there must be a growth of the capacity of an economy.

This depends upon expenditure in capital formation – the creation of buildings, equipment and infrastructure. Capital formation is an energy intensive business because infrastructure, buildings and equipment require energy in their production – plus they require an energy throughput for their utilisation. The point about energy is that it is required for every good or service purchased. Even a haircut requires electric light or warmth in the barbers shop and to run electric clippers. Anything that enters into the production of all goods and services is a cost of production that all share. So if the cost of energy rises so does the cost of producing everything.

The nearest comparable example of a cost that enters into the production of all goods and services is interest rates. Virtually all individuals and companies must borrow so the interest rate enters into the cost of all production and into many everyday living expenses too. You can argue therefore that the real reason that interest rates have been driven down so low by central bankers is that energy costs have been so high. It is has not been possible for the economy to sustain BOTH high interest rates AND the higher energy prices. This is the reason for the stagnation.

Most energy intensive of all is investment in the energy and mining sector. The amount of energy required to tap and process energy is rising as it becomes harder to find, extract, process and transport oil, gas and coal from smaller, deeper, more remote, and harder to tap geological sources.

Slowing growth of global productive capacity is the result of the global economy running up against ecological system limits. This is particularly apparent in the climate crisis and the costs that occur as a result of this but, more immediately too, in the economics of extracting fossil fuels. The long run trend is towards rising energy costs which acts as a drag upon the growth of the productive capacity of the global economic system. The most energy intensive sector of all is the energy sector itself. We can see that if we compare the amount of energy used per hour of human activity in the energy and mining sector compared to the amount of energy used per hour of human activity in other economic sectors. (This is the so called exosomatic metabolic rate). These figures are for Catalonia in 2005 because the academics who have studied this issue are mainly at the University of Barcelona but one can expect comparable figures in other places. The rates are 2,000 Megajoules per hour of human activity devoted to energy and mining. This compares to 2.8 Megajoules per hour outside of paid work in households, 75 Megajoules per hour in services and government, 331 Megajoules per hour in the building and manufacturing sector (not including energy and mining) and 175 MJ/h in agriculture. As a matter of fact 11% of the energy throughput of society was taken by the energy sector itself – even though only 0.0945% of the time of everyone in Catalonia was devoted to energy and mining.

With energy and mining being the most energy intensive sector one would expect the impact of rising energy costs to be felt initially and most powerfully in the energy and mining sector itself. This has indeed been the case. In a presentation by Steve Kopits of the Douglas Westwood Consultancy he shows this graph (CAGR = compound annual growth rate).

Impact of energy costs on mining

As can be seen the capital expenditure required per barrel of oil in the exploration and production sector has increased enormously. To extract oil is requiring greater and greater amounts of investment in exploration and production.

We can see very clearly what is happening if we look at the statistics for fracking for shale oil in the USA. The fact that the US oil and gas industry has had to resort to fracking is a sign that American oil and gas fields are highly depleted and near to exhaustion. As an analyst called Arthur Berman puts it, fracking is the “retirement party” of the oil and gas industry. It is not a new beginning. As a matter of fact the USA, Russia and Saudi Arabia almost produce an identical amount of oil but look at the difference in the way that they produce it:

USA = 11.7 MMBl/d, 35,669 wells, 297 million feet
Russia = 10.9 MMbls/d, 8688 wells, 83 million feet
Saudi Arabia = 11.4 MMBls/d, 399 wells, 3 million feet

In order to extract a roughly equivalent amount of oil the US industry has to drill almost 100 times the footage in wells and drill 90 times the number of wells. It is obvious that that will require an enormous amount of energy to get out an equivalent amount of oil (and gas) and that the cost will be a lot higher. But is this investment actually profitable? The answer is that it is only profitable at higher and higher oil prices. Different oil and gas companies require different prices to break even but, according to Kopits most of the oil companies require an oil price of at least $100 for new investment in conventional oil production to be profitable. High prices are needed in the unconventional sector too and most of the fracking companies in the USA have not been making money for several years. In the last year the price has fallen even lower.

So how come that they are still around? How come they have not gone bust? There are several kinds of reply to this.

