Published on The Doomstead Diner on March 5, 2017
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I ran across a chart on Bloomberg which is perhaps the best demonstration to date that the Oil Economy is in Full On Collapse mode now. The chart is of Oil Inventory in storage, and covers the last 35 years since 1982 of Oil Inventory in the FSoA, and is the Header Pic for this article.
Do you note the Hockey Stick nature of this graph? For 35 years until 2014, Oil Inventories were kept within a very narrow range. Supply & Demand were kept in balance by the folks in control of both the extraction of Oil and the production of money. A more or less steady "growth" rate of the entire system was maintained, as oil output and population increased, the money supply increased in tandem with it, a couple of percentage points ahead which provided return on investment for those in charge of creating the money in the first place. For everyone else, this appeared as Inflation as the cost of housing, food and just about everything else besides techological gizmos kept spiralling upward.
However, even through all the recessions through the 1980s to today, Oil Inventories always stayed inside this narrow range. That includes the Great Recession following the 2008 Financial Crisis. Something CHANGED in 2014 though, and my good friend Steve Ludlum of Economic Undertow pegged it to the month more than 2 years in advance with his "Triangle of Doom". What changed at this time was that the cost of extracting oil went higher than the price the customers could afford to burn it at. The price crashed, from over $100/bbl down to $40/bbl or so.
Charts by Steve Ludlum of Economic Undertow
August 2012 Prediction
April 2015 Reality
At this price, virtually nobody extracting oil makes a profit. A few folks like the Saudis still have Legacy fields they can extract oil at a profit at $20/bbl, but across the whole of Saudi ARAMCO their costs are a good deal higher than that. Here in Amerika, the Frackers may have got their extraction costs down to $60/bbl in some of their better fields, but they're still not making a profit at $50/bbl. Just not bleeding money quite so fast,and if they are TBTF, then Wall Street keeps rolling over their loans to keep them floating another day. This is better in the short term than having to write down $Billions$ in losses, which then would make the bank itself insolvent.
So what has occured here in the Oil Trading market since 2014? Well, Oil Traders keep holding back selling until they can make a profit. But in the $50 range they mostly can't, so the oil stays in a tank somewhere while they wait for the price to go back up, but it doesn't. Meanwhile, the Extractors of Oil all around the world keep extracting, because they have to do that to pay their bills. Crude keeps piling up because Konsumers refuse to burn the shit fast enough, because they can't AFFORD to burn it faster!
Until they lower the price DRASTICALLY, the glut will continue to accumulate. Eventually here, they will run OUT of tanks to store this shit in, and it does cost money every day to keep the Oil you bought at one price stored in a tank somewhere to sell on another later date at the higher price you hope for. NOBODY wants to "buy high, sell low"! That's a recipe for Bankruptcy of course. So they keep the oil in the tanks, and they keep filling up more and more.
Oil Tanker Parking Lot off Singapore
Inevitably, a LIQUIDATION SALE has to come here. There is not endless room for storage of this stuff above ground, and besides that it's expensive to store all that oil. Whoever owns it is bleeding red ink as long as they hold onto it.
Now, whenever you read any of the Oil pundits, they will tell you the reason for the glut is either OPEC members cheating on their quotas, Iranians bringing more Oil online or FSoA shale frackers drilling more wells. But is the total global production really up all that much? No, in fact it's been going down since it peaked in August of 2015. So if it's not the supply going up, why the glut?
IT'S THE DEMAND, STUPID!
Because they massage the figures everywhere else in the economy to show "growth" and nobody wants to admit being in a recession, Oil inventory keeps growing. This figure you can't massage (well not too much), because the stuff is a physical quantity that has to be stored in…something. So they have to know where they are going to put it.
Oil is a Global Commodity, in which the FSoA is among the largest consumers but it's not the only consumer. Europe as a whole consumes a lot, China consumes a lot also. All the consumption is not Happy Motoring either, a lot of it is industrial consumption. Globally in aggregate, if the economy was truly growing we would be consuming more Oil, not less.
Sometimes when I make the Demand Argument with respect to both the price and the glut, critics will tell me, "But RE, the traffic is just as bad as ever and everybody in my neighborhood is still driving gas guzzling SUVs!". Well, that may be true in your neighborhood, but in somebody's neighborhood somewhere it's definitely NOT true.
My best guess is most of the reduction in demand is coming from southern Europe, where they have been in severe recession for years now. This is probably also bleeding into the Chinese manufacturing sector with declining demand for their toys. So then they use less Oil in the manufacturing process.
With a declining amount of total production, along with a Hockey Stick graph of skyrocketing inventory, the only answer can be declining global demand for Oil. In order to get the demand up, they have to drop the price down. But they're already losing money at the current price in the $50 range. So the traders keep hanging on for the day the demand will magically rebound here and the consumers will step back up to the pump and pay the prices they need to make a profit. There is however no reason at the moment to believe that the consumers will magically get more money to pay more for the oil, they already have trouble paying for it at the price it is selling for now.
Unlike the magical world of Money where you can conjure as many digibits as you want out of thin air and which takes virtually no room to store inside a laptop, Oil is a physical commodity which must be burned to have value. If it's not burned as fast as it is pumped, then it's going to lose value. The traders don't want to recognize the loss of value though, because they will take a serious bath. A bloodbath. They don't have to take the write down though until they actually sell the stuff. So they don't sell, they keep it stored on a tanker somewhere and pay the daily storage fees out of more borrowed money, which the banks keep lending them because they will go tits up when the traders they lent money to go tits up. No matter how much money they lend to keep storing the Oil though, eventually they're going to run out of room. Then EVERYBODY will HAVE to stop pumping Oil until they work through the glut. Given there is double the normal inventory, this could take a little while. Can any Oil Producing nation go even a week without the revenue from their Oil?
This condition of extreme glut has to break, and the only way to break it is a major reduction in the price. When that comes, there will be carnage all across the energy and banking industries. I don't know how long before the last storage tank and VLCC tanker will be full up, but I can't imagine it is too far off. The End Game Approaches.
Published on Our Finite World on September 29, 2015
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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.
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:
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.
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.
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.
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.
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 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.
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.
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.
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:
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.
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.
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:
- The amount that consumers in advanced economies can afford.
- 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.
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.
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.
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.
Off the keyboard of Steve Ludlum
Published on Economic Undertow on August 13, 2015
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Since last summer oil prices have crashed 50% (in dollars). The media fairy tale suggests an output contest between Saudi Arabia and US oil drillers with the resulting glut overwhelming demand. This is yet another reprise of the modern myth of plenty and prosperity, eternally bountiful supply enabling bottomless demand in a consumption paradise. Indeed, demand exists everywhere there is a TV set and paper money; it is the ability to exercise demand that is slipping away.
The Undertow story is of an unacknowledged energy shortage leading to exclusion of less-solvent customers from petroleum markets world-wide. Instead of odd-even days or gas lines, fuel is rationed by way of access to credit. As the fuel shortage propagates, the number of solvent customers declines. This is natural and should not need explanation: oil prices fall because customers are broke. There is the illusion of excess supply because the number of solvent customers falls faster than extraction rates. Attempts by drillers to lift more petroleum exaggerates the illusion of excess supply; prices fall which strangles drillers in a vicious cycle.
Low prices are unable to stimulate consumption, instead, they illuminate the failure of consumption to earn anything … that the economy itself is bankrupt-by-design rather than mismanaged.
The absence of real earnings means all returns must be borrowed. Debt is expensive, the costs are added to those of extracting- and distributing fuel. The marginal consumer is excluded from fuel markets because he cannot afford to borrow or the lender rations credit for solvency reasons. The outcome is a margin call across the economy leading to bankruptcies that ration credit further. Ultimately, credit becomes unavailable and fuel is allocated to those who can earn an actual return on its use … provided there are any real returns to be had. If the returns are not sufficient to support energy extraction there is no energy. This is the outcome of energy deflation, why every effort must be made to keep from slipping into it.
Just as leverage amplifies itself in a virtuous cycle during the expansion period, leverage works violently ‘the other way’ as credit contracts. Self-amplification of customer insolvency is the point of no-return. When low prices strangle- rather than enable consumption, there is no way to reverse the process. If relative solvency cannot enable output then neither will insolvency. If governments cannot enable output by way of subsidies during a period of credit expansion they certainly cannot do so when credit is contracting. Governments must borrow the subsidies they offer to drillers, in doing so they ultimately borrow from the same customers who cannot meet the drillers’ costs; as such governments are no more solvent than their bankrupt citizens.
The great post- World War Two buildout of American style suburbs in the US and elsewhere has succeeded in devouring its resource base and replacing it with claims against what (little) resource capital remains. We are certain to fail spectacularly because we have succeeded at our fools’ errand so spectacularly.
When Is the Crash Coming?
The usual finance suspects are queuing up to predict an imminent market crash, aome have been predicting one for twenty years. They don’t want to be seen as missing the Titanic, others have proven to be prescient: Jeremy Grantham, Nouriel Roubini, Professor Steve Keen. Robert Shiller warns investors to beware the ‘New Normal Bubble'; Dean Baker … well, maybe not this time. Martin Armstrong suggests October this year for the big bang (slump). Nicole Foss suggests that the unraveling is already underway as does Economic Undertow. The problem is most economists view the problem as confined to finance and interest rate policy. This misses the point, monetary- and financial adjustments are irrelevant to an outcome that is driven by resource depletion. Finance difficulties are symptoms of the disease not the cause; we are undergoing a self-propelled regime of hard rationing that is taking shape under everyone’s nose.
