Finance

ZZZZZZZZZZZ….

gc2smFrom the keyboard of James Howard Kunstler
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Freda burning money_1280

 

Originally Published on Clusterfuck Nation  August 8, 2016

 


Wake the fuck up! Today we turn from the sordid dumbshow of Election 2016 to the parlous mysteries of finance and economics behind our sick politics. Most of the commentary in the mainstream special needs news media is based on the incorrect notion that the current disposition of things is sure to continue and therefore all we have to do is manage the familiar dynamics of the operating system in place. For instance, Grand Vizier Paul Krugman in today’s New York Timespimping for the US to issue ever-greater debt to repair US infrastructure. Does it seem like a sound idea? Borrow tons more money to get American running gear back in order so we can return to a growth economy. (There’s even a Trumpian gloss to it.)

Here’s the catch: the “growth economy” of which they chatter is done. You can stick a fork in it. The techno-industrial fantasia is drawing to a close. We are heading into a long term contraction of activity, productivity, and population and the salient question is how disorderly will the long emergency of the journey be to that new disposition of things?

The wish to keep all our rackets running is understandable. They have provided a lot of comfort, convenience, and luxury. But we are no longer in Alexander Hamilton’s world of cornucopian American abundance, just needing to borrow a little from the future to get at the gargantuan riches of a wilderness empire. We’ve been there and done that, and our present-day techno-narcissistic wish to replace all that spent material abundance with a Pokemon Go virtual reality economy is sure to lead to epochal disenchantment.

Borrowing from the future only works when you have some real prospect of paying the future back. The institutions that govern borrowing have been pretending for some time that our debts can be paid back. The untruth of this can be easily traced to the revocation of FASB (the Financial Accounting Standards Board) Rule 157 in 2009, which said that banks no longer had to report the market value of the loans on their books, but rather could make up any old number that made things appear to pencil out. In other words FASB decided that standards were optional. But that is only one cog in the great wheel of fraud that has rotated mercilessly with the seasons since the Fall of 2008.

What we face is discontinuity, the end of old spent dynamics and the beginning of new dynamics. Monetary deflation has been underway for years because that’s what happens when debts can’t be repaid: money vanishes. Now we will encounter the other dimensions of deflation: the contraction of manufacturing, trade, wages, and all the familiar markers of expansion in the waning techno-industrial era. The many dodges and stratagems tried by the supreme central bankers to work around contraction only produce ever greater distortions in markets, currencies, and the distribution of dwindling capital, leading to a grand battle over the table-scraps of history, i.e. the rise of radical politics world-wide, including Islamic Jihadism, and the western response in Trump, LePen, and the nascent Germanic right-wing. These current manifestations may be mild versions of what’s coming.

Nobody in power can come to grips with the reality of our situation. We have to salvage what we can and get smaller, becoming a more modest presence here, or the planet itself is going to hit the delete button on us. It rubs against the current religion of progress, which has replaced the other old cultic practices. The choice now is between time-out or game over, and the debate over these things is absent from the arena.

The aforesaid distortions in markets, currencies, and capital are spinning out in an ever broader, centrifugal gyre, coinciding, as chance would have it, with the most peculiar election in modern times. The incoherence and deceit on both sides is far beyond even the extravagant American norms of dauntless political bullshit. We literally have no idea what we’re doing in this country, or what we’re actually wishing for. The financial structures of everyday life look more fragile than ever. Gravity always wins.

 


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

Collapse Cafe 8/6/2016

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The Elephant Cometh

media manufactured consentgc2smFrom the keyboard of James Howard Kunstler
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media manufactured consent

 

Originally Published on Clusterfuck Nation April 18, 2016

 


The elephant’s not even in the room, which is why the 2016 election campaign is such a soap opera. The elephant outside the room is named Discontinuity. That’s perhaps an intimidating word, but it is exactly what the USA is in for. It means that a lot of familiar things come to an end, stop, don’t work the way they are supposed to — beginning, manifestly, with the election process now underway in all its unprecedented bizarreness.

One reason it’s difficult to comprehend discontinuity is because so many operations and institutions of daily life in America have insidiously become rackets, meaning that they are kept going only by dishonest means. If we didn’t lie to ourselves about them, they couldn’t continue.

For instance the automobile racket. Without a solid, solvent middle-class, you can’t sell cars. Americans are used to paying for cars on installment loans. If the middle class is so crippled by prior debt and the disappearance of good-paying jobs that they can’t qualify for car loans, well, the answer is to give them loans anyway, on terms that don’t really pencil out — such as 7-year loans at 0 percent interest for used cars (that will be worth next to nothing long before the loan expires).

This will go on until it can’t, which is what discontinuity is all about. The car companies and the banks (with help from government regulators and political cheerleaders) have created this work-around by treating “sub-prime” car loans the same way they treated sub-prime mortgages: they bundle them into larger packages of bonds called collateralized loan obligations. These, in turn, are sold mainly to big pension fund and insurance companies desperate for “yield” (higher interest) on “safe” investments that ostensibly preserve their principal. The “collateral” amounts to the revenue streams of payments that are sure to stop because the payers are by definition not credit-worthy, meaning it was baked in the cake that they would quit making payments — especially when they go “under water” owing ever more money for junkers that have lost all value.

It’s easy to see how that ends in tears for all concerned parties, but we “buy into it” because there seems to be no other way to a) boost the so-called “consumer” economy and b) keep the matrix of car-dependant suburban sprawl in operation. We took what used to be a fairly sound idea during a now-bygone phase of history, and perverted it to avoid making any difficult but necessary changes in a new phase of history.

Health care is now such a blatant, odious, and ruinous racket that it is a little hard to believe that it hasn’t ignited an outright revolution or, at least, a workplace massacre in some insurance company C-suite. It is a well-known fact that most Americans don’t even have $500 to pay for a car repair. How are they supposed to cope with a $5,000 deductible health insurance incident? Answer: they can’t. Their mental health is destroyed in the process of attempting to fix their physical health. Not uncommonly, they have to declare bankruptcy after a routine appendectomy or a visit to the emergency room to set a broken arm. Sometimes, they don’t even bother to go to the doctor, seeing clearly how this plays out. The pharmaceutical industry has, of course, been allowed to convert itself into a simple extortion racket. Got an unusual kind of cancer? We have something that might help. Oh, it costs $43,000 a month….

What kind of a polity allows this cruel and indecent grift to go on? Why, the Obama administration, which allowed the health insurance company lobbyists and their colleagues in Big Pharma to “craft” the Affordable Care Act — the name of which must be the biggest public lie ever floated.

It’s interesting to see how a parallel fraud is playing out in higher ed. I submit the reason that college presidents are not pushing back against the Maoist coercions of the undergraduate social justice warriors is because the marvelous theater of the gender, race, and “privilege” melodrama is a potent distraction from the sad fact that college has turned into a grotesquely top-heavy and high-paying administrative racket offering boutique courses in fake fields (Dartmouth College: WGSS 65.06 Radical Sexuality: Of Color, Wildness, and Fabulosity… Harvard University: WOMGEN 1424:  American Fetish) in order to pander to their young customers (students) conditioned to tragic “oppression” sob stories. All in the service of paying huge salaries + perqs to the dynamic executives running these places.

Then there is banking, a.k.a. the financial system, certainly the greatest racket of rackets, since the fumes it’s running on — combinations of ZIRP, QE, and “forward guidance” (happy talk) — is all that there is to maintain the illusion that “money” remains a reliable gauge of value. Finance is the racket that will go down first and hardest, and when it does, all the other rackets currently running will go up in a vapor. That elephant will storm into the room before the political conventions, and when it does, it will usher in the recognition that nothing can go on as before.

 


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

Too Big to Scale

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Published on Peak Surfer on April 3, 2016

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"We’re looking at The Cloud from both sides now."