Firstly, in economics things happen if people take a view of the future in which they believe that they will be profitable – even if subsequent experience shows this not to be the case. No one can know the future exactly so every investment is to some degree a gamble. A whole economic sector can share the same gamble and invest on the assumption that they will make money even if this turns out not to the case – and indeed they can be encouraged to. An oil sector drilling 90 times the number of wells and 100 times the footage is going to be immensely profitable for the companies selling and/or hiring out the drilling rigs, pipelines, tankers and other equipment. As the saying goes – in a gold rush sell shovels. A coalition can form around illusions that are profitable to some powerful players who make a lot of money even while others lose. A vested interest coalition pursuing a delusion is called a Granfalloon. It is important to realise that it is in the interests of the Granfalloon to keep on hyping their message in order to keep the money flowing. (This does not mean that the members of a Granfalloon are intentionally misleading – it means that there is an element of confirmation bias in the way that they interpret and describe things. We all do this to some degree – it is very difficult not to select and interpret available information in a way that confirms ones existing preconceptions, one’s faiths).

Secondly, at this time with interest rates very low there have been very few places where businesses in the finance sector can make much money. There is a temptation to make money on a gamble and the oil and gas industry has been a place for Wall Street to make another gamble. This is especially the case as the collateral for the industry is in the ground. However, when the sub-prime mortgage boom went bust after 2007 banks were left with a lot of houses. Shifting them was not so easy – finding a use for the assets of insolvent fracking companies is likely to prove even more of a problem. How many banks have the expertise to run fracking companies?

Thirdly in economics things happen with a time lag. Even if companies are making a loss they do not immediately go bust. They and their creditors may take the view that the unfavourable conditions are temporary and more credit may be extended to bridge them over what are assumed to be temporary hard times. If oil and gas prices have fallen they may still be able to sell at a higher price because they have insured themselves by selling their oil and gas already on the futures market. To respond to soon would be to lay off workers, and break up teams that would be difficult to reassemble. The temptation is to hang on, assume that difficulties are temporary and to tell the world that there are no problems, that everything is just fine, that the latest technologies make it possible to produce at a profit at even lower prices. If one looks at the figure however this does not appear to be what is happening. That part of the oil and gas pursuing new development, and particularly in countries where depletion is already advanced, are caught in a dilemma that unconventional oil and gas is expensive oil and gas – and the market cannot be made to pay these high prices over a long enough period to make the development of their part of the industry profitable.

In conclusion

The story thus described is one in which the world economy could be heading into a massive economic meltdown. The authors of the famous Limits to Growth, writing in 1972, thought it likely that unless humanity could adjust to the limits that there would be an overshoot and collapse sometime in the future. The crisis of 2007-2008 gave a preliminary taste of what that kind of collapse might look like. The after shocks in the Eurozone and what has been happening in Greece likewise give us a picture of what the future might be like for all of us.

What this does not mean however is that there will be some general realisation, some mass epiphany or “Aha” moment when everyone realises in a blinding flash of insight that humanity has reached the limits of growth. There are also limits to the extent to which people change their basic faiths about the world. Such flashes of insight about their real situation do sometimes happen when people are thrown into troubled times and circumstances that challenge all that they believe. However, even then most people are reluctant to abandon their faiths as that could leave them even more disorientated and fearful – living in a world that suddenly appears a lot less secure, and facing a future that is a lot less rosy, than they previously believed.

Most mainstream economists and politicians will continue to believe that the task at hand is “get growth going again” and, in the vast tangle of connected events, will privilege those connections and processes for their mental attention that confirm their viewpoint on what is wrong, the other people who are responsible for what has gone wrong – and what must be done to remove these people. To drum up support for themselves elite politicians of this type will no doubt identify favourite scapegoats and enemies to demonise. The worst futures would be where these kind of politicians get a mass following, sponsored financially by the elite, and lead emerging fascist movements. The best of all futures would be where these kind of political leaders drift into irrelevance because a popular majority gravitate to those who have positive community level responses of sharing, mutual aid and re-localisation connected to ecological design – and link this to a new approach to politics that supports the transformation at the base of society. This would go together with a new politics of finance to replace the debt based money system and a new politics of energy that keeps the carbon in the ground. A politics of this type would not be about “getting growth going again”. It would be about creating economic arrangements that create security for communities while conserving resource use. This would involve a revival of the commons and a solidarity economy, making growth unnecessary for a good life.