Recent China currency depreciation (vs. dollars) puts more downward pressure on fuel prices even as OPEC drillers Iran and Iraq send more crude to the markets, currency depreciation (vs. dollars) in Japan and Europe reduces the overall bid for crude; demand in countries that supply China such as Brazil are likewise blowing up due to ripple effects and unwinding carry trades.
U.S. stocks fell in early trading on Tuesday in a broad-based retreat as China’s surprise devaluation of the yuan pushed the dollar higher and pressured commodity-related shares.
Oil erased most of its gains from Monday following the devaluation by the world’s top energy consumer. Other commodities such as copper, aluminum, nickel and zinc also fell.
Concerns around the health of the second-largest economy in the world also weighed on shares of U.S. automakers and industrials. General Motors was down nearly 3 percent, while Caterpillar was down 2.4 percent.
The yuan fell to its lowest against the dollar in almost three years following what the country’s central bank described as a “one-off depreciation”.
Stock prices are variable, what matters is the price trend (in dollars) relative to the trends of other currencies. Dollar-preference can be seen at work: China needs dollars to import fuel, so do other fuel importers. China also needs dollars to prop up its gargantuan stock- and real estate swindles – slash – Ponzi schemes. To gain dollars it must offer more RMB to foreign exchange holders than it did the day previously. This becomes a sort of dog-chasing-his-tail process where every depreciation gives cause for further depreciations down the road. The name of the game is to trade the ‘Brand X’ currencies including RMB at any price to gain dollars; as these are bought up becoming scarce and more desirable the trade amplifies itself.
With time, the causes that propel depreciation become indistinguishable from effects. China depreciates because of the flight of dollars overseas represents shrinking demand for its own currency. Yet, the depreciation itself is incentive to ditch the currency! Over the span of two days China and everything that it contains is today worth five- percent less than it was, previously. Out of $6.8 trillion in GDP, $340 billion has vanished without a trace, in the blink of an eye: whatever increase the country expected to gain this year is lost by way of its depreciation.
Whatever China seeks to gain by way of cheaper exports is lost due to higher import prices (in dollars):
Figure 2: China net petroleum exports by Mazama Science (click for big). The gap between what China extracts domestically and what it must import is financed with borrowed dollars and euros. China turns out to be another energy deadbeat little different from Greece, Argentina or Spain. While China domestic crude output is significant, it cannot keep pace with the country’s galloping consumption.
As China property- and stock markets crash, China aims to dump its deflation onto its trading partners … who are all trying to do the same thing. Like Germany within the eurozone, China has its bunch of captive punching bags to which it can export its misery: Australia, Peru, Myanmar, Brazil, Canada among others. For China’s largest trade partner the US, depreciating RMB is a defacto interest rate increase whether it is considered as such or not. This renders irrelevant whether the Federal Reserve raises policy rates later this fall or not … the result is deflation for the US leading to recession.
Economies are nothing more than fuel wasting enterprises, with the financing edifice erected upon this scaffold. Because fuel itself is hard to hold and store (without a tank farm), ‘money’ is held instead of fuel. With the passage of time, the dollar becomes preferred over other currencies as a fuel carrier. This is because there are plenty of dollars, because Wall Street produces the bulk of the world’s credit; because the US has been the ‘consumer of last resort’, because so many countries export goods or workers to the US that dollars are in wide circulation in these countries … because the dollar is proxy for the American hyper-wasteful lifestyle that almost everyone on Planet Earth aspires to.
Dollar preference turns this last dynamic on its head: instead of being a proxy for waste, the dollar becomes a proxy for what is being wasted. Once that point is reached it becomes a hard currency like the gold-backed dollar of 1932, the same dollar that was hoarded out of circulation causing most of the banks and businesses in the country to fail. The difference was that going ‘off gold’ did not affect how the US consumed energy, going ‘off oil’ would mean just that: switching from a non-functioning industrial economy to a non-industrial version that uses little or no oil at all.
Figure 3: The Canadian loonie (in dollars); Forex charts by XE.com, (click for big). China exports deflation: the loss of crude oil customers in China and elsewhere leaves Canada at the brink of a recession.
Figure 4: The US dollar — Australian dollar cross; like Canada, Australia bought the ‘it’s different this time’ hype about China resource capital consumption. As it turns out, Australia, like China, is worth a less today than it was over several years of yesterdays. Its reliance on China manufacturing leaves it with assets that have become liabilities.
Figure 5: The US dollar — Brazilian real cross. Sez Bloomberg:
Investors are concerned that the political instability (in Brazil) will push the country into a deeper recession and make it increasingly vulnerable to a sovereign-credit downgrade. The real has depreciated 8.1 percent in the last month, the biggest decline among 16 major currencies tracked by Bloomberg.
Currency depreciation is a dynamic that drives itself. Monetary- and fiscal policy is irrelevant: the worst-case scenario is well- meaning policy blunders amplifying dollar preference unintentionally. As with debt, once on the depreciation treadmill it is almost impossible to get off; this offers a continuum of opportunities for errors, these tend to be self-amplifying as well.
Figure 6: Welcome to Eurolandia, the home of self-propagating policy errors (in dollars). Turns out Germany beating its trading partners to a pulp is not good for business. Who could have guessed? As the fuel buying power of dollars increases, they flow toward the highest bidders, out of Europe, China, Japan and elsewhere toward Wall Street … and offshore tax havens. The outcome is a margin call against leveraged assets. Credit flows are never one- way. After flooding into a country, credit reverses and the funds that are necessary to support leveraged assets are withdrawn. This results in deflation. The same credit rationing underway in Greece is scaled up monumentally in China … with the same outcome!
Figure 7: China’s problem takes the form of a giant pink arrow: China’s finance structure is like Argentina’s because China is dependent upon dollar- and other hard currency inflows as collateral for domestic loans. This contradicts conventional analysis which has China as a US creditor. China cannot create dollars or dollar credit; China ‘lends’ energy (coal) and human labor to the US in the form of manufactured goods, these cost the country very little to produce. Repayment is in the form of dollar loans which cost Wall Street almost nothing to produce.
Within China there are two parallel dollar economies. Dollars flow by way of US customers and retailers to Chinese manufacturers. Some are forwarded to the Peoples Bank of China at the official exchange rate where purchasing power is replicated in the form of secured RMB loans into the Chinese economy. The balance are diverted by manufacturers into the loan shark economy where they become quasi-collateral for as many RMB loans as the market will bear. This lending is universally unsecured: when there is no collateral to seize in the place of circulating money, both borrower and lender are ruined.
In China, the shadow banks are very strong, they have distributed losses into the economy a long time ago; these losses have simply not been recognized. Deflation occurs when these losses are finally measured, when inflated Chinese assets are marked to market.
Analysts insist that Chinese dollar reserves can be deployed to bailout its shadow lending business. This is not possible because there is no refunding channel between the central bank and shadow finance. Lenders are simply shells erected to enable the theft of Forex reserves. Any redeployed reserves would be stolen as well. This in turn starves manufacturers of customers who lack vendor credit with which to purchase Chinese goods. Because shadow banks are strong, any unsecured central bank lending would be distributed into the Chinese economy as more unrecognized losses. Attempts to bail out shadow banks precipitates the deflation crisis the Chinese establishment is desperate to avoid: flight of dollar collateral => decline in RMB purchasing power => recognition of losses => bank insolvency and runs out of banks.
Credit cannot expand forever; the ‘Minsky Moment’ occurs when the cost of servicing (unsecured) debt plus the cost of running the actual economy exceeds the cash flow that can be generated by more borrowing.
Figure 8: The yen (in dollars). The Japanese government purposefully aimed to depreciate the yen and monetize government spending at the same time. The outcome has been higher import prices and less consumption, “Conservation by Other MeansTM“.
Figure 9: Argentina would rather not depreciate but it has little choice. The country is desperate to develop even as it becomes another economic road kill. Argentina shares with Brazil, Canada and Australia a dependence upon Chinese purchase of commodity goods; as China falters so does the peso. Sadly, Argentina’s plight does not offer it any relief from its overseas creditors …
Figure 10: Even oil producing giants such as Russia are not immune to dollar preference. Like other countries, Russia uses foreign exchange dollars, euros and sterling as collateral for its own lending. As a result, it is in trouble when the Forex starts flowing out of the country; there is nothing supporting the ruble. Russia’s fortunes have not been helped by its sclerotic ruling cadre and military adventures; Russia is only a powerhouse in the history books.
Figure 11: US dollar – Iranian rial. The chart clearly indicates when Western sanctions were applied in 2012 and later in 2013. Iranians were desperate to swap whatever rials they could get their hands on to gain precious dollars. Oil exports do not give any country wealth, instead the wealth is pumped onto ships and sent away to be annihilated somewhere else. Sadly, our economists don’t see things this way, they call the parasitic claims on wealth ‘capital’ and the wealth that is destroyed … ‘inputs'; they whine when the inputs can’t be had cheaply, they whine louder when they are too cheap. Because of economists’ blindness, it is always a surprise when countries like Iran, Russia, Brazil and Mexico find themselves in hot water; economists refer to the ‘Dutch disease’. These countries are hollowing themselves out as fast as they possibly can. What might save some of them is the ruin of their customers; a bit of oil might remain in the ground until some day in the future when someone can figure out what to do with oil besides burn it up for nothing!