While it is not likely that the heterodox economist E.F. "Fritz" Schumacher was the first to use the term “appropriate technology” — he preferred “intermediate technology” — he certainly had a big role in defining it. In Small is Beautiful he described it as the “middle way,” which dovetailed nicely with his elucidation of Buddhist economics, or what Mohandas Gandhi called "Economy of Permanence." 

According to Schumacher, a technology is appropriate to preserve, adopt and adapt if it is truly village scale, lying in that mid-range between individualistic technology (toothbrush, smartphone, coffee cup) and industrial-scale (pharmaceutical laboratory, steel mill, railroad).

Examples of village scale are the old bakery, perhaps a large stone or brick oven where families bring their doughs to become breads; the bicycle repair shop; or a family-run tofu shop (as in the 10,000 or more in any large Japanese city) because handcrafted tofu is much to be preferred in taste, texture and nutrition over machine-produced.

 

James Earl Jones as Locust-Man

As early as the 1960s Schumacher, as president of the UK Soil Association, was correctly diagnosing what was wrong with the atom as an energy source. In 1977 he published A Guide for the Perplexed as a critique of materialist scientism. It was also a foray into the nature and organization of knowledge. He championed the style of Ivan Illich's conviviality: user-friendly and ecologically suitable; applicable to the scale of the human and natural community.

Born in the late 1940s, we were witness to Moore’s Law from its birth. We watched electric typewriters replace manual portables, then IBM Selectrics arrive with their changeable font-balls and auto-erase tape. We were there when punch cards and tape readers began to type form letters like a player piano. From the days of our youth, hand calculators kept getting smarter than we were. 

In the late 70s we automated our Plenty Office and the Book Publishing Company with arrays of linked, part home-brew, part off-the-shelf, CPU-and-dumb-terminal minicomputers. Soon came inexpensive personal computers that put desktop publishing and spreadsheets into the hands of the masses and made small fortunes for Apple, Atari, Dell and Texas Instruments.

Office networks of linked hard-drives using first ethernet and then wireless LANs and WANs were middle scale appropriate technology as long as you could service the devices or maybe even build them yourselves within the village. All was well on this good earth. Desktop computers were like tractors or teams of oxen, shortening the time it took you to furrow your inbox or do your taxes.  

Then came The Cloud upon the land. Cut to the scene in The Good Earth where the Chinese farmers look to the sky as their faces darken — the locusts are here! That was about 10 years ago, or 5 generations in factor-four Silicon Time.

Boston-based research outfit Forrester calls cloud computing—that’s public cloud computing—a “hyper-growth” market. In a recent report, it predicts the market for cloud services will grow to $191 billion by 2020, a 20 percent leap from what it predicted just a few years ago. “The adoption of cloud among enterprises, which is really where the money is, has really picked up steam,” Forrester analyst John Rymer recently told us. “It’s a big shift. The cloud has arrived. It’s inevitable.”

– Cade Metz, Wired 12-22-15


Getting back into our annual workshop schedule here at The Farm, we find ourselves stuck without a middle way, with no “village scale” with regard to either email or accounting. We have always suffered the digital divide by electing to live in a rural area in a country without Net Neutrality, but we take clean air and birdsong more seriously than ones and zeros.

What passes for broadband in rural Tennessee would be laughable in Romania or Thailand. We live beyond the profitable reach of the cable companies, or even DSL from the quasi-federal phone monopoly. Getting a dumbphone mobile connection here can be challenging, never mind G3 or G4. We pay far too much for far too little connectivity, but then, welcome to the unpaved precincts. Have you seen the stars at night?
 

But now they only block the sun
They rain and snow on everyone
So many things I would have done
But clouds got in my way

— Joni Mitchell, Both Sides Now (May, 1969)


We’re looking at The Cloud from both sides now. Many, if not all, of the email and accounting packages that have the capabilities we need have discontinued stand-alone functionality and hard drive data storage on your personal device in favor of wireless subscription plans. An unbeckoned choice is being thrust upon us. Either we late-migrate to the Cloud and trust in her all-knowing beneficence (and suffer indignities whenever there is no connection) or we put up with rapidly-shrinking features and capabilities. 
 
For code-writers keeping legacy software working may be somewhat easier. But most code-writers are Cloud addicts, not old school.

We use Photoshop but seldom have need for the other Adobe apps packaged into their (formerly $3650) Master Suite. To us it was worth several hundred dollars plunked down every few years to have that one app. We’ve tried GIMP and other freeware but they are no substitute for Photoshop. Now a subscription to Adobe’s Creative Cloud would cost us about $2,400 — assuming the price doesn’t go up. And that is just one subscription, from one cloud provider.

Microsoft rolled out Office 365 in 2011 but still plans to sell packaged software for a while, which makes sense given how much of the world has weak to nil internet connectivity. “Unlike Adobe, we think people’s shift from packaged software to subscription services will take time,” Microsoft told Wired.

The largest cloud storage provider, Amazon Web Services, reported $2.41 billion in revenue for the fourth quarter last year, or more than $9.6 billion in annualized sales—and that’s after the $10-billion-dollar company Dropbox ported off Amazon to build its own server farms in Q3.

Dropbox calls each of its storage machines a Diskotech. “The thing we care about the most is the disk,” its chief engineer told Wired. “That’s where all the bytes are.” 

Measuring only one-and-half-feet by three-and-half-feet by six inches, each Diskotech box holds as much as a petabyte of data, or a million gigabytes. Fifty of these machines could store everything human beings have ever written. Maybe even all the cute kitten videos on YouTube (“Maru gets into a box” – “大きな箱とねこ” – 8.1 million views).

At one point in 2015, when it was moving from Amazon to its own 40 acres and a mule, Dropbox was installing forty to fifty racks of hardware a day, each rack holding about eight individual machines. That installation rate continued for nearly six months. They surpassed Peak Kitten in the first month.

We have had the trauma of a terabyte data fail. It is not pretty. It means we now have to have 2 or 3 terabyte safety redundancies. If you go to DVD you can become dependent on legacy hardware (DVD readers and burners), calling up recollections of floppies, cassettes, optical readers, etc. we may still have in the attic but prefer not to think about. 

A flash drive is ephemeral – how many years will it hold its charge without any degradation or chance encounters with moisture, temperature change or magnetic fields?

We want to be able to access 20-year-old data using only the power of a Biolite Stove and no cloud. We can do that right now with an iPad and a portable HD. Can we do it still in 2017?

There may come a time when we just have to go our own way and de-cloud. At the moment we are struggling to remain amphibian, with a webbed foot in each world. Thanks for all the fish, but for now we intend to keep our paper-based bookkeeping and a sharpenable pencil.

Many years ago Amory Lovins’ Brittle Power described how lack of prudence and foresight had allowed city and regional planners to erect a monumental infrastructure of energy supply that keeps the lights on at night across North America but can be taken down by a tree branch falling on wires in a blizzard, or a pipe bomb in a pipeline.

The same kind of blind spot infects the planners of the Cyberverse. Mighty as they be, they are not Gods. To get to be in their club, you have to take the blue pill to believe the separate reality the Google-vets believe; the one with Space X missions to Mars and fusion-powered Teslas.

This represents an attitude that began with Google and has gradually spread across Silicon Valley. Google was so successful not just because it built a pretty good Internet search engine, but because it built the underlying technology needed to run that search engine—and so many other services—at an enormous scale. Facebook, which recruited countless ex-Googlers, did much the same. And so did Twitter and its ex-Googlers. And, now, so has Dropbox. To become a giant, you may have to stand on the shoulders of others. But once you become your own giant, you start to feel like you need to build a home that’s just right for you.