(In Dollars)

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on August 13, 2015

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Triangle of Doom 080815

Figure 1: the not-quite-triangle of not-yet doom: World is slipping relentlessly toward energy deflation. Chart by TFC Charts, (click on for big).

Discuss this article at the Economics Table inside the Diner

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.

Eight of the 10 major S&P sectors were down, with the energy index and the materials index both lower by nearly 2 percent (and more).

Exxon Mobil’s 1.8 percent drop was the biggest drag on the energy index and Freeport-McMoRan’s 12.5 percent slump dragged on the materials index.

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):

China Oil 081115

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.

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Figure 3: The Canadian loonie (in dollars); Forex charts by, (click for big). China exports deflation: the loss of crude oil customers in China and elsewhere leaves Canada at the brink of a recession.

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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.

USDBRL 081215

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.

USDEUR 081215

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!

China Sector Credit Flows(1)

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.

USDJPY 081215

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“.

USDARS 081215

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 …

USDRUB 081215

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.

USDIRR 081215

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!

USDMXN 081215

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):

Chart Thumbnail 070514

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

TSHTF Podcast with Nicole Foss, Raul Ilargi Meijer & RE

logopodcastOff the microphones of Nicole Foss, Raul Meijer & RE

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Aired on the Doomstead Diner on August 9, 2015

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Recently, Nicole Foss of The Automatic Earth returned to blogging after taking something of a hiatus over the last year.  I caught one of her recent pieces on the situation in China, and her partner Raul Meijer has been covering the situation in Greece extensively.

Besides the two ongoing clusterfucks of China & Greece, there's quite a bit of ongoing collapse related to climate, the recent publication by James Hansen on Sea Level Rise, and of course the Encyclical by the Vicar of Christ on Earth, His Holiness Pope Francis, Chief Spokesperson for some 1.2B members of the Holy Roman Catholic Church, not to mention all the hubbub about Near Term Human Extinction…. clearly no shortage of Collapse Topics to discuss! 🙂

It's been nearly 2 years since I first got together with Nicole to talk about Energy & Inflation & Deflation.  So this seemed like a good time to do an update, and I nailed her down for another chat this week.  She happens to be visiting with Raul in the Netherlands, so as a bonus in this conversation we got his input as well., for those of you expecting to get the normal "Just the Facts, Ma'am"  type of presentation from Nicole in this Podcast, you may be slightly disappointed.   There definitely are a lot of facts jammed into this hour of KollapsnikTM chat.  However, because Nicole was chatting with both me and Raul, we kind of went off the rails a few times, and hilarity ensued.   I decided to leave some of it in there for a little entertainment value. 🙂  The stuff I cut out is even funnier, but sadly not for public consumption.  LOL.

Additionally, Nicole currently has a DVD in post production, discussing parameters of where you want to live, what kind of choices you can make moving ahead and so forth.  We currently have up a Doomstead Diner SurveyTM on places you DON'T want to live, still OPEN.  We'll have a new survey up next week on places you DO want to live.

Anyhow, crack open a bottle of your favorite beverage and enjoy the latest in Collapse from the Collapse CafeTM on the Doomstead Diner and the folks from The Automatic Earth.



Just that the people need to understand that this is the model that we've been suggesting as to what's going to happen is not a theory, it's actually happening exactly the way we said it would. It's just not happening everywhere at the same time because systems that are predatory pick off the little sick ones first. They work from the periphery towards the center as you said. But where we're seeing things move more and more to the center now. And China has been the the global engine of liquidity for the last while,  and drives demand for absolutely everything.  That's now tipping over the edge and we are going to see those same consequences manifesting in countries in the center that do not see themselves as being in any way comparable to Greece, but they are, they're just not there yet.  The same dynamic ends up operating there. But when we tell people what's happening people, they tend to think "oh well that's just my theory", but it's not a theory,  it's actually happening and will in the future a lot more places…


Yeah it's an ongoing phenomenon it's definitely not something that is projected or happening in the future or something like that,  collapse is ongoing now,  it's happening and you can watch.  You can watch it  progress, you can see all the different places where it manifests itself. Greece is one of course and Puerto Rico now as well…


Civil War…That makes me think…  People think the French are very good at protests right?   But they haven't seen the Chinese.  The Chinese do protests like nobody else does. (RE: Yea…they get serious about it…) because it's very bloody, very violent and I've been writing about this for years. I don't see how China can not end up in that kind of thing…


Confessions of a Carnivore

Off the keyboard of RE

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Published on the Doomstead Diner  on August 1, 2015

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The Meat FIX for the week…

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I have a confession to make.