Figure 12: Mexican peso (in dollars). Another petroleum exporter facing the hardest of times: the government is incompetent and corrupt, the countryside is overrun with violent bandits, its largest oil field is in terminal decline … the peso is worth less every minute. Checking through other currencies and countries the indicators are much the same. Save for UK sterling and a few others, the world’s currencies are worth much less — over a considerable period of time — relative to the dollar.
Regarding what can be done, vs. what will be done: consider the role of crashes within debtonomies (click on thumbnail then look to the far right):
Technology and institutions are suggested as change-agents by conventional analysts. Within Debtonomics, the change agent is the process itself. Increasing the capital burn-through rate results in more changes which in turn serve to amplify capital exhaustion. Technology is the instrument of waste, institutions take form to rationalize the use of technology and to provide credit to enable more waste.
Crashes are the consequence of resource depletion (Great Finance Crisis) or aggregated surplus-related costs that cannot be shifted. The outcome is that costs rebound against the aggregators themselves; (Great Depression, Long Depression, ongoing Great Finance Crisis). In advance of a crash there is no general incentive to make management changes so as to reduce risks … even as risks compound. Crashes result in mass bankruptcy and obvious changes including public demand for accountability. Crashing is the hardest way to change but seemingly the only way for Debtonomies.
It is hard to say right now whether the depreciation seen worldwide represents dollar preference or something else. It is possible that currency movements are marketplace phenomena that will revert to some sort of mean over time. In any event, the time to take steps to avoid this problem and energy deflation … is slipping away. Obviously, the most important step is to stop wasting resource capital. Because one way or the other, like it or not, capital is going to be conserved.
“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”
— John Maynard Keynes,
© Copyright Steve Ludlum 2015
Aired on the Doomstead Diner on February 26, 2015
With this Rant, the Diner breaks through the 88,888 Listen Barrier on Diner Soundcloud!
To paraphrase Doc Brown, “When this Baby hits 88,888 Listens, you are going to see some SERIOUS SHIT! 😀
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…Given it is an Epic Fail to try to blame the Saudis for the price crash, the next place the economistas go is to our own Home Grown Frackers, and the idiots on Wall Street and at Da Fed who funded that White Elephant with gobs of cheap credit thrown at Junk Bonds any dimwit with a drilling rig was issuing out. Problem with that idea is that even with drilling rigs being shut in here and production plateauing, the fucking oil price is still dropping and the storage tanks for the stuff are filling up to overflow level. They aren’t producing much more of the stuff, they keep dropping the price, nevertheless the storage tanks keep filling up. This is some kind of big fucking MYSTERY to the economistas and prop desk traders.
The obvious answer here is that if there isn’t too much supply being dropped on here, then the problem has to be on the DEMAND end. As in, J6P simply is not BUYING the Oil in the same quantity at the same rate he was just 1 year ago. Steady Supply, Price Going Down, Inventory Going Up, you are left with only one variable in this bathtub problem, which is that the fucking DRAIN is STOPPED UP!
Now, why oh why would J6P all of a sudden STOP buying gas, even at the new Low Low prices every day of $2/Gallon? Actually, it’s gone even below $2 in quite a few places. According to Da Goobermint, our Economy is recovering, the UE rate is like 7%, so WTF don’t these assholes start BUYING MORE GAS?…
For the rest, LISTEN TO THE RANT!!!
Off the keyboard of RE
Published on the Doomstead Diner on November 6, 2014
Discuss this article at the Economics Table inside the Diner
Over the course of the last week, we have had two MAJOR Black Swans come in for a landing.
The first one actually has been ongoing for a couple of weeks now, the collapsing price in the Oil Market, plunging from its recent “set point’ at around $90/barrel to $77 for WTI as I write this article:
The second Swan came in the form of an announcement by BoJ Chief Psycho Kuroda that the BoJ would ENGAGE Warp Drive on the Printing Press and buy up every last JGB the Nip Goobermint sells in order to meet their ever increasing need for cash. The Yen was already sliding, this announcement however sent it on a Downhill Run worthy of an Olympic ski course.
Flip this upside down to get JPYUSD. Nobody publishes it that way, I wonder why?
Are these two events unrelated coincidence? Of course not.
Demand Destruction has taken hold all across the globe now, and Oil consumption is dropping everywhere. Here in the FSoA, we’ve seen a 10% drop in gasoline consumption since 2008, and the end to this is nowhere in sight either.
Fewer miles driven means fewer Japanese Carz sold here in the FSoA, and it is no different over in Eurotrashland, in fact it is worse over there, particularly in the PIIGS Nations. Fewer Japanese carz sold means a ballooning trade deficit for Japan, and their trade surplus over the years is the only thing that kept them able to support ever increasing Goobermint deficits, which now have reached the Ionosphere and soon will encompass the entire solar system, including UR-ANUS.
Global Deficits in aggregate soon will reach the Edge of the Visible Universe.
Going Where No Man Has Gone Before in Debt
What Psycho Kuroda-san wants to do here is devalue the Yen so far that Amerikans can by Japanese Carz for Pocket Change, and with Gas Prices dropping at the pump EVERYBODY hopes this will stimulate Demand and Happy Motoring Amerikans will once again start burning oil as fast as the Saudis can pump it out of the ground.
The Saudis themselves have promised to be the Walmart of Oil Wholesalers and sell their Oil at Low, Low Prices Every Day into the forseeable future, because they too have hefty obligations in subsidies to keep their population from rising up and beheading the Saudi Princes. What they have lost in high prices they hope to make up for in VOLUME!
Sadly for the Saudi Royal Family, it appears they will have some difficulty getting this Oil to Market however, since they seem to have Pipelines mysteriously BLOWING UP, another mere coincidence of course. Pipelines Blow Up regularly over there, nothing to see here, please move along.
Even if the pipelines remain intact however, it is unlikely that the Happy Motoring Amerikans are going to start increasing consumption again just because Gas Prices drop even $1/Gallon here. Millions of formerly Middle Class Amerikans have completely dropped out of the “Workforce”, and they can’t afford to drive around willy nilly at ANY price. They divested themselves of their cars already, and they aren’t buying enough new ones from Toyota because they can’t afford car payments either, even at ZIRP for 5 years! Unless the newly elected Republican Majority magically starts creating Jobs that pay better than Minimum Wage, there is ZERO chance these folks will be Happy Motoring ever again.
Besides this problem on the Consumption End, there is still more Blowback from Low Oil Prices on the Extraction end just around the corner here if Low, Low Prices Every Day continue for any significant period of time, which is the enormous DEBT BUBBLE worked up by the Energy Extraction Industry here during the “Fracking Miracle”, which dimwitted Pols and Energy Shills and the Corporate Media have been selling non-stop as the Ticket to “Energy Independence”.
Depending on the particular play and the costs involved in production, generally speaking only the very best of these plays can bring in Oil at under $80/barrel, so anyone drilling for it in less than perfect locations starts losing money with each well they drill, and the more they drill, the more they lose. They borrow more money to keep drilling, because to stop is to realize the losses, and nobody wants to do that! At some point though, and sooner rather than later if the prices stay below $80, the copious debt money being issued to these folks from Wall Street will stop flowing, many companies will go Belly Up and production at all but the best places will be shut in.
Don’t believe me? Read the report DRILLING DEEPER from the Post Carbon Institute for 300+ Detailed pages to get a picture of this nonsense. We will have a Podcast discussing the Drilling Deeper report with Author David Hughes up in the next couple of weeks here on the Doomstead Diner.
Don’t believe David Hughes? Go to Bloomberg in the Heart of the MSM/Wall Street Oligopoly:
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
Will this cut the supply sufficiently to outpace the ongoing Demand Destruction and finally get Oil prices to start climbing upward again? Eventually, it probably will, except by the time this occurs about the only people left able to afford the $200/barrel Oil still produced will be the 1% still on the Gravy Train of Funny Money from Da Fed.
Can 1% of the population pay for all the Road Maintenance, Bridge Repair and drive enough miles every day to keep Gas Stations open along their driving routes to fill up? Of course not, this is a volume bizness, and in order to build out the whole system it required constant Growth, issuance of ever more Debt on the supposition this growth would continue in Perpetuity, which of course is an impossibility on a Finite Planet with Finite Resources.
Has the Oil Run Out here? No it hasn’t, and it never will, but most of what is left will never come up from the rock formations it is wedged into, or deep under the sea or way up in the Arctic Ocean, where the costs for producing it are even higher than the tight oil formations in Marcellus and Eagle Ford, which already are higher than the Consumers of the Oil can afford to pay.
It doesn’t matter who gets elected into office here, the only solution to this problem is reduction in per capita energy consumption, and this will occur either through enforced rationing or “Conservation by Other Means” as Steve on Economic Undertow likes to phrase it, the reduction will occur as more and more people simply cannot afford to buy the Oil, or the products made with it.
Since most of our current economy is based on this, it has nowhere to go but DOWN now, which means fewer Jobz in this economy, lower tax receipts and further Defaults at all levels from Goobermint to Corporations to Consumers, and further Defaults means a reduction in the total Money Supply, because the money supply is entirely based on Debt and the belief that the Debt will at some point be repaid, which it will not be. It is all IRREDEEMABLE DEBT.