— Cade Metz, Wired 3-14-16


The problem, as we see it, is that the parallel reality field is eating away the brains of its wizards. Wormhole-brained, they keep edging farther out onto the limb of a system that is just one fallen-tree-branch or cyberattack away from ruin. Worse, they are forcing the rest of us to follow along and add our weight to that same weak limb.

The psycho-dynamics of the financial market

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Published on FEASTA on February 19,2016

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Mental health problems and debt finance are strongly linked. People in debt have a higher incidence of psychiatric problems, and there is a higher rate of psychiatric symptoms among the people working in the finance sector too. During a bubble, egos are pumped up with asset values – and, when the bubble bursts, reputational collapse occurs with corresponding psychological effects.

When we look at the financial markets from an emotional and mental health angle, we don’t find optimal equilibrium states and rational people adapting to them. Instead, we come across a large number of unhappy, dysfunctional and disorientated people. Let’s look first at the debtor – creditor relationship from a mental health point of view.

Mental Health and Debt

For a start, there is a striking correlation between mental ill health and debt – on both sides – lenders as well as borrowers. Among other things, it is now well documented that self-reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression which they are likely to consult their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self-harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self-identities and is implicated in isolation, social exclusion and strained relationships. (Fitch, Chaplin, Trend, & Collard, 2007)

Now let is turn to look at the situation on the other side, among the people who lend money, or at least those who manage and direct the credit markets. Mental health problems can be severe in the heat of financial competition. Drugs and alcohol are commonplace on Wall Street.

In a study of 26 men ages 22 to 32, all prestigious Wall Street brokers, researchers at Florida’s Nova South-eastern University examined how work stress affects brokers” physical and mental health. Led by John Lewis, Ph.D., a psychology professor at NSU, the study found that a broker’s average workday was 10 to 12 hours long, and that those earning the most also slept the least. The participants rarely missed work, calling in sick an average of twice a year but suffering from the flu or a virus at least twice as often. And despite being wealthy, the brokers were unhappy. Thirty- eight percent met the criteria for subclinical major depression, while 23 percent were clinically
diagnosed with major depression—shocking, considering only 7 percent of men are currently depressed in the U.S., according to the National Institutes of Mental Health. (Gorrell, 2001 update 2009)

A few years ago, during the financial crisis of 2007-2008, New York newspapers revelled in stories about stressed-out traders reaching breaking point. One broker, Christopher Carter, was charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an Upper East Side gym. The hedgie’s offence? He grunted and shouted, “You go, girl!” too loudly during a spin class.

In London, a hedge fund manager, Bertrand des Pallières, made news during the time of the financial crisis because he was so busy shorting stocks that he didn’t notice for three months that his £80,000 Maserati had been towed away.

Jim Cramer, a hedge fund manager turned television stock picker, told the New York Times that drugs tended to reinforce traders’ inability to spot a looming downturn: “Prozac and all those other drugs banish the ‘this is the end of the world’ thoughts. Which means you are not as anxious as you should be about an obvious downside.” (Clark, 2008)

During the panic, therapists reported that there was an epidemic of psychological illnesses in the finance sector, while some of the managers used some of the oldest of psychological strategies for coping – avoidance, denial, switching off mentally in the heat of the crisis. An example was James Cayne, chief executive officer of the Bear Stearns bank.

The German news magazine Der Spiegel described Cayne’s work style thus:

“Even in times of the greatest crisis the boss of investment bank Bear Stearns did not let himself be distracted from his hobbies. Last July, as one of his Hedge Funds broke down, the head of the board travelled undisturbed to a several day long bridge tournament in Nashville, Tennessee. While his troops fought for survival Cayne was not contactable. He had turned his mobile phone off. Its ring could have disturbed the many times American bridge champion.” (Die Bank Raeuber, 2008)” – translator author.

Even a cursory glance reveals therefore that, from the point of view of community mental health, the credit system is highly dysfunctional. Of course mental health workers meet desperately unhappy
people living absurd lives all the time. Meeting people trapped in belief systems that, from the outside, seem crazy goes with the job. Normally, to be unlucky enough to qualify for a mental illness diagnosis, the apparently strange belief system that you have, and your strange way of making sense of the world must be unique to you. It will be seen as part of your inability to communicate with others. Then a psychiatrist can damn you with a variety of diagnostic labels like “thought disorder” which are said to be the symptoms of something deeper.

Over the last couple of decades, it has become clear that a lot of these strange thoughts are actually interpretable with a bit of effort. Psychologists, therapists and counsellors who become good at this quickly note emotional response patterns in society at large – the common cultural assumptions that help form collective emotional responses made by whole groups of people. There is nothing new in this. Freud applied his ideas out of the consulting room in observations about the wider world and his ideas were picked up by the advertising industry in the manner already described.

Using what we know about group emotions, it seems to me that it ought to be possible, and would indeed be valuable, to integrate the knowledge of group psycho-dynamics into our understanding of the way that markets evolve, including financial markets.

As explained in the previous chapter, using borrowed money during a boom phase, as long as asset values continue to inflate, it is easy to make money using borrowed money. This is called leverage and the point about leverage on the way up is that it can get out of control. Betting that asset values will go up with borrowed money creates a further pressure pushing those values up even more in a self-fulfilling prophecy. Such self-fulfilling prophecies are common in mental health – confidence leads to success and builds confidence even more. However, where there are no limits to mood enhancement, it leads into mania – and that includes on the financial markets…

Egos get pumped up at the same time as assets values

In the circumstances of a leveraged boom it is not only asset values that get pumped up but egos. Ordinary mortals who, in other circumstances would see themselves as no more or less important than anyone else, suddenly become very rich and acquire the symbols of social success that are so important to “marketing characters”. It is, thus, not only bank balances that swell in size when bonuses are announced.

Trading rooms are fiercely competitive places and the action is fast and furious. In finance, just as in any other branch of life, the more one devotes one attention to the matter at hand, the better one will do. The broader and deeper one’s knowledge is, the more edge one will have over everyone else. However, this has some resemblance to addictive behaviour. In an addiction, everything and everyone takes second place to the addiction. The guru who understands the markets better than anyone else probably understands the other things in life less well – and certainly gives them lower priority. For the finance experts, it will probably seem self-evident, ultimately, that the way out of problems is to buy one’s way out. This will not make for happy relationships. (Kreitzman, 1999, p. 26)

Earlier in the book, I quoted the example of the currency trader whose marriage was wrecked because of the way that he tried to keep track of the 24 hour currency market and woke every 2 hours to keep track as markets on the other side of the world opened. This is the kind of thing that a manic person will do. The fact that other people in the financial markets are living in the same crazy way is likely to mean that it is not interpreted as mania, but it does not change its essential character. The euphoria of mania is like the excitement of a small child the day before its birthday. This child cannot sleep because the next day will bring a pile of presents, a party and lots of attention. The manic person cannot find a way to switch their feelings off and is constantly on an adrenalin high. Often enough, in these circumstances more and more commitments are taken on. What is missing is the idea of a personal limit to one’s practical and work capacities.

In the life of a person who is not wealthy, these practicalities and the urgent adrenalin-charged character of their relationships will eventually mean that they come unstuck. Making ever more commitments means that they over-reach. Complications are not foreseen. Other people do not play ball with grandiose designs. If one does too much one doesn’t have time to wash one’s clothes and do the washing up. Life, practicalities, projects and relationships fall apart as one goes past one’s limits.

A rich person may not have some of the complications of ordinary life which would floor a manic person. Their money can buy servants and, with enough wealth, sex (though not love) is no problem either. Many of the practical problems in life can be solved with money or a credit card – until the crash.