This addiction may be even worse than my Beer Addiction, it's a tossup. can blame the Meat Addiction on my parents.  Growing up in my youngest years in Brasil, they often took me to Churascarias where many delicious cuts of meat were served up directly off the spit.  My Taste Buds became so entranced by the flavor of Meat cooked over an Open Flame that upon returning to the FSoA around age 10 or so, I immediately embarked on a career as a BBQ Chef, utilizing a small Cast Iron Hibachi that was the site of many Steaks, Burgers, Chicken Wings and Salmon Fillets being Grilled to PERFECTION! 🙂

I am of course aware these days of how poorly treated the cows, pigs and chickens are by our Industrial Ag system, but people aren't treated a whole lot better and it becomes a bit much to worry about the unfortunate life of a cow in a feed lot when there are a few billion people not living much better lives, and besides I just LOVE MEAT!  So I can't quite buy in to the Vegan mind set because of this. the downside of the unfortunate life for an an Industrially raised, fed and slaughtered cow in some Chicago Feed Lot is the ENERGY and WATER problems involved with a diet copiously laden with MEAT in it.

According to HuffPo, it takes around 1847 gallons of water to raise up a Pound of Beef.  Chicken does a lot better at just 518 Gallons for a pound of Chicken, and Beer does better than Wine at 296 vs 872, although you then get into serving size questions as well.

In any event, as you can see it takes a whole heck of a lot of water to put the meat on the table, and even the Beer in your Bottle also!  To acquire enough of that water these days also takes energy, pumping it up from ever more depleted Aquifers like the Ogalalla.

However, the problems of Industrial Ag and its treatment of animals used for food sources, the problems of energy consumption and the problems of water consumption are NOT the reason I am writing this article!

The reason is that due to a few reasons, I cannot STOP buying MEAT at the grocery store!  The Feature Photo at the top of the page has this week's selections, a rack of Baby Back Pork Ribs which ON SALE came in around $4/lb, and 3 nice Filet Mignon Cuts coming in at $12/lb.  That wasn't a sale, but it's still pretty cheap for Filet Mignon. to buying this meat, I still have in the fridge leftovers from LAST week. particularly some nice Short Ribs and about 1/3rd of a Rotisserie Chicken left to eat, and that is BEFORE I take the carcass and throw it in the Slow Cooker to make a batch of Chicken Soup, which itself will last me another 2 days EZ.

Layered on top of this is the fact that my neurological problems from my neck injury are depressing my appetite, so most of the time I just don't feel like eating any of it!  Regardless how good it smells or looks!  I'm just not feeling HUNGRY enough to devour it!

Now, because  I can't help myself as an ADDICT, I keep buying this stuff.   I'm NOT living on the SNAP Cad Gourmet budget of $2/day (yet!), but neither am I spending much more than $5/day either on food.  The Filet Mignon I picked up for around $12, The Pork Baby Back Ribs for another $16, but together this is enough Animal Protein for 2 weeks EZ!  If I would just STOP buying the stuff when i see it ON SALE, I COULD stay under $2/day! I can't stop buying it, I'm a JUNKIE for Meat!  Not just beef, any Animal protein.  You know what ELSE I bought this week?  A Cocktail Shrimp Ring for $10!  Like I really need this with all the freaking leftovers I have in the fridge right now?  It will take me a month to work through just the LEFTOVERS, and some of it will probably go bad before I am hungry enough to eat it!

Supermarket-meatsI can't even vaccuum seal it up and put it in the Freezer!  Why not?  Because the freezer itself is JAM PACKED with as yet uncooked Steaks, Fish, Chicken and Sausage I have purchased on other occassions travelling down the Meat Aisles of the local Food Emporiums.  I'm like a kid in a Toy Store when I walk (or these days cruise on the Ewz) down the meat department.  Look at those beautifully marbled Rib Eye's ON SALE!  Gotta have those.  Hot Italian Sausage ON SALE!  Mmmm, think of the great Spaghetti Sauce I can make with those!  LOL.