Financial Gimmickry has kept this Ponzi going here for a long time, but there are some Hard Limits that gimmickry cannot fix, and one of them is Consumers who just will not BUY oil, because they don’t have the money to buy it. This is not a “Choice” Consumers are making, it is not a “Paradox of Thrift”, the endless reams of Toilet Paper Da Fed and the BoJ are printing are not filtering out to the end consumers. You do not have an Economy when you have Sellers but No (or really too few) Buyers. That is Common Fucking Sense.
It’s the FINAL COUNTDOWN now.
Off the keyboard of Ugo Bardi
Published on Resource Crisis on October 27, 2014
Oil consumption in Italy in million tons. From “MondoElettrico“
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Off the keyboard of Ugo Bardi
Published on Resource Crisis on October 20, 2014
Discuss this article at the Energy Table inside the Diner
Originally published in Italian in “Greenreport” [14 October 2014]
There is plenty of movement in the oil world: after five years of relatively stable prices, the legendary “barrel” is coming down from over $ 100 to under 90, and it looks like it will keep falling. What’s happening? Has anyone found new resources? Or is it Saudi Arabia using the “oil weapon” to bring down Russia, the heir of the old “evil empire”?
In reality, it is nothing like that. There are no major new discoveries of oil in the world and the Saudi oil weapon is much less fearsome than it is normally described in the media. But, then, why are prices going down? There are good reasons, but we need to understand them and, more importantly, to explain why the likely future drop in oil prices would NOT be a good thing; indeed it could be a planetary disaster.
First of all, we should take into account that oil is a finite resource, but also that it is subject to the laws of supply and demand; it cannot escape the control of the entity we call “the market“. So, we are seeing two contrasting trends in the oil market. One is the gradual depletion of the so-called “conventional” oil; that is liquid oil extracted at relatively low cost from wells. As a consequence, the production of conventional oil is static or declining almost everywhere. The other trend is the increase in the production of “unconventional” oil, that is combustible liquids which are obtained, for example, by treating oil sands, or biofuels, or “oil shale,” the kind you obtain by means of the “fracking” process.
Up to now, the rapid development of the production of unconventional oil – especially shale oil in the United States – has compensated the worldwide decline in the production of conventional oil; it has, in fact, allowed production to keep growing. At the same time, many of the major economies are in recession and are reducing their energy demand. Italy, for example, has lost 25% of its oil consumption over the last five years, and the descent continues. Other economies, such as in Germany, are in trouble, even if not yet in recession. This causes a decrease in the world demand.
So, the two factors – increase in supply and decrease in demand – go in the same direction: the market wants the price of oil lowered, and it goes down. We should also take into account that these phenomena are often heavily influenced by the perceptions of financial operators: if everyone thinks that the price of oil should fall, then it will fall. In practice, we risk to see not just a drop in oil prices, but also a true meltdown of the oil market, like that witnessed in 2008-2009.
Many people would be tempted to believe that lower oil prices are a good thing, but it is not so. If we will see a repetition of the scenario of 2008-2009, the result can only be a disaster (as it was at that time). The problem is that oil resources are not all the same: to produce certain types of oil is very expensive. Extracting from tar sands or from oil shales, for example, is more expensive than extracting from traditional wells. So what happens if prices go down? It happens that extracting and marketing certain types of oil does not generate a revenue anymore. Then, those types of oil are not produced any more. Who would ever want to produce at a loss?
In practice, if prices decrease, the world’s oil production decreases: have you ever eard of “peak oil”? It is just this phenomenon: “peaking” does not mean running out of oil; absolutely not. It means that producing more oil is not as convenient as it was before, hence less is produced. Therefore, we see a peak in the production curve. That’s peak oil.
And that’s exactly what may happen in the near future. Oil at over $ 100 a barrel allowed the industry to maintain a fairly constant production – actually even to increase it slightly over the past few years. Oil at significantly lower prices does not allow it anymore, and it forces the industry to reduce production. This leads, among other things, to the closing of many refineries, as is happening in Italy.
In the end, it is perfectly possible that oil will cost less in the future, but also that we won’t have the money to pay for it. There is nothing to do about that: it is the market, baby! But above all, the troubles come from our attitude that continues to make us believe that oil will last forever. It is not possible. Let’s start thinking about that!
Off the keyboard of RE
Published on the Doomstead Diner on April 23, 2013
Discuss this article at the Energy Table inside the Diner
Of all the charts and graphs which can be pulled up off the net to demonstrate that the Peak Oil corner has been turned, none do it more effectively than the Total FSoA Gasoline Sales History chart published by the EIA at the top of this article.
Retail Gasoline sales to J6P essentially fell off a cliff beginning in 2005, actually well before the collapse of Bear Stearns and Lehman Brothers and the implosion of the Subprime Mortgage Market, all today seen as watershed moments in the ongoing collapse of Industrial Civilization. Today in 2013, retail gasoline sales are 50%, HALF what they were at the Peak of Happy Motoring in 2005. That is roughly 8 years of time, an average rate of decline of around 6% per year. Assuming no other trend line changes, retail gasoline demand in 2021 would hit ZERO. This all while total population size (if you believe the stats) continues to INCREASE, which can only mean a lower per capita usage of energy through this period.
It may not take that long of course if the Dollar crashes, or it might take longer if some sort of “plateau” effect takes place as portions of the world economy are triaged off the Oil Jones, but there is no evidence to support the idea said demand will ever Rebound, or that if it did rebound that Gasoline could be produced in sufficient quantity at cheap enough price to supply that demand.
Oil production at all the main “Legacy” fields such as the North Slope here in Alaska is in decline, with the persistent Myth promulgated in the MSM that Horizontal Drilling and Fracking will produce enough to replace the lost production from the conventional Oil fields. If that were really true, the Oil companies would have been ramping up this production to keep the demand up and keep the game going, but the fact of the matter is that said companies are shutting down Refineries here and in Europe because the demand isn’t there to justify their existence. The only reason they can still show a “profit” is because the price is so high, and the few people with money/credit left are Bankrupting themselves to keep buying it. Eventually there won’t be enough of them left either to keep 1/2 the number of refineries open, at which point it shrinks again to 1/4. Then 1/8 etc until finally there isn’t enough tax revenue coming in to keep maintaining the roads and bridges, and Open Gas Stations can only be found in a few small Ringfenced local economies. No more Happy Motoring for ANYBODY after that, drive a few miles outside a Major Metro there will be no Open Gas Station around to fill up your Jag or Maserati, even if you are a Filthy Rich Pigman.
The other Myth promulgated is that besides Fracking producing enough liquid fuels to replace the lost production from fields like the North Slope and Ghanwar, Happy Motoring will transition off the ICE and move to EVs, battery powered vehicles running on Electricity. The problems with that idea are abundant, overall the battery technology is itself very dependent on fossil fuels for extraction and refinement of the Rare Earth Metals used in the more durable rechargeables, and the Electric Grid as it stands is decaying and having major issues with Demand Destruction as well. As more McMansions get abandoned because the ex-Suburbanites can’t pay the Mortgage, the revenue stream to the Local Power Company drops off the map. They keep cutting back on Staff, maintenance is deferred, breakdowns and blackouts become more common. What do you DO if you have driven your EV to the next county over to visit Granma and her Lights are OUT, so you can’t charge up the Prius to drive back home? Are you going to wait for the Solar PV Panel on the Roof of said Prius to recharge the batteries? Maybe with REALLY sunny days in a Week or Two the PV panels could generate enough electricity to get you halfway home.
It’s pretty obvious why there is so much Demand Destruction in Gasoline consumption now here in the FSoA, one only has to look at the UE figures and the size of the Employed workforce to see the reason for it. Although the BLS persistently massages the UE figures by dropping people off the stats, the actual number of working age people gainfully employed continues to drop, all while the total population continues to increase. Although we do use copious amounts of gasoline to drive around willy-nilly for no good reason, in REALITY the major use of the automobile is to get J6P to and fro his workplace in the Morning and Evening Rush Hour. The Billions of Gallons of Gas wasted by J6P sitting in Rush Hour Traffic Jams for the last 50 years here in the FSoA is impossible to calculate, but those gallons were a HUGE portion of the demand for Gasoline in the Car based economy developed here in the post-WWII era. Fewer people employed means fewer people driving to work, less gas consumed. Old Retired Boomers & Silents don’t usually consume that much gas, besides a few who cruise their Bugout Machines around the country to visit Grandkids. They mostly sit home these days and get into arguments on Internet Message Boards and Blogs like the Doomstead Diner. LOL. Consumptive still of Electricity, but it doesn’t use much Gas.
The effect is of course synergistic, since so much of the economy is based on people driving around willy-nilly, as fewer people do this, more jobs are lost. Now it’s not just Retired Silents hanging out at home getting into arguments on the Internet, UE GenXers and even Millenials are doing it too! Nobody has REASON to leave the house, they don’t have JOBS to go to! The only reason to leave is to go to Walmart to pick up Food for the Week, or even MONTH if you really wanna conserve on Gas usage. In most cases also, people are not SOOOO far from their local Walmart they can’t ride a bike pulling a trailer to pick up Groceries using their JPMC SNAP cards either. That crew represents near 50M people in the FSoA now, close to 15% of the whole population NOT using any gasoline at all!