The whole history of the market economy tells us that a crash comes eventually. Euphoria impairs judgement. The overconfidence of rich and powerful people, because it cannot be held in check by the countervailing power of those who are not as strong economically or politically, nevertheless, reaches a point beyond which it cannot go further. As I once argued in a psychotherapy journal:

“The ancient Greeks already knew how to describe situations like this. This was a job for the Goddess Nemesis whose role it was to maintain equilibrium on earth “rebalancing” happiness from time to time. In fulfilment of her role, Nemesis had a tricky relationship with the goddess Tyche – who was irresponsible in handing out Luck and Fortune, indiscriminately heaping her horn of plenty, or depriving others of what they had. In particular Nemesis would wreak havoc on those favoured by Tyche if they failed to give proper dues to the gods, become too full of themselves, boasted of their abundant riches or refused to improve the lot of their fellow humans by sharing their luck.” (Davey, What Future?, 2007)

People who become too full of themselves eventually believe that they can get away with anything in the pursuit of their addiction. In the literature about the financial crisis of a few years ago we could read over and again that the banks did not trust each other. When trust breaks down, we have a very specific kind of psycho-dynamic occurring between people.

A Professor of Organisational Ethics at the Cass Business School, Roger Steare, undertook integrity tests on more than 700 financial services executives in several major firms and came to the conclusion that: “There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry”.

The results of these tests indicate that, as a group, they scored lower than average in honesty, loyalty and self-discipline. Steare compared traders to “mercenary hired guns”, who regularly switched firms to maximise earnings. (Hunt, 2008)

Reputational collapse

Behind the technical language of “liquidity”, is a language that distances us from the deeper reality.
The truth about the credit crunch was that it was a reputational collapse of the participants of an entire economic sector – the people running this sector overreached themselves. The really damaging thing has been that most of them have been able to get away with it because governments feel that they must bail them out. This means that the whole charade will happen again… and again… until society organises a fundamental root and branch reform of this sector.

The road that has brought humanity to this crazy point has been one where there have been, and still are, plenty of illusions. These are little different from the illusions that a manic person would create. Cassandras who try to express the folly of pushing beyond the limits are ignored.

In the case of the financial markets, because the manic process is a collective one, the illusions are repeatedly embodied in institutions and are dignified with words like “financial innovation”.

Rather as a mad person will split off the part of their personality that does not fit their cosy self-image, that is, the murderously angry and hateful self, so the financial institutions split off the financial junk that earns them fees making predatory loans to people who cannot afford to pay them back or are in other ways dubious ethically and financially. The splitting hives securities off balance sheets into “special purpose institutions”. Rather as the mad person will wishfully believe what they want to believe rather than hard realities, the banks have paid other organisations to give AAA ratings to the worthless pieces of paper that they issue so that everyone, including themselves, can believe that everything will be OK.

Such strategies have their parallels in mental mechanisms of avoidance – the pathologies unravelled by clinical psychology. But then, to use the terminology of Freudian analysis, the repressed truth, the reality that has been held at bay, returns. The worthless assets have to be taken back onto the books. Reality bursts through the illusion.

To conclude, it would be valuable to integrate into our theorisation of what happens in the course of the credit and other economic cycles and events, the emotional changes of the people involved as they act and live through these events. Very often, people live with their emotions but barely notice them. They have no language or concept systems to describe their emotional responses and we may describe them as emotionally illiterate. Not having reflected deeply on their own emotional responses and those of others, they may act in ways which are unconscious, lacking in self-awareness. As explored in other chapters, this kind of person lives through what the therapist Erich Fromm called a “marketing personality”.

 

 

 

 

 

 

Foiled by Oil

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Published on Peak Surfer on February 14, 2016

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"Pemex revenues are down 70% in the past 18 months. That is what Peak Oil looks like."
 

 

 

"Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets." 

People do use their oil shares to buy houses, cars, planes and college educations. When crude oil prices hit $140 per barrel, pension funds and college endowments rejoiced.

Our 2006 book, The Post-Petroleum Survival Guide and Cookbook was published just as conventional hydrocarbons struck their all-time global production top and began to decline (a picture that emerged only years later). The book challenged readers to consider how they might cope with $20 per gallon gasoline and the absence of public transit alternatives.

It also described the undulating top we now see, where high price destroys demand, which crashes price, which boosts demand, which raises price, and so on. Think of this part as the whoop-de-doos after the roller coaster cranks its way to the top and lets gravity take over.

Lately there have been a spate of articles in the financial press beating up on Peak Oil theorists for being so widely wrong in their predictions. They point to charts showing global oil production rising from 86.5 million barrels per day in 2008 to 96 million in 2015. Of course, they are mixing apples and oranges. What peaked, right on schedule in 2006, was conventional liquids.

After 2006 Big Oil played its hole card, unconventional oil and gas. Those inside the sector had been telling the Peak Oilers about this all along, but it still caught some incautious prophets out on a hoisted petard. "Our community would concede that we underestimated or didn't quite understand this whole fracking thing," said Jan Lars Miller of ASPO-USA (Association for Study of Peak Oil). "It exceeded everyone's expectations."

Not everyone's.

What Big Oil did not tell the pundits was that the unconventionals are a Ponzi scheme, too expensive to compete with renewable energy, made up mostly of a great credit bubble and churning real estate plays. Like all such schemes, unconventionals run on a short fuse that is only as long as the credibility of its grifters. As long as the con can keep up an appearance of legitimacy, people still buy houses, cars, planes and college educations riding on cascades of fraud.

On Big Oil's books, proven reserves of oil are presently estimated at 1,700 billion barrels. Just in the past 18 months, and accelerating after the Paris Agreement, the decline in value has been $70 per barrel. The value of oil shares, therefore, has been reduced by $119,000,000,000,000. That is 119 trillion. It is only a matter of time until the market catches up to that peg. It is already on its way. Maudlin said, "The lost value in crude oil is equivalent to a couple of hundred Googles and Apples going up in smoke."

But lest we forget, we are not just over the top of Peak Oil, we're at Peak Everything: coal, natural gas, iron, copper, zinc, nickel, lead, palladium, platinum, silver, and aluminum – all suffered double-digit percentage valuation drops in 2015.

One of our earliest blogs here on this site was published August 14, 2007. It was called "The Mexican Trigger." We still do not know if what we prophesied then will yet come to pass, but it is worth looking at. We laid it out more completely in September, 2007 for Energy Bulletin:

In 2004, Pemex was pleased to announce that its oil wealth would continue for many years to come. Pemex's head of exploration and production, Luis Ramirez, was quoted in the daily newspaper El Universal as saying that Pemex had mapped seven new offshore blocks with large pools of oil and natural gas, likely in the range of 54 billion barrel-equivalents, more even than México’s proven plus probable reserves at that time.

“This will put us on a par with reserves levels of the big players like Iraq, United Arab Emirates, Kuwait or Iran,” Ramirez said. “What's more, we would be in a position to reach production levels like those of Saudi Arabia, which produces 7.5 million barrels per day, or Russia, which produces 7.4 million.”

Just 3 years later, Pemex's tune had changed. It had reckoned the cost of unconventionals versus conventionals and fully understood that high prices would be required if it was going to become a big league star. As we described in our post, on July 27, 2007, Raúl Muñoz Leos, Director General of Pemex, warned that México had less than seven years before the country would run out of conventional oil. Not seven years until it peaked. Not seven years for Cantarell, its super field. Seven years, and Méxican production would run dry.

Let's see. 2007 plus 7 equals 2014. So what happened?

What happened was that Mexico did the same thing as the United States did in 1970. It deployed technological advances, it went unconventional (first offshore, later shale and fracked gas), and it imported to fill the gaps. When Enrique Peña Nieto was elected he quickly moved to privatize the national oil company. Pemex stopped being a public agency and became a "State Production Enterprise." Thanks to Peña Nieto's government, Pemex is now authorized to attract foreign investment of $8.5 billion dollars by selling parts of itself to private companies, including the US oil cartel.

Fast forward to 2016.