Meanwhile of course out there in the rest of the world and even here in the FSoA, plenty of people have trouble just putting enough Rice in a Bowl to get the daily necessary intake of calories.  Houston, We Have a Distribution Problem!

You might think this would make me feel guilty about buying more meat than I can actually eat, but it doesn't.  Why not?  Because all the dead cow flesh in the local freezer will never make it onto the plate of a starving child in India, and in fact a good deal of it never even goes to feed the homeless up here either.  It just gets tossed if it gets too old and can't even be sold at discount. It's not my fault the distribution system is so fucked up, and I am not going to blame myself because I have more meat to eat than I can handle and somebody else has none.  It happens to be the shelf at my local grocery store, and I happen to have money to buy it, so I do. other reason I can't stop buying the Meat is because of the problem I KNOW is coming down the pipe here at some point, which is that the stuff just won't be available to buy AT ALL.

Cattle are already not looking too good in many parts of the world, and here in the FSoA as the water depletes out of Ogalalla and the energy isn't there to pump it up either, the Cattle right here are going to look just like the one at left.  The ones still left anyhow, since the ranchers are already culling the herds, which leads to some pretty weird effects not dissimilar from what is going on with Oil, which is that in spite of a real shortage, the prices go DOWN rather than UP. as a temporary GLUT hits the market.

You have the additional problem where as Credit dries up, the first folks to lose access to the credit are the actual End Consumers of the product, be it either Rib Eye steaks or Gas for your SUV.  If the end consumers don't have credit to buy the stuff, where can the price go but DOWN?  This deflationary driver is ongoing across the Globe at the moment, and is likely to continue on for quite a while in many places, while in others new Credit is created, driving an inflationary spiral in those places.  Eventually either way though, without the stuff on the meat rack to buy, the Money Dies.  It simply stops working to buy things, and you revert to a barter economy if you are fortunate, this already is occurring in Greece.  You do need something to barter though that somebody else wants, and they have to have something you want.  Both of those things are also likely to start disappearing too.

Which brings us back round to the old question of TIMELINE, how long will it take for this to play itself out, in what locations first and how can you best negotiate what is inevitable here, for yourself and your progeny?  There are no firm answers to those questions, but we do tackle them daily here on the pages of the Doomstead Diner.


4 Signs of Deflation

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on July 20, 2015

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4 Things That Are Happening Today That Indicate That A Deflationary Financial Collapse Is Imminent

When financial markets crash, they do not do so in a vacuum.  There are always patterns, signs and indicators that tell us that something is about to happen.  In this article, I am going to share with you four patterns that are happening right now that also happened just prior to the great financial crisis of 2008.  These four signs are very strong evidence that a deflationary financial collapse is right around the corner.  Instead of the hyperinflationary crisis that so many have warned about, what we are about to experience is a collapse in asset prices, a massive credit crunch and a brief period of absolutely crippling deflation.  The response by national governments and global central banks to this horrific financial crisis will cause tremendous inflation down the road, but that comes later.  What comes first is a crisis that will initially look a lot like 2008, but will ultimately prove to be much worse.  The following are 4 things that are happening right now that indicate that a deflationary financial collapse is imminent…

#1 Commodities Are Crashing

In mid-2008, just before the U.S. stock market crashed in the fall, commodities started crashing hard.  Well, now it is happening again.  In fact, the Bloomberg Commodity Index just hit a 13 year low, which means that it is already lower than it was at any point during the last financial crisis…


#2 Oil Is Crashing

On Monday, the price of oil dipped back below $50 a barrel.  This has surprised many analysts, because a lot of them thought that the price of oil would start to rebound by now.

In early 2014, the price of a barrel of oil was sitting above $100 a barrel and the future of the industry looked very bright.  Since that time, the price of oil has fallen by more than 50 percent.

There is only one other time in all of history when the price of oil has fallen by more than $50 a barrel in such a short period of time.  That was in 2008, just before the great financial crisis that erupted later that year.  In the chart posted below, you can see how similar that last oil crash was to what we are experiencing right now…

Oil Price 2015

#3 Gold Is Crashing

Most people don’t remember that the price of gold took a very serious tumble in the run up to the financial crisis of 2008.  In early 2008, the price of gold almost reached $1000 an ounce, but by October it had fallen to nearly $700 an ounce.  Of course once the stock market finally crashed it ultimately propelled gold to unprecedented heights, but what we are concerned about for this article is what happens before a crisis arrives.