Right beneath everyone’s NOSE, the effects of Peak Oil have been ongoing in earnest since 2005. Really of course they began long before that in the late 60s and 70s, evidenced by the Political Turmoil in those years as well as the Oil Embargos by OPEC, not to mention the closing of the Gold Window by Nixon in 1971 and the ever increasing Debt load taken on in the intervening years to mask the effects, at least here in the FSoA.
Now however since the problem has gone GLOBAL rather than LOCAL, the old tricks of Masking resource depletion with Debt Issuance is no longer working too well. There are no “Credit Worthy” customers anywhere on the whole GLOBE left now, and there are no SOLVENT Banks or Sovereigns left who can lend to anybody either! Anybody who thinks the Chinese or Germans are really solvent needs a wake up call, neither of them are. They just have positive account balances measured in debt other Insolvent countries “owe” them. Will the FSoA EVER pay back the $2T in USTs held by the Chinese? With WHAT? They don’t even need J6P as SLAVES, they got 1.3B of their own Slaves to Feed & Clothe here.
So inexorably and in rather RAPID time here we see the economic system collapsing in tandem with the Energy extraction and Distribuition system, which really TOOK OFF in the late 1800s with the development of the Railroads and then Standard Oil under the aegis of John D. Rockefeller. EVERYTHING in the Industrial Economy since that time was based on a seemingly ENDLESS supply of Cheap Energy in 1880, but what in fact was a quite LIMITED supply which enabled a huge Population EXPLOSION of Homo Sapiens, which just ended up CONSUMING said energy all that much faster. I remember reading as a 2nd Grader in Brasil out of a textbook that we had a “500 Year” supply of Oil, which perhaps we did at the population size and per capita consumption of the era, but the Exponential Function took care of that problem in 50 years. It is plain OBVIOUS as a Pimple on your Nose that we are running short on the Cheap Energy necessary to run the Industrial Lifestyle. Every last economy tied to this system is in some stage of Collapse now, barely 8 years since Gasoline demand started to Crater here in the FSoA. All due respect to John Michael Greer, that is NOT a “Slow Catabolic Collapse”, it is a fucking HEAD ON COLLISION with REALITY.
What can you DO about this problem? It is not going away here, and Goobermint cannot really solve the problem, at least on a Global Basis they can’t. Locally it may be solved for a while by the Big Ass Military stealing resources from some places to keep Happy Motoring going here in the FSoA for another day, week, month or year, but that strategy gets ever less effective all the time as the Costs for running such Wars grow ever Greater, while the resources captured are ever less productive. When the War Machine cannot feed ITSELF, it collapses on the Grand Scale and this is still a bit down the line, though perhaps not as far as some people believe.
The best you can do is to find others who understand these problems and who see the Writing on the Wall, and plan together with them a new Life in the Post Industrial Economy, such as it may evolve here in the future. Here on the Diner, this is what we DO on a daily basis as we hash out TEOTWAWKI. Such discussions formed the Genesis of our SUN Project, for Sustaining Universal Needs, and we invite all others to join with us as we plan for a BETTER TOMORROW. Only through Cooperation and Selflessness can anyone make it through the shitstorm coming down the pipe here. NOBODY will survive going it alone, not even up here in the Bush of Alaska, not in the Yukon Territory either. Such strategies only might preserve your life for a bit, they won’t resolve the problem of making the society of Homo Sapiens compatible with the rest of Life on Earth. It is up to us to remake ourselves to be in harmony with the Spaceship Earth, and to do this TOGETHER. That is what it MEANS to be a DINER ON SPACESHIP EARTH.
THIS IS ALL WE HAVE. WE MAKE IT WORK, OR WE GO THE WAY OF THE DINOSAUR.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on April 14, 2013
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In 2013 it is 2007 all over again, there is a sense of foreboding. Markets are breaking down except for the self-funded stock markets. When these markets begin to break … ?
A difference between now and the ‘good old days’ is that management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero and cannot be effectively lowered. Torrents of cheap credit flow from central banks toward commercial finance. Bad loans have been shifted from the private sector to the public’s accounts. Trillions in all currencies have been borrowed and spent by governments … largely to benefit finance. Every one of these are rear-guard efforts, behind them there is nothing, only desperate flailing, arbitrary confiscation, stealing what remains to steal … capitulation to reality … and ruin.
Figure 1: What a fuel price hedge looks like along with its collapse, the Incredible US Housing Recovery compared to the monumental surge in housing churn that took place from 1990 to 2007. The ‘recovery’ is the tendril on the far right. Realtors want Americans to believe what is underway right now is the start of another ramp-up in house building and selling. This is a lie: Americans are broke, suburbia is too expensive to duplicate. A palatable alternative to suburbia in 2013 does not exist.
What would make a ‘recovery’ sustainable? Fuel prices returning to sub-$20 per barrel of crude oil. Otherwise, most of what is seen on the chart is a stranded ‘investment’.
What would derail any hope of recovery and leave the world a sustainable ruin? Fuel prices returned to sub-$20 per barrel of crude oil. At that price there would be very little crude oil available, there would be insufficient buying power to lift the hard-to-reach petroleum that now remains.
|Crude Oil (WTI)||USD/bbl.||91.29||-2.22||-2.37%||May 13|
|Crude Oil (Brent)||USD/bbl.||103.11||-1.16||-1.11%||May 13|
|RBOB Gasoline||USd/gal.||280.18||-2.92||-1.03%||May 13|
|NYMEX Natural Gas||USD/MMBtu||4.22||+0.08||+2.01%||May 13|
|COMEX Gold||USD/t oz.||1,501.40||-63.50||-4.06%||Jun 13|
|Gold Spot||USD/t oz.||1,482.75||-78.75||-5.04%||N/A|
|COMEX Silver||USD/t oz.||26.33||-1.37||-4.93%||May 13|
|COMEX Copper||USd/lb.||335.00||-8.35||-2.43%||May 13|
|Platinum Spot||USD/t oz.||1,486.75||-45.55||-2.97%||N/A|
Bloomberg commodities: precious metals and US petroleum were hammered on Friday. Metals have been leading indicators, petroleum is declining to the price level where drilling becomes unprofitable. Without new drilling there is no replacement for rapidly depleting existing reserves.
As reserves are exhausted so is the ability pay for them. The fuel waste process is collateral for fuel extraction, not the fuel itself. The reason for this should be obvious: as soon as fuel is extracted it is destroyed, it is useless as collateral. Instead, the fuel wasting implements become collateral for the funds used to waste more. As credit expands, it first becomes more costly then unaffordable. Industrial output — which is nothing more than non-remunerative waste — becomes impossible to finance. Ultimately, credit contracts, the nominal prices decline … as the ability to meet prices declines faster … we are entering into the credit contraction phase now.
This is a dynamic that escapes conventional analysis, which assumes an economy running normally in the background and providing credit … even as its fuel supply is depleted. Meanwhile, the economy runs down in real time, credit is diminished and analysts are perplexed.
Figure 2: (Click for big), Brent crude @ $118 in February accompanied the robbery/crash of Cyprus, panic in Japan and deflation. Brent crude today is $103.11, nearing the marginal level where extraction becomes unprofitable. Chart by TFC Charts.
Since 2008 the world has been in the grip of deflation which reflects facts on the ground. With depleting resources, multiplying claims against these same resources or adding wasting implements does not create anything new but depletes what we have access to, faster. Deflation exposes claims as worthless, the fuel extraction process itself is stranded. We have so successfully cannibalized ourselves that it is becoming too late to do anything useful about it.
Figure 3: (ZeroHedge) Japan 20 year bond yields have become massively volatile: bonds are offered for sale driving up yields which retreat as the Bank of Japan steps up to buy. For Japan’s central bank to meet its targets it must flood the world’s markets with … more credit. This credit-for-credit exchange is a charade, it cannot alter the trajectory of Japan’s fuel- and resource reality, it cannot even change Japan’s finance reality … it is capitulation, the wheels finally coming off in Japan.
Bond-holders ‘sell’ their holdings for yen then swap these for dollars or euros in forex markets. Volatility is increased because of the enormity of the trades required to move the generally liquid bond markets. Large lenders to Japan such as banks and insurance companies appear to be dumping bonds, exiting their positions. These lenders become yen sellers as well: because there are more sellers than buyers, the currency is depreciated. There is no real increase in the overall supply of money. Sean Corrigan @ Diapason Commodities Management, (ZeroHedge):
Net new debt issues are currently being penciled in at around the Y42 trillion mark a year and, with the BOJ scheduled to buy Y70 trillion p.a., it might seem that JGBs offer a one-way bet even here, but with a current overhang of Y942 trillion as we write, the possibility is not to be overlooked that while the Bank may be comfortably able to mop up the new flow, it might have its work cut out if others decide to use its resting bid to get rid of some of their enormous existing stock of claims.Prime candidates would be foreigners (with Y87tln to hand and steep currency losses to hazard), the banks (which, we have seen, hold Y425tln in government claims, of which Y360tln in JGBS per se), and insurance companies (with Y222 trillion in debt and Y184 trillion in JGBs & TBs combined). In its last concerted attempt at re-inflation, conducted in 2002-3, the BOJ briefly pushed up both the monetary base and overall M1 by around 30%. The response of prices was modest to say the least: CPI moved from -1.4% to +0.5% three years later. If the same thing were to happen again, all that would have been achieved would be to have introduced an unnecessary disturbance of the pricing structure between inland and foreign trade and, at the margin, between those living off current income and those reliant upon stored past income. Debt would, of course, have climbed inexorably skyward, as would the debt/nominal income ratio.
The reason for the gambit is Japan’s vanished trade surplus which had overseas customers subsidizing resource waste by the Japanese. Exports never provided any return for Japan’s customers: they are now broke, they cannot subsidize anyone. The depreciation is a futile attempt to retrieve the irretrievable.
There are two potentially market moving sections in the report. The Treasury Department planted a “dirty bomb” at the Bank of Japan, and tossed a grenade at the Swiss National Bank. I’m thinking of all the folks who are big long USDJPY. They are going to have to sweat the next 50 hours. They have to hold their cards and wait. I suspect that quite a few FX players will have their weekends ruined.The key words on Japan (from US Treasury Secretary Jack Lew):
“We will continue to press Japan to adhere to the commitments agreed to in the G7 and G 20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”
“I think we just had the Jack Lew moment that I was anticipating. I believe that Jackie Boy has made a mistake. He picked a public fight with Japan that he can’t win. Having picked the fight, he can’t back off. When the BOJ and the markets make him look silly (USDJPY = 110+) there is going to be pressure on him. Jackie has set himself up for a fall.
In all my years of watching (and participating) in the FX markets I have never once seen a situation where “talk” accomplished a damn thing. In fact, idle talk often creates the opposite reaction to what was intended. So for those who are having sphincter problems this weekend over a long USDJPY book, and the 50 hours you have to wait to find out what happens, I say relax. By the opening in NY on Monday, you will be okay again. In a few weeks you’ll be buying hot cars and houses.”
Keep in mind, the Treasury Secretary doesn’t act by himself, he has a fleet of ‘associates’ at the Big Banks pulling his strings. If he makes a mistake they lose and they don’t like to lose = they pull the strings as needed.
Meanwhile, the fundamentals are ignored: the effects of Japan’s maneuvering are likely to be negligible. Management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero … torrents of cheap credit flow, etc. Things cannot be improved, only be made worse.
Japan — like all the other countries — has no independent monetary policy. This is because the price of money has nothing to do with interest rates or trades on forex markets. Rather, it’s priced at gasoline stations around the world by millions of motorists every single day. If gas prices are too high — because of currency depreciation or some other reason — drivers buy less and economies deflate. This undoes the efforts of the money-managers.
Enter the post-1998 peak oil paradigm shift: when gas prices fall drivers buy more fuel but there is quickly less available, prices either increase again or shortages occur. The real price of fuel — that relative to other goods and services — increases relentlessly. Eventually, this real price bankrupts countries like Japan!
Think of the old-fashioned ‘gold standard’ constraining the money supply as well as industry and commerce as it did during the 1930s. With the ‘gasoline standard’ there are the same constraints except it is impossible to go off petroleum and grow the economy as could be done by ‘going off gold’. The only way to escape the gas standard is to jettison cars and other fuel-guzzling gadgets, this also annihilates economic growth which is dependent upon more and more of these things being sold. Meanwhile, in the background where the analysts pretend not to notice, the gasoline standard strands cars and other fuel guzzling gadgets anyway: at the end of the modernity’s ever-shortening gangplank there is no room to maneuver.
Fiddling with nominal prices is pointless: any possible currency-driven export gains are offset exactly by currency-driven import costs. Because Japan is nothing more or less than a car factory with radioactive beaches it cannot gain anything by depreciating its currency. Its export prices are determined entirely by what it pays for imports … including fuel! The only effect of so-called monetary ‘policy’ is steal funds from workers and shift them to plutocrats. Everything else remains the same.
The blowup in Japan is part of the de-carring process which is underway right now everywhere in the World. Depreciating the yen does not bring one drop of petroleum fuel onto the market. The only question is how soon the ‘Abenomics’ experiment will fail and what form the failure will take. As holders of yen and yen-denominated bonds reduce their ‘exposure’ and dump their bonds there is less credit available rather than more. Prices for fuel decline … as they are doing so now! This does not help the Japanese exporters because their customers are still broke … regardless of the price of credit.
When the price of crude declines below the cost of extraction there will be physical shortages. These will reduce credit further which will in turn shut in more crude in a vicious cycle. There will be a return to recession with no way to end it: conservation by other means.
What sort of country does Japan become? A place to look is Egypt which has its own currency but depends upon foreign exchange same as Japan:
Short of Money, Egypt Sees Crisis on Fuel and FoodDavid D. Kirkbpatrick (NY Times)A fuel shortage has helped send food prices soaring. Electricity is blacking out even before the summer. And gas-line gunfights have killed at least five people and wounded dozens over the past two weeks.The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals.
The establishment insists that the fuel shortage is the result of a money-credit shortage. Instead, the reverse is true: there is a shortage of fuel; there is no useful collateral for new credit, only (obsolete) waste enablers.
Portugal’s elder statesman calls for ‘Argentine-style’ defaultAmbrose Evans-Pritchard (Telegraph UK)Mario Soares, who steered the country to democracy after the Salazar dictatorship, said all political forces should unite to “bring down the government” and repudiate the austerity policies of the EU-IMF Troika.“Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened,” he told Antena 1.The former socialist premier and president said the Portuguese government has become a servant of German Chancellor Angela Merkel, meekly doing whatever it is told.
“In their eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal,” he said.
Raoul Ruparel from Open Europe said Portugal had reached the limits of austerity. “The previous political consensus in parliament has evaporated. As so often in this crisis, the eurozone is coming up against the full force of national democracy.”
The rallying cry by Mr. Soares comes a week after Portugal’s top court ruled that pay and pension cuts for public workers are illegal, forcing premier Pedro Passos Coelho to search for new cuts. The ruling calls into question the government’s whole policy “internal devaluation” aimed at lowering labour costs.
A leaked report from the Troika warned that the country is at risk of a debt spiral, with financing needs surging to €15bn by 2015, a third higher than the levels that precipitated the debt crisis in 2011. “There is substantial funding risk,” it said.
To operate its massive fleet of cars, Portugal must compete with China and America for fuel. These countries’ can generate their own credit, Portugal cannot, in fact none of the eurozone nations are able do so. Right now Portugal must borrow from Wall Street by way of EU banks, so as to repay Wall Street. Portugal has borrowed to buy fuel, it must borrow additional amounts to buy more fuel at the same time service and repay its dead-money debts.
The end result for all these countries is the same: there are debts that cannot be retired, industrial obligations that cannot possibly be met. As during the early years of the 20th century, the wheels are falling off all over the world … we shall not see them turn again in our lifetime …
Off the keyboard of RE
Published originally on the Doomstead Diner on January 12, 2013
Discuss this article at the Economics Table inside the Diner
If you are the kind of person who worries about Inflation and read the pages of Zero Hedge, there’s a good chance a few days ago reading through the article summaries on the Home Page you had to take a trip to the Throne Room and kneel down and Pray to the Porcelain God while Heaving the Technicolor Yawn.
Let me begin this article by pasting in a few of the synopses from Jan 7th, which came nearly one right after another describing the various and sundry Monetary “experiments” being undertaken by the Bank of Japan (BoJ), the People’s Bank of China (PBoC), the Swiss National Bank(SNB) the European Central Bank (ECB), and of course that Central Bank we all Love to Hate here in the FSofA, Da Fed(FRB). Not all these main CBs are covered in these articles, but they are sufficient to detect a pattern forming up.
Submitted by Tyler Durdenon 01/07/2013 – 22:03
Just when we thought America would be alone in crossing into the montary twilight zone where so many Keynesian lunatics have gone before, and where trillion dollar platinum coins fall from the sky right onto the heads of all those who have not even the faintest understanding of money creation, here comes Japan:
ASO: JAPAN TO BUY ESM BONDS
ASO SAYS JAPAN TO BUY ESM BONDS USING FOREIGN EXCHANGE RESERVES
ASO: ESM PURCHASES WILL HELP TO STABILIZE YEN
For those who have forgotten, the E in ESM stands for European (the S for Stability), not Japanese (Stability). Otherwise it would be, er… well, JSM. Keynesian at that. But yes – Japan will now proceed to “stabilize” itself by monetizing European debt. Because its own JPY 1 quadrillion in debt was not enough.
Submitted by Tyler Durdenon 01/07/2013 – 19:58
Bloomberg is out after hours with news that was expected by many, but which was yet to be formalized, until now: namely that following today’s flurry of contntious nomination by Obama, the latest and greatest is about to be unveiled – Jack Lew, Obama’s current chief of staff, is likely days away from being announced as Tim Geithner’s replacement as the new Treasury Secretary of the United States. In other words, Jack will be the point person whom the people who truly run the Treasury, the Treasury Borrowing Advisory Committee, chaired by JPM’s Matt Zames (who just happens to also now run the notorious JPM Chief Investment Office which uses excess deposits to gamble – yes, you really can’t make this up) and Goldman’s Ashok Varadhan, global head of dollar-rate products and FX trading for North America (recently buying a $16 million pad at 15 CPW) will demand action from.
Submitted by Tyler Durdenon 01/07/2013 – 19:19
As loathed as we are to say “we told you so,” but we did and sure enough eKathimerini is reporting this evening that: thanks to the ‘voluntary’ haircuts the Greek banks were force-fed via the latest buyback scheme and the political uncertainty causing non-performing loans (NPLs) to rise (in a magically unknowable way), they will need significantly more ‘capital’ to plug their increasingly leaky boats. The original Blackrock report from a year did not foresee a rise in NPLs (which Ernst & Young now estimates stands at 24% of all loans) and the buyback dramatically reduces the expected profitability of the banks as it removes critical interest payments that would have been due. Whocouldanode? Well, plenty of people who did not just buy-in blindly to the promise of future hockey-stick returns to growth. Expectations are now for the Greek bank recap to be over EUR30bn.
Eooowwwchhh! Reading this stuff, you get the sinking feeling that Monopoly Money is pouring off the Printing Press at Warp Drive Speeds, and in a fashion you would be correct in believing that. The Nipponese are clearly in the Deep Doo Doo, their Export Market is collapsing, the “Off” switch on “cheap” Nuke Power currently remains off (though the new Goobermint intends of firing them up again); the Greeks are a Black Hole of Debt the ECB and various and sundry Financial Special Purpose Vehicles (SPVs) like the ESM keep funding with more fictitious money, and of course Da Fed remains busy in Financing the FSofA War Machine through an exponentially growing Federal Deficit, while at the same time expanding it’s “Balance Sheet” in order to buy absolutely WORTHLESS collateral from the TBTF Banks to keep them from going under this week.
Trying to look at what EVERY CB is doing here to Monetize Debt is an exercise in futility, the rest of the post would be filled with Graphs up the Wazoo here. As it is, just looking at FSofA Debt Monetization and Population Issues has more graphs than I like to jack into one article. I’m a Big Picture Pontificator, not an Actuary or CPA, so inundating the reader with endless Graphology of the Exponential Function in action is not my Stock in Trade. I’m a decent enough mathematician, but I am also perfectly aware that throwing out endless numbers for most people makes their eyes Glaze Over, so I try not to do that.
However, it is necessary in going forward with this post to look at what actually is occurring on the Monetary level, at least here in the FSofA utilizing Da Fed as the Example. It’s no different for the BoJ,the ECB, the SNB or the PBoC, and in fact since Da Fed produces the WORLD RE$ERVE CURRENCY of the DOLLAR, this best represents what is occurring on a global scale with the monetary system.
Let’s begin with the expansion of the Balance Sheet of Da Fed. This BS expands as Da Fed purchases Trash for Cash. TBTF Banks unload worthless MBS, CDOs, Soveriegn Bonds, Securitized Student Loans and Baseball Cards (the ONLY thing in this list of real value)
As you can see, the FRB Balance sheet shot to the Moon in 2008, when in order to keep the Financial System from Imploding, Da Fed when on a Buying Spree of Junk Assets on the books of these banks they could not unload to anybody else for Cash, which everybody was short of at the time. Does this really mean Da Fed “printed money” here for this stuff that wasn’t already in existence? Not really, becuase these ‘assets” represented money that was already trading around in the system anyhow, Da Fed just traded FRNs for the collateral, providing more liquidity in the system. Actual Dollars in Circulation, the M1 Money Supply didn’t change all THAT much, certainly not as much as what the above fairly TERRIFYING Graph would indicate.
Not that it still isn’t terrifying to see this vast expansion of Da Fed BS, it still is because it is indicative of the fact the regular Credit Market was in catastrophic failure mode so the assets were transferred off of Private Balance sheets onto Da Fed Public one, even though all this accomplishes is moving insolvency from one place to another. In the end when the system does implode (it will), it really doesn’t matter who goes broke FIRST here because everybody will go broke. The Banksters weren’t ever going to be able to pay off their Bad Bets, nor will the Taxpayer be able to do it. Broke is Broke when distributed over an entire system like this.
The next graph shows the ALSO TERRIFYING expansion of the Federal Deficit, not coincidentally occurring at precisely the same point in time, 2008-9, when Da Fed Balance sheet went Ballistic.
Why is the Federal Deficit ballooning here at the same time? Because with Private Credit drying up for lack of Creditworthy Borrowers in the Private Sector, in order to keep the system from imploding on this level, Da Goobermint steps in as the Borrower here, basically borrowing money on its own account to do the numerous Bailouts of failing institutional lenders. This again serves the purpose of providing liquidity and keeping Zombie Banks as the Walking Dead a while longer, but it is still not really putting money into a system that wasn’t already there, just in other forms in the “Shadow Banking” system. This is unaccounted for money, and nobody really knows how much of it is out there even now, estimates run as high as Quadrillions. All that is happenning in this case is that some of that sloshing pool of fictitious money is being moved to the Public balance sheet, in dribs and drabs as parts of the system continue to fail.
So now what we have to do is to drop back from the gross debt being pitched around here and look at the components of the Money Supply to see how they are doing. Below is the graph of the FSofA Monetary Aggregates, divied up into M1, M2 and M3 forms of “Money” that circulate and/or get parked as Savings or Investment in something.
The part of this graph that concerns the Main Street Economy and J6P is mainly down in Blue at the Bottom of the graph. That’s the actual Cash FRNs floating around out there and digibits in your Checking Account. As you can see, it has increased substantially since around 1980, but nowhere near the vast increase through the other components of the Money Supply, half of which were such a small component of the total supply in 1970 they don’t even show up on the graph. This is where most of the “Money” is floating around, and it is mainly held in large Corporate Accounts, Pension Funds etc, in theory there as a balance sheet number, but in realty not there at all. This is the most fictitious of the fictitious money. “Other Checkable Deposits” I believe represents Reserves the TBTF Banks have on deposit at Da Fed, my good friend and fellow Macro Economist Steve from Virginia from Economic Undertow will correct me if I am wrong on this.
Although the increasing muber of FRNs and digibits is causing some inflation, particularly in Food prices now which are also being pressed on the Supply End due to drought, overall cost per capita doesn’t expand that rapidly (at least not at an HI pace until there is a currency collapse of the Dollar), because this Main Street Economy money is distributed out over many more people than it was in 1970. First the graph of US Population expansion over the time period in question.
As you can see, since 1970 the FSofA has seen a roughly 50% increase in population size from the 200M neighborhood to the 300M neighborhood, so what FRNs there are out there for J6P to earn are spread over more people. All else being equal, if the number of FRNs don’t increase at the same rate the population size does, each person will have fewer of them, which would be of course highly deflationary for Prices. Fewer people would have say $5 for a 1 lb Ribeye Steak at Safeway, so to sell the same number of ribeyes, Safeway would have to lower the price to what the new normal was, in this case a 50% decrease in available cash per capita of consumers of Ribeyes, so the price would have to drop to probably around $3/lb to keep selling the Ribeyes.
Obviously no such thing has happenned, the price keeps going up, but not as fast as you might think it would if you look at the top graphs in the Fed balance Sheet and Federal Deficit graphs. More money is out there, but sprinkled out over many more people than it was in 1970, and not just here in the FSofA either. The vast increase in total money supply mostly is NOT distributed out either, it remains “in reserve” at Da Fed on accounts of the TBTF Banks.
This because with increasing Globalization of trade along with the fact the Dollar has served as World Reserve currency through the time period has meant many of these Dollars are now sprinkled across the WHOLE WORLD, often used as black market currency in many highly populous nations that are unable for one reason or another to run a viable currency system of their own. So Dollars now aren’t spread through just the FSofA population, but across the whole WORLD population in one form or another.
So this leads us to look at the Global Population Graph for the time period, yet another TERRIFYING graph.
Here you can see especially if you look at Asia since around 1950, the Global Population has more than Doubled, and where have many Dollars been spent to buy stuff? From Asia of course, Japanese Carz and Electronics, Chinese Plastic Toys etc. Since the FSofA has had a Trade Deficit since at least the 1970s, a constant outflow of Dollars produced has made it into the hands and savings accounts of literally Billions of Asians, when looked at across the aggregate scale anyhow. In reality, most of said dollars are just in a few hands, not ALL Asians have gobs of FRNs stuffed in the Bank of Sealy.
Any given INDIVIDUAL in China doesn’t have gobs of FRNs to spend to buy a Ribeye steak, in fact most have far fewer than even the most imoverished Amerikans living on Food Stamps. The result is that instead of getting an HI in the price of Ribeyes, what yoou mostly get is Demand Destruction as margins are compressed and the actual price a Cattle wholesaler can get is pressed down by the inability of most people to afford to buy the Ribeyes.
The same Bizness of course is occurring with Gasoline (Petrol for the Eurotrash), so instead of HI in Gas, actually prices have now once again DECLINED here in Alaska to BELOW what I paid for it when I first got up here 7 years ago. It has been above that price for most of those years, but across the board the Demand Destruction is taking hold on this, and despite no increase in total production of Liquid Fuels (see Monsta666 Energy I&II articles), the prices are getting pushed back down again. Mainly probably attributable to cratering demand for Gasoline in Eurotrashland, now Double digit Unemployment throughout the PIIGS countries and working its way into France also.
To conclude here in this portion of the running Kick the Can Game in Debt Monetization Economics, despite some outrageously BIG numbers and some really TERRIFYING graphs is really just spreding its way across the entire global monetary system, but because all the CBs are currently engaged in the same process of trying to provide liquidity to an illiquid market, the RELATIVE VALUATIONS between the currencies are not yet changing that much. Euro’s will spike up or down on a given day dependent on the Newz, same with Yen, same with the Dollar itself of course. Everytime they do spike though, the OTHER CBs in the system react to it, genrally themselves ALSO adding more liquidity. Absolute Numbers go up, Relative Values don’t change all that much, at least they have not YET.
Eventually, somebody’s currency will crack here in a Crisis of Confidence, forcing a run out of that currency. Remains to be seen who is the FIRST to go down the Toilet, but it most CERTAINLY will not be the Dollar. It is too big and too much of the current system is dependent on valuations made in Dollars. the much more likely candidates are the Euro or the Yen. These are the currencies most at risk right now for an HI event, not the Dollar.
In terms of actual Purchasing Power for all these currencies with respect to Oil & Food (closely related clearly), all are destined for terminal decline as the resource base declines and the Cheap Oil dwindles in availability. What counteracts that on the gross scale is Demand Destruction, and that can occur a lot faster than actual resource depletion does. It is moving at an INCREDIBLY rapid pace in Eurotrashland right now.
I had Chartist Friend From Pittsburgh do a curvilinear wave analysis of this graph, and as I suspected, the resistance line is well broken and demand for Oil Products in Europe is likely to hit new lows as we move into 2014. How LOW will it GO by 2014? 13K BPD seems like a very good bet to me. This represents around a 20% decline off Peak Demand in Europe for Oil, while at the SAME time the population there has increased substantially. Obviously, per capita consumption of Oil is on a steady downward slope there already, and this is nothing if not highly deflationary all around. Thus of course the massive Unemployment problems the Eurotrash are immerssed in already.
Where will the Demand Slack be taken up? Will it be in China or South America or Africa, in the “growing” economies of the developing world, or will it be in the last place to lose Credi to buy the Oil, likely the FSofA, home of the Printing Press of the Dollar and Home Base for the Big Ass Military? One thing is for certain, TPTB cannot allow the Demand to Crater entirely, because when it does (it will eventually of course), the entire monetary system they depend on to maintain power goes with it. The ULTIMATE demand side solution for this is full on WAR, and that of course is liekly to come down the pipe in the bye and bye.
Time will tell, but until the whole Geopolitical equation plays itself out, my bet is that no debt monetization undertaken by Da Fed will spark an HI in the Dollar during this period. There are too many other weaker players in the same game. The “Game” still has a few rounds to go in terms of competitive devaluations of the Major Currencies by each of the respective Central Banks, along with still more rounds of Austerity and Demand Destruction being embarked on by more Central Players, including France, Germany, and of course the FSofA.
Figure 1: Brent crude weekly futures chart by TFC Charts (click on for big): Fuel prices decline because there is less credit available to support the price, yadda, yadda, yadda …
Estimable Gregor Macdonald had an interesting bit the other day regarding the last TED circus. For those unfamiliar The TED, here is their webpage:
“TED is a nonprofit devoted to Ideas Worth Spreading. It started out (in 1984) as a conference bringing together people from three worlds: Technology, Entertainment, Design. Since then its scope has become ever broader. Along with two annual conferences — the TED Conference in Long Beach and Palm Springs each spring, and the TEDGlobal conference in Edinburgh UK each summer — TED includes the award-winning TEDTalks video site, the Open Translation Project and TED Conversations, the inspiring TED Fellows and TEDx programs, and the annual TED Prize.
The prize being a shiny new car no doubt. Basically the TED is ignorable waste of time due to self-congratulation-without-limit and its hammer-meets-nail fixation on computers. It is a launch pad for tomorrow’s crop of wannabe technology oligarchs who have no real products but highly developed marketing skills. The TED events give pilgrims a chance to hone their skills on defenseless victims: each other.
Gregor introduced a new kid on the Economic Undertow block: Paul Gilding:
… it was perhaps surprising but also encouraging that the January 2012 TED conference finally addressed the subject of Collapse, by inviting Paul Gilding to give his talk The Earth is Full (opens to video).
I’d actually seen a version of Gilding’s talk at the Ilhahee Lecture Series here in Portland last fall. Gilding’s view is that we’ve reached a relationship between global population and available natural resources, that makes it inevitable that the economy—a converter of natural resources into goods—will sharply slow down, if it has not started to slow down already. Gilding can be thought of not as a neo-Malthusian, or a doomer, but rather as an ecological economist. (As most readers know, I share this same view.) Gilding looks at trailing historical growth rates — again, the rate at which natural resources are converted to industrial and population growth — and concludes that the future size of the economy at these growth rates would create a machine that the earth simply cannot sustain. Again, I agree.
Gilding’s observations regards limits and are familiar to readers here, at the same time he doesn’t scare the horses:
There are two key issues to making this the case. Ecosystem lags – the delay between action e.g. emitting CO2 pollution and response e.g. the climate changing – and the inherent risks in a highly integrated global economy i.e. the low margin for error when a globally impactful crisis hits.
We learnt the latter in 2007/8, which many now believe was triggered by record oil prices sucking money out of the US economy, causing sub-prime mortgages to default and almost bringing down the global financial system. This is a good example of systemic risk vs theoretical markets. In theory higher oil prices just reduce demand and encourage alternatives but in reality change happens fast and markets can’t respond, leading to complicated impacts. As we saw, our now tightly wound and integrated global economy can thus be easily shaken to the core by a relatively normal event such as high oil prices.
It’s semantics whether the current price run up/mini-spike in Brent futures prices is/was a ‘shock’ or equivalent to the 2008 spike: I say ‘tomayto’ you say ‘tomahto’. There have been a series mini-spikes and retreats, of smaller price run ups and consequent declines; this post-2008 interval has been punctuated by firm- then market- now sovereign bankruptcies. These bankruptcies appear to be closely coupled to rising fuel prices: demand destruction is more serious now than it was in 2008 which primarily effected firms and households. The bolt to $128 two months ago might have been sufficient to unhinge the Chinese economy and send it over the edge.
There are two opposing forces at work: China is dependent upon external sources of credit and foreign exchange. Its economy is an integral part of the overseas supply chain, its trade — the bulk of its economy — almost entirely takes place using euros and dollars rather than in its own currency. Difficulties among China’s customers reduces capital flows to China. Europe is in a recession, China feels pain because she can’t sell as many goods nor can it gain as many euros.
China like Greece must pay increasing amounts of hard (overseas) currency for fuel and other inputs. Its bid moves the price: here is the First Law of economics in action: the costs associated with China’s existing euro surplus are greater than the euros’ worth … and are increasing. China must diminish its surplus by spending euros but its overall currency position — like that of JP Morgan-Chase’ London Whale — is too large to liquidate.
China instead swaps some of its currency surplus into slightly smaller but still large commodity surpluses. The surplus-related costs haven’t been eliminated, instead they has been spread around China’s economy. The effect of the increased costs is inflation inside China.
Meanwhile, China cannot spend euros it does not earn. Having spent on commodities as stores of wealth, China must spend more to support price. China now lacks the new euros to do so. China is trapped by her own mercantile dynamic: she must sell goods for euros at the same time she has too many euros!
What China should do is buy more EU and US finished goods but she cannot. China can buy commodities and store them but not finished goods as her workers cannot afford them: China is a selling machine, only.
China’s past euro earnings pushed commodity prices higher while China’s current euro non-earning undercuts the same prices. How this turns out is anyone’s guess but right now the process indicates lower bids for commodities in China: the bids strangled by diminished credit in Europe caused by high prices of crude, the slowdown in capital flows chokes the Chinese capital-dependent economy while it must manage the high costs of currency surpluses. As Gilding points out: “the inherent risks in a highly integrated global economy”.
This leaves out entirely the matter of whether the euro itself will vanish and what will become of China’s euro hoard under the circumstance. For China to save herself ahead of the onrushing debacle would mean dumping euros at the market and precipitating the cataclysm she seeks to postpone.
Figure 2: This is the cumulative weekly gold chart: in the short term, gold has been in a bearish market for the past ten months. This is something to watch as metal prices declined during the ‘crash’ phase in 2008: the bear market in gold remained intact with no new highs until late Autumn of 2009:
Figure 3: this is the gold monthly chart: this chart and others from TFC Charts (click on for big). The 2008 decline in gold began while fuel prices were sharply increasing. The current consolidation began in September, 2011, while petroleum prices were likewise increasing. While past performance does not assure future results, it is necessary to consider whether gold is sending the same sort of economic signal it offered during the Spring of 2008. Gold is a core asset for finance firms: unlike shares or mortgage-backed securities it is not generally offered unless margin calls must be met and other assets are either unavailable or not worth enough.
The indication is that there are margin stresses building up within establishments that leverage gold or gold- derivatives. There are arguments offered that there is paper selling against the buying of physical but the price speaks for itself: there are more sellers than buyers with funds. The same means of support for crude prices exist for the gold prices. While the high price of gold does not effect availability of credit — nobody burns their gold for fun — the high price of crude reduces the amount of credit available to bid for gold.
The implications are serious: the ongoing cheerleading efforts on the part of the establishment effects assets. This includes endless moral hazard, foreign-exchange rate manipulation, ZIRP and various ‘easing’ programs. Funds flow from finance toward assets for the purpose of finding speculative returns. Some of these assets are economically vital inputs. Economists airily suggests that one input will substitute for another at some price level: what is not understood by economists is that the required price level to effect the substitution is probably unaffordable. For instance, it is technically possible to have nuclear powered automobiles if for no other reason than we have already nuclear powered ships and submarines.
(Un)fortunately, nobody can afford a nuclear-powered car so there is no economic cause to build one. What remains is alternate substitutions: in place of cheap petroleum, autos, freeways, fly-overs, parking garages, suburbs, retail malls and office towers and all that go with these things … there is shoe leather.