30 January: With budget cuts, the abandonment of the oil installations on land and in the Campeche Sound, it appears that the Federal Government is determined to liquidate Petroleos Mexicanos (Pemex) and return to where we were before the oil boom, which would create an economic and social catastrophe for the oil states like Campeche….


Por Esto, the newspaper of Yucatán

The government, which previously milked Pemex oil revenues to pay for breathtakingly rapid development of the country, found itself having to now raise taxes from tourism and other sources to keep Pemex afloat. In 2015 it cut what it spent on Pemex by 340 million dollars. Pemex shed 11,735 jobs and did not replace 80% of those retiring. It canceled $10 billion in pensions for those in retirement.
 

Mexico: Oil Production 1960-2015

Editorials in the Mexican press say the crisis was "the most important in the sector since the 1938 constitutional change [nationalizing energy companies]."

What is still not being widely recognized is that the crisis in oil is the main reason for the crisis in the finances of Mexico. The crash of the peso against the dollar — 20% per year since 2013 — is seen as good for tourism. How tourism will fare when the national grid fueled by petroleum cannot provide power to beach resorts is not discussed.

In January, 25 Pemex buildings had no electricity service for a period because the Federal Electricity Commission (CFE) cut off service for nonpayment. Some workers ran to the hardware store and bought portable generators so they could continue monitoring critical functions like pipelines and offshore drill rigs.

The average price Pemex received for oil in 2015 was $49/bbl. It is now below $25. Some analysts estimate that government, in full-blown financial free-fall, may cut investment in Pemex by $3 billion in 2016, which would take production to 2.0 million barrels per day, down from 2.27 million last year and 3.4 million at the peak in 2004.

Low oil prices do not mean oil is not going to peak any more than a snowstorm means that global climate is not warming. In fact they only serve to prove the peak oil theory.

Pemex revenues are down 70% in the past 18 months. That is what Peak Oil looks like. Mounting debt for exploration, which must be paid in dollars to US companies, is $11.7 billion, or 63.8% of the present value of Mexico's declining proven reserves. Remittances — money earned abroad and sent back to the families – are now one-third larger for the Mexican economy than oil revenues. Will those be used to pay Pemex's foreign debt service, 65% of which is due in dollars, and 15% in euros, yen and yuan? Or perhaps the government just can switch to legalizing and taxing marijuana?

This month Mexican Association of Petroleum Industry (AMIPE) Chairman Erik Legorreta told potential investors:

"Petróleos Mexico is and remains the ideal for Mexican companies and foreign participants in the sector, and this is the time to invest in it, to seize the coming period of rising prices, that are historically cyclical." He said Pemex was among the most competitive companies in the world .

In January Pemex issued a tranch of 10-year junk bonds valued at 5 billion pesos, roughly 300 million dollars, with promised interest rates of 6.9%, or 491.6 basis points over comparable US Treasuries. Standard & Poor's rates them BBBB. Those are still for sale. Want some?

And, lest we forget, Mexico was until recently the largest source of crude oil flowing to the United States. Its share was down to just 9% of US imports in 2015 and the flow will change direction in 2016. But then, the US no longer needs to import oil, right?

Shale oil fields, by their nature, are easy to turn on and off. If your oil costs $40 a barrel to produce and you can sell it for only $35, you can cap your wells and wait for higher prices. Canada, which supplies 37% of oil imports to the US, is doing this now.

However, if you borrowed or fleeced gullible investors for the money to drill your wells you need cash to service debt and pay dividends. You will keep pumping even if you only break even or run a loss, as long as you can pay the debt. The alternative is default. Bondholders are the only ones getting quick liquidations from drilling — in bankruptcy court. Oil patch bond prices have collapsed.

Fracked gas is a different story. Once you drill you have to extract. If you are not fast enough, you can wind up with a methane gusher like Porter Ranch (or Deepwater Horizon's Macando blowout). So you have a monkey on your back. It doesn't matter what you paid to drill the well, you have to sell at a loss, as North Dakota fracker Hess Oil recently discovered to the tune of negative $875 million (forcing it to sell off all its retail gas stations to Marathon and shares of its stock it had only just purchased at twice the price, in exchange for a couple more quarters of solvency and hope).

Current Depletion Projections by Industry Analysts


We suggested here in 2007 that if Pemex went down, it could take the US economy with it. Since then, however, the US economy has weaned itself of dependence on Mexican oil. Instead, it grew its own (and Canada's) unconventional fuel capacity on a foundation of financial fraud. That became the US's main economic driver — extending by pretending — and a growth industry it could export.

Fraud is a fragile mistress that likes to be pampered. She does best with the trendy urbane who imagine that to the clever, reward comes without work and that pushing paper between desks, or electrons through the ether, is the same as growing potatoes or pounding nails. She avoids being seen around reality-based communities, preferring to find dark embrace where the fog of deception is thick and judgments are clouded by greed.

As Frederic Bastiat reminded us, "When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."

In his documentary, Capitalism: A Love Story, Michael Moore observed that during the Bush Recession when the auto industry laid off much of its workforce and shut down most its lines, it wasn't because it could not make and sell cars. It was because the Bank of America would no longer loan it money to upgrade its production lines. Mexico is able to extend the illusion of development only as long as someone loans it money. The same is true of the United States.

What if the banks would or could no longer loan money? That day may be nearer than most economists believe, but then, predictions of peaks, or a systemic crash, are a risky proposition.

 

 

 

 

 

 

 

 

 

 

 

President Trump

Il Duncegc2reddit-logoOff the keyboard of Albert Bates

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Published on Peak Surfer on January 31, 2016

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"From here this presidency sure looks like an unqualified success."

 

  It has been more than a year now since The Donald moved into 1600 Pennsylvania Avenue and he continues to be thwarted at every turn by that do-nothing Congress and the Democrat Party.

We all had expected that by now the Asian countries that have dumped their goods here and almost bankrupted our country by causing our trade deficit would have felt the bite of tough new rules, but the Trans Pacific Partnership tied Donald's hands on that one.

Mexico still won’t keep its illegals — the source for Americans’ drugs — on their side of the border. NAFTA prevented the border closing there. It wouldn't even take those Mexican tractor-trailers off our roads, and who knows how many of them are filled with illegals being dropped off in Ohio and Pennsylvania? Still, we are pouring concrete for a bigger wall all the time, whether Mexico pays for it or not. They should because they created this problem, but so far Donald has not gotten a single peso from the ingrates.

And, of course, the Muslims have always been fighting us when they are not too busy squirmishing between themselves. The Donald's executive order closed all our borders to refugees from Syria, Libya, Egypt, and Afghanistan; countries populated by still more ingrates who are unwilling to pay for the wars that we started on their behalf. And wouldn't you know? That is now going to the Supreme Court, challenged by the Democrat Party as unconstitutional. As if the President of the United States, as Commander in Chief, doesn't have the power to keep all the riffraff out. That wishy washy Supreme Court is not conservative enough! The Donald will get his chance to change that, soon, with real right-winging, bitter-clinging, proud clingers of our guns, our God, and our religion, and our Constitution.

Solving our trade deficit wasn't as simple as ending the supply of cheap Chinese stuff. Donald got around Congress and the TPP by calling that retailer CEO summit at the White House. But it still comes in from places protected by those bad trade deals negotiated by idiot presidents who didn't know the first thing about the art of the deal. Now the Chinese stuff goes to Australia and gets rebranded before the container ships take it to WalMart. That is why the prices we pay didn't change much, so I guess we can be grateful. The Chinese and Koreans should be too, but are they? No way.

When the Donald sent the marines to grab Iraq’s oilfields last month there was a big uproar at the UN but what could they do, the toothless liberals? Donald just vetoed any Security Council resolution they passed. Now we control a significant supply of the world’s oil and can set prices where we like, and not just where the Saudis want them, in the basement. We all have to put up with higher prices at the pump now, but rising crude prices have stopped the slump in fracked gas futures and got us back on the path to the energy independence that made America strong.

If the Saudis gripe about that, Donald says he is ready to send a bunch of oil sheiks to his reopened Guantanamo just to let them know who's in charge. Sure, he hasn't gotten rid of ISIS yet, but give him time. He will get their oil too, and you can take that to the bank. The marines are just settling into Iraq now. Syria is a quick hop.

Donald's poll numbers are quite good, and it is long past the honeymoon stage. People are calling him the Second Great Communicator. Doubters have to eat crow. Our military is stronger than ever, and we are respected again, whether foreigners like it or not.

We will know soon whether that do-nothing Congress passes the President's energy plan and American builders can get started on those 100 new nuclear plants. That will be a real shot in the arm for the economy, as well as making energy cheap again. People say the President is a climate denier, but those new nukes will do more to stop climate change than anything Obama did in Paris. Put a trillion dollars into nuclear power, like we will, and your other countries can be energy independent too, you UN people.

People criticize the President for ordering the National Football League to move the Super Bowl to New Jersey, but now that more than a third of the teams have relocated to California, it seems only reasonable that the East Coast should get its share of the action. Some of the best football we've ever seen was played in snow.

When the Donald took office the economy was in shambles. Stocks were getting schlonged. Oil, coal, and car companies were talking bankruptcy and wanting bailouts. The Donald doesn't do bailouts. How about that?

The Donald met with all the banks and cut them checks. He refinanced the country. Remember: this is a guy who knows what it is to go bankrupt and still wind up with high-rise penthouses and golf courses. That's exactly what he did for America. Who cares what the dollar is now worth in Timbuktu? We will soon have legal casinos in every city and every state, and they won't be run by Indians, either.

We are still only a year into this presidency, but from here it sure looks like an unqualified success. We guess that's only to be expected when you buy the best.
 

“I’m Donald Trump and I endorse this message” — Trump for President 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A Financial Transaction Tax (FTT) for Ireland

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Published on FEASTA on January 27, 2016

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Around 40 Irish civil society groups and NGOs (including Feasta) have expressed their support for RobinHoodTax.ie, an initiative led by Claiming Our Future aimed at introducing an FTT in Ireland. The launch event yesterday at the Mansion House in Dublin featured speakers from Stamp Out Poverty and the Nevin Economics Research Institute plus, inevitably, a large number of Lincoln Green hats with red feathers for the apres match photo-opportunity.

A Financial Transaction Tax levies a (small to miniscule) percentage tax on financial transactions such as share and bond purchases and derivatives. The idea is as old as the hills (well 1930s) but it has recently reappeared on the political horizon, as ten EU countries work together to flesh out a European implementation under a so-called ‘enhanced co-operation‘ [1] regime – an occasionally used device for facilitating agreement of a subset of EU members when full consensus is not possible in the short-term. David Hillman of Stamp Out Poverty gave a rundown of progress on this front, ending with a ‘you are not alone’ message.

The Irish government has taken a passive aggressive stance on the proposal – lining up (but less vociferously) with the UK and Sweden in the anti-lobby. The last detailed discussion in the Dail looks to be in 2013 [2].

The second presentation at yesterday’s event was from Micheál Collins of the Nevin Economic Research Institute (NERI). He is in the process of completing a quantitative analysis of the likely tax receipts of an FTT in Ireland, based on the emerging European model. Estimates stand at a net positive annual tax receipt effect of 320-360 million euros. Full results are scheduled to be revealed at a NERI seminar on February 10th [3].

So what are the messages that would most likely hit the spot with policy makers? This is difficult territory for me because while I admire policy advocates, I have no deep belief in the power of ideas carrying all before them. The thoughts that follow therefore are more in the tradition of Harry S Truman’s advisors [4].

Fairness. After many years of privatised megaprofits, the losses associated with the 2008+ financial crisis have been socialised. Thats a coded way of saying that the corporations who caused the problems didn’t pay for them, citizens did. The residual resentment at that unfairness is deeply entrenched in society, and despite calls for an end to banker-bashing from the 1%, they are still part of the zeitgeist. The #MakeBankersPay hashtag is therefore understandable.

Whether it is wise is another matter. It identifies with the activist strand within the FTT lobby. If we believe that policymakers are more likely to identify themselves with the 1% than with street demonstrators [7], it may invite a further retrenchment into that embattled minority, and encourage existing confirmation bias against all and any activist agendas. So it may be a good message for recruiting activist support and a bad one for influencing policy makers.

This is not to say there is no fairness issue here, clearly there is. But it may be best approached via a plea for rebalancing the economy. With the prevailing neoliberal self-sufficient self-interest narrative, ‘not fair’ is the complaint of the playground weakling. Sad and deeply disappointing as that is.

Rebalancing. There is a clear sentiment in society at large that the financial economy tail has been wagging the real economy dog for too long. There are also some indications that this sentiment extends into the mindset of many politicians. They are constrained however by the ‘race to the bottom’ between nation states as they seek to compete for the attention of multinationals by deregulating, lowering corporation tax and generally bribing to achieve FDI (Foreign Direct Investment). Arguably FTT gives these nation states a mechanism for embarking on the beginnings of a rebalancing – if – and only if – they can be reassured that their resident financial corporations will not migrate to pastures new at the first mention of the tax. As they will no doubt threaten.

So there’s the rub. At yesterday’s event David Hillman defended the laughably low levels of tax (for example a tax of 0.01% on derivatives) by saying it was easier to get it accepted at that level and then increase it once it was established. This has indeed been the pattern with taxes, and that much will be obvious to the financial lobby who will see it as the thin end of the wedge and resist it tooth and nail. In this context it becomes vital to be able to rebut the FUD (fear, uncertainty, doubt) agenda that will be offered up. FUD is proving a reliable strategy for those seeking to preserve the status quo. It worked well for the electoral reform referendum in the UK and for the Scottish independence vote, and will take some countering here.

NERI’s work is vital because it will break down the taxation receipts by instrument, allowing an analysis of the likely effects of a tax at a per instrument level. It seems likely that virtually all the costs will fall on financial institutions and that the potential for them to pass on these costs to consumers will be limited by competition. This is the way the FTT is designed. In 1936 when John Maynard Keynes floated the idea of an FTT, he saw it as a tax on excessive speculation [5]. If a detailed analysis by instrument can reinforce this strategic positioning, there may be a chance. This brings us to the final message – of increased stability and resilience.

Stability. If, as Keynes envisaged, and the more enlightened politicians hope, an FTT dampens some of the excessive speculation/ gambling that takes place in the casino economy, it can be developed as an intervention mechanism for policy makers. Having discovered that control of the interest rate does not give them the power they once thought it did, they have very few tools left in their toolbox and may well welcome one more. To say such a tax could do away with the boom-bust cycle is going too far. Other systemic monetary changes will be necessary for that including the resumption of strategic guidance over the allocation of credit-as-capital [6]. But an FTT could well give potential for a smoothing effect. Policy-makers who must feel like eunuchs in a brothel at present, may well like the idea of having another meaningful instrument at their disposal.

So that would be my prescription for messages – stability, rebalancing and yes,ok, fairness. The final message, which most FTT proponents emphasise and which I called unkindly in the introduction dogoodability is also important. Emphasis is usually placed on the use of FTT receipts for (say) climate change work and international development. As delegates yesterday pointed out, such hypothecation of tax receipts is normally resisted by policy makers as a constraint on their decision-making. But as an appeal to a wider society audience it has it place. And there are precedents in Ireland with some environmental taxes, so why not?

Claiming our Future are to be congratulated for spearheading FTT adoption in Ireland. If NERI can put together some detailed technical rebuttals on a per-instrument basis, we may yet see a proposition for re-empowering economic policy-makers on the back of a societally-beneficial FTT. Used and adjusted actively such a tax can help restore financial resilience – a valuable quality that has been sacrificed in favour of efficiency for too long.

References

[1]: http://www.euractiv.com/topics/enhanced-cooperation which also has an article on banking industry response.
[2]: http://oireachtasdebates.oireachtas.ie/Debates%20Authoring/DebatesWebPack.nsf/committe etakes/FIJ2013100200003?opendocument#C00350
[3]: http://www.nerinstitute.net/events/2016/02/10//
[4]: “Give me a one-handed economist! All my economists say, ”On the one hand? on the other.'” Harry S. Truman
[5]: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.” J M Keynes
[6]: see for example: Richard Werner at http://republicirelandbank.com/?p=601
[7]: http://www.commondreams.org/views/2016/01/26/volcanic-core-fueling-2016-election

Featured image: “Here begynneth a gest of Robyn Hode”, 16th century. Source: https://commons.wikimedia.org/wiki/File:Here_begynneth_a_gest_of_Robyn_Hode.png

 

 

The Paris Gravity Well 2: Trillionization

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Published on Peak Surfer on January 24, 2016

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"We will not suddenly convert steel mills, cement kilns and road surfacing machines to operate on sunbeams."
 

Charlie said, "That's the trouble. You see it the way the banking industry sees it and they make money by manipulating money irrespective of effects in the real world. You've spent a trillion dollars of American taxpayers' money over the lifetime of the bank and there's nothing to show for it. You go into poor countries and force them to sell their assets to foreign investors and to switch from subsistence agriculture to cash crops. Then, when the prices of those crops collapse, you call this "nicely competitive" on the world market. The local populations starve and you then insist on austerity measures even though your actions have shattered their economy….

"You were intended to be the Marshall Plan, and instead you've been carpetbaggers."

— Kim Stanley Robinson, Sixty Days and Counting: Science in the Capitol (2007).

“With fundamentals changing slowly and risk appetite falling rapidly, the stage is set for a longer period of risk asset underperformance,” Jabaz Mathai, a strategist at Citigroup Inc., said.  “There is no quick fix to the headwinds facing global growth.”

"Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters."

There has been a storm brewing since the last trifle with full-on collapse in 2008-2009. The extend-and-pretend debt balloon was reinflated and stretched to new enormities as Keynesian cash infusions fueled a Minsky Moment, if not a Korowicz Crunch.

The instability in finance is compounded by the instability in demographics. In Mexico City, Bogata and Rio they call them NINIs — the millions of youth between 15 and 24 who neither study nor work. They are now about a fifth of the population in the underdeveloping world, responsible for higher rates of homicide, gangs, and unwed pregnancy. Of those born to NINI mothers, there is a 22.3% greater likelihood of becoming a NINI, according to the World Bank. All this tinder simply builds, bides its time, wanders the streets, waits for a revolutionary spark.

As we said here last week, the trigger for the markets' sudden move may have been what happened in Paris but could not stay in Paris. When it filtered out from the December summit that 195 countries had actually done the unimaginable and set a goal of carbon neutrality, meaning phasing out net fossil fuel emissions by 2050, the financial sector was at first caught dumbfounded. The World Bank guys flinched.

Now it has sunk in. The Guardian reports:

Former OMB Chief David Stockman's recap

Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 (£11) a barrel, economists at the Royal Bank of Scotland have warned. In a note to its clients the bank said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point.

Government subsidies are about to undergo a titanic shift. Many governments spend more on fossil-fuel subsidies than they do on health and education, more than a trillion dollars. Consumer benefits such as subsidized fuels and cheap finance add $548 billion per year. Government support for companies to expand production add another $542 billion just in G20 overdeveloped countries, and a mere top 8 of those will spend $80 billion of this kind every year, four times the investments going to renewables globally.

Tomorrow those same Big-8, and 188 others, will begin spending several times those trillions subsidizing renewables. Jeremy Leggett, founder of Solar Aid and Solarcentury, calls it "trillionization." It won't begin to fill the energy gap that the switch will create, but the psychology of sunk investment will be in charge from thereon out.

Oil producing states and countries are aghast. The "clear signal" that Paris sent was not what they were expecting. In Alaska, the Permanent Fund has been running in the red and the legislature is talking about an income tax. Had the Paris Agreement not come together, they might hope for a rebound of fossil prices and investments in drilling the North Slope and Arctic Refuge.

Petroblas, the national oil company of Brazil and wellspring of the Brazilian Economic Miracle, is now cash negative. It will be forced to turn to the government for a bail-out, but to where will its government turn?

In Mexico, the deficit is running 100 billion and the peso has dropped from 12 in 2014 to soon-to-be 20 against the dollar. If you have dollars you can get a meal in a good restaurant or a room for the night for 5 or 10 of them. So far in January the price rise of food for the average Mexican is alarming. Onions are up 19%, poblanos 15%, bananas 10%, tomatoes 9%.
 
The national oil company, PEMEX, came out on Monday saying it is not true that its operating with losses, but below the $26 per barrel it would be. On Tuesday the price dropped to $24.74. It closed the week at $22.77 but as we write this you can buy a barrel in Mexico City for as little as $20.32. Mexico's federal budget is entirely dependent on oil money and don't look now but Mexico, when it was petrodollar flush, became a net importer of most staple foods and many other essential commodities, which helps explain the grocery dilemma. Mexico now buys onions, poblanos, bananas and tomatoes from California. Also beans, corn and rice.

Gotta love those World Bank guys.

Venezuela, which surprised everyone by signing the Paris Agreement at the final hour, declared an economic emergency on January 15. France, which foolishly drank too much atomic kool aid thinking it might spare itself from petrocollapse, has a budget shortfall of 2.2 billion dollars and declared national economic emergency on January 17. The jobless rate in France, the eurozone's 2d largest economy, is above 10%, compared with a 9.8% EU average.

Andrew Roberts, RBS’s credit chief, said:

European and US markets could fall by 10% to 20%, with the FTSE 100 particularly at risk due to the predominance of commodity companies in the UK index. London is vulnerable to a negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe.

We suspect 2016 will be characterized by more focus on how the exiting occurs of positions in the three main asset classes that benefited from quantitative easing: 1) emerging markets, 2) credit, 3) equities … Risks are high.

Zero Hedge reports:
 

"For dry bulk, China has gone completely belly up,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, talking about ships that haul everything from coal to iron ore to grain. “Present Chinese demand is insufficient to service dry-bulk production, which is driving down rates and subsequently asset values as they follow each other.”

“China’s slowdown has come as a major shock to the system,” said Hartland Shipping’s Prentis. “We are now caught in the twilight zone between shifts in China’s economy, and it is uncomfortable as it’s causing unexpected slowing of demand.”

The continued collapse of The Baltic Dry Index remains ignored by most.

According to  Zero Hedge:

The North Atlantic has few to nil cargo traveling in its waters. Instead, the giant container ships are anchored. Unmoving. Empty.

Commerce between Europe and North America has literally come to a halt. For the first time in known history, not one cargo ship is in-transit in the North Atlantic between Europe and North America. All of them (hundreds) are either anchored offshore or in-port. NOTHING is moving.

This has never happened before. It is a horrific economic sign; proof that commerce is literally stopped.

The slow response to the Paris outcome has been a complete portfolio review by every actuary and bean-counter in the biggest banks and investment houses, pension funds and mutuals. Hedge fund managers are scratching and sniffing for places to park billions being lifted from soon-to-be-stranded fossil assets. The clean-tech market, signaled first by China, is reacting by recycling cash out of fossil holdings.

Peter Sinclair of ClimateCrocks.com reports:

The Energy Information Administration calculates in its 2015 analysis that the average U.S. levelized cost for new natural-gas advanced combined cycle plants is 7.3 cents per kilowatt-hour — the same as solar.

However, to compare accurately, we have to add about 10 percent to the cost of solar to firm up this variable resource. So we’re close to cost parity, but not quite there.

At $1 per watt, the levelized cost falls to just 5.7 cents per kilowatt-hour, well below cost parity with new natural-gas plants. With two-axis trackers and the best solar resources, which increase the capacity factor to 32 percent, that cost falls to just 4.5 cents per kilowatt-hour. We’re headed to $1 per watt as an all-in cost in the next five to 10 years.

Bloomberg New Energy Finance reported last summer that wind power was the cheapest source of power in the U.K. and Germany in 2015, even without subsidies. The article’s tagline reads: “It has never made less sense to build fossil fuel power plants.” The same article highlights the feedback loop that solar and wind power have in terms of reducing the cost-effectiveness of fossil fuel power plants due to the dispatch order of renewables versus fossil fuel plants.

The solar singularity is indeed near (here?) in the U.S. and increasingly around the world. I described previously that 1 percent of the market is halfway to solar ubiquity because 1 percent is halfway between nothing and 100 percent in terms of doublings (seven doublings from .01 percent to 1 percent and seven more from 1 percent to reach 100 percent). The U.S. will reach the 1 percent solar milestone in 2016. We’re halfway there. Buckle your seatbelts.

There are plenty of unemployed oil workers ready for retraining. James Howard Kunstler: 

So, in 2015, the shale oil companies laid off thousands of workers, idled the drilling rigs, and kicked back to pray that the price would go back up. Which it didn’t…. The landscape of North Dakota is littered with unfinished garden apartment complexes that may never be completed, and the discharged construction carpenters and roofers drove back to Minnesota ahead of the re-po men coming for their Ford F-110s.

To see what does well in the new, post-Paris domain, watch stocks like First Solar (FSLR), Renewable Energy Group (REGI), SolarCity (SCTY) and Siemens (SIE) over the next quarter, and mutuals like Firsthand Alternative Energy (ALTEX), New Alternatives (NALFX) and Guinness Atkinson Alternative Energy (GAAEX). Some of these know their audience and have vowed to screen for social justice. Gabelli SRI AAA says, for instance:

The fund will not invest in the top 50 defense/weapons contractors or in companies that derive more than 5% of their revenues from the following areas: tobacco, alcohol, gaming, defense/weapons production….

There is a psychology that sets in once the corner is turned on fossil investments that may make a big difference in the political debate about climate change. For more than half a century the GOP, the Fossil Lobby and Wall Street have blocked, cut or delayed investments in renewables and papered it over with greenwash. Forced by pledges made in Paris — and a legally-binding agreement with the word "shall" used 143 times — and the emergence of a huge new global competition to begin not only unchaining the clean-tech sector, but to actively promote it with subsidies, research grants and moonshot-scale deployments, the psychology of chasing after sunk investments will drive an apolitical energy conversion.

Moreover, 350.org and Greenpeace are ramping up campaigns to make sure the promises made in Paris are kept.
 

No pipelines, no mines. You said 1-point-5!
No pipelines, no mines. You said 1-point-5!
No pipelines, no mines. You said 1-point-5!

Clean energy will not deliver a 1:1 replacement for fossil fuels. Get over it. We will not suddenly convert steel mills, cement kilns and road surfacing machines to operate on sunbeams. But the investments we do make, and the worsening weather, will drive us to make even more and ever larger investments, in a forlorn search for a full replacement. While wasteful, it is not nearly as wasteful as the industrial and military investments of the past century or more.

Persian Gulf wars, going back to antiquity, have never been fought over sunlight. As David Stockman recently recalled:

[A] 45-year old error … holds the Persian Gulf is an American Lake and that the answer to high oil prices and energy security is the Fifth Fleet.

***

That doctrine has been wrong from the day it was officially enunciated by one of America’s great economic ignoramuses, Henry Kissinger, at the time of the original oil crisis in 1973. The 42 years since then have proven in spades that its doesn’t matter who controls the oilfields, and that the only effective cure for high oil prices is the free market.

The switch to sunlight will make the lives we are living better for many, especially those on the front lines of the oil wars, even as we continue towards an Anthropocene Armageddon with little sign of being able to change that trajectory.

Guy McPherson is fond of reminding us, after University of Utah professor Tim Garrett's deft analysis, that industrial civilization is a heat engine.

In a well-read article in Climate Change in November 2010, Garrett ran the simple arithmetic:

Specifically, the human system grows through a self-perpetuating feedback loop in which the consumption rate of primary energy resources stays tied to the historical accumulation of global economic production — or p×g — through a time-independent factor of 9.7±0.3 mW per inflation-adjusted 1990 US dollar.

If civilization is considered at a global level, it turns out there is no explicit need to consider people or their lifestyles in order to forecast future energy consumption. At civilization’s core there is a single constant factor, λ = 9.7 ± 0.3 mW per inflation-adjusted 1990 dollar, that ties the global economy to simple physical principles. Viewed from this perspective, civilization evolves in a spontaneous feedback loop maintained only by energy consumption and incorporation of environmental matter.
 

Unsold cars sit on receiving docks all over the world

Because the current state of the system, by nature, is tied to its unchangeable past, it looks unlikely that there will be any substantial near-term departure from recently observed acceleration in CO2 emission rates. For predictions over the longer term, however, what is required is thermodynamically based models for how rates of carbonization and energy efficiency evolve. To this end, these rates are almost certainly constrained by the size and availability of environmental resource reservoirs. Previously, such factors have been shown to be primary constraints in the evolution of species


What this means is the same thing that Gail Tverberg, Richard Heinberg and many others have been saying for a very long time — modern economies are a product of cheap energy. Take that away and they crash and burn. That’s the good news. Garrett says there is no other climate remediation model that works. Civilization is a heat engine whether it is powered by nuclear fusion or photovoltaics. The global economy must crash for humanity to stand a chance. McPherson would take it a step farther and say it is already too late, enjoy what time you have.

The famous Fermi paradox raises the question: why haven’t we detected signs of alien life, despite high estimates of probability, such as observations of planets in the “habitable zone” around a Sun-like star by the Kepler telescope and calculations of hundreds of billions of Earth-like planets in our galaxy that might support life. To produce a habitable planet, life forms need to regulate greenhouse gases such as water and carbon dioxide to keep surface temperatures stable. Early extinction, before interstellar communication, solves the Fermi Paradox. So does merely the extinction of civilization capable of interstellar communication without the same degree of trauma. No civilization, no heat.

But wait! Can that excess heat civilization is producing be turned into air conditioning for the planet? Is there a permacultural decroissance that could rescue our genome? Stay tuned, but first, next week, we play the Trump card.

 

 

 

 

 

 

 

 

The Paris Gravity Well 1

Peak-Exxon-OIlgc2reddit-logoOff the keyboard of Albert Bates

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Published on Peak Surfer on January 17, 2016

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"The idling of rail, barge, ship and pipeline traffic is the biggest change of its kind in 30 years."

 

   The World Bank Guys talked about rates of return and the burden on investors and the unacceptable cost of the doubling of the price of a kilowatt hour. Everyone there had said all of this before, with the same lack of communication and absence of concrete results.

Charlie saw that the meeting was useless. He thought of Joe, over at the daycare. He had never stayed there long enough even to see what they did all day long. Guilt stuck him like a sliver. In a crowd of strangers, 14 hours a day.

The bank guy was going on about differential costs. "And that's why its going to be oil for the next 20, 30 and maybe even 50 years," he concluded. "None of the alternatives are competitive." Charlie's pencil tip snapped.

"Competitive for what?" he demanded. He had not spoken until that point and now the edge in his voice stopped the discussion. Everyone was