Just like in 2008, the price of gold has been hit hard in recent months.  And on Monday, the price of gold absolutely got slammed.  The following comes from USA Today

The yellow metal has tumbled to a five-year low amid a combination of diminishing investor fears related to foreign headwinds in Greece and China, and stronger growth in the U.S. which is leading to a stronger dollar and coming interest rate hikes from the Federal Reserve. Investors have been dumping shares of gold-related investments as other bearish signs, such as less demand from China and the breaking of key price support levels, add up.

Earlier today, an ounce of gold fell below $1,100 an ounce to $1,080, its lowest level since February 2010. Gold peaked around $1,900 an ounce back in 2011.

For years, I have been telling people that we were going to see wild swings in the prices of gold and silver.

And to be honest, the party is just getting started.  Personally, I particularly love silver for the long-term.  But you have got to be able to handle the roller coaster ride if you are going to get into precious metals.  It is not for the faint of heart.

#4 The U.S. Dollar Index Is Surging

Before the U.S. stock market crashed in the fall of 2008, the U.S. dollar went on a very impressive run.  This is something that you can see in the chart posted below.  Now, the U.S. dollar is experiencing a similar rise.  For a while there it looked like the rally might fizzle out, but in recent days the dollar has started to skyrocket once again.  That may sound like good news to most Americans, but the truth is that a strong dollar is highly deflationary for the global financial system as a whole for a variety of reasons.  So just like in 2008, this is not the kind of chart that we should want to see…

Dollar Index 2015

If a 2008-style financial crisis was imminent, these are the kinds of things that we would expect to see happen.  And of course these are not the only signs that are pointing to big problems in our immediate future.  For example, the last time there was a major stock market crash in China, it came just before the great U.S. stock market crash in the fall of 2008.  This is something that I covered in my previous article entitled “Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

As an attorney, I was trained to follow the evidence and to only come to conclusions that were warranted by the facts.  And right now, it seems abundantly clear that things are lining up in textbook fashion for another major financial crisis.

But even though what is happening right in front of our eyes is so similar to what happened back in 2008, most people do not see it.

And the reason why they do not see it is because they do not want to see it.

Just like with most things in life, most people end up believing exactly what they want to believe.

Yes, there is a segment of the population that are actually honest truth seekers.  If you have felt drawn to this website, you are probably one of them.  But overall, most people in our society are far more concerned with making themselves happy than they are about pursuing the truth.

So even though the signs are obvious, most people will never see what is coming in advance.

I hope that does not happen to you.

It All Falls Apart

Off the keyboard of Steve Ludlum

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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.

Fred GDP-debt 061515

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.

Greek Outcome

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.

It’s the 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.

Bond Market Collapse and the Banning of Cash

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MoneyHoleDiscuss this Rant at the Podcast Table inside the Diner



…Bitcoins, a relatively new form of electronic money are also often hawked as the latest and greatest solution to keeping your money safe. Except EVERYBODY KNOWS about Mt. Gox by now. From Wiki:

Mt. Gox was a Bitcoin exchange based in Tokyo, Japan. It was launched in July 2010, and by 2013 was handling 70% of all Bitcoin transactions.[1] In February 2014, the Mt. Gox company suspended trading, closed its website and exchange service, and filed for a form of bankruptcy protection from creditors called minji saisei, or civil rehabilitation, to allow courts to seek a buyer.[2][3] In April 2014, the company began liquidation proceedings.[4] It announced that around 850,000 bitcoins belonging to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time.[5][6] Although 200,000 bitcoins have since been "found", the reason(s) for the disappearance—theft, fraud, mismanagement, or a combination of these—are unclear as of March 2014.[7]

You think Fraud, Mismanagement and Hacking will STOP if money goes cashless? OF COURSE NOT, IT WILL GET WORSE! There is no computer system ever that is foolproof and incapable of being hacked, and of course the rewards for hacking such a system or “mismanaging” it gets bigger all the time, so the Best & the Brightest spend all their time figuring out how to do that…

For the rest, LISTEN TO THE RANT!!!

Full Rant Transcript available HERE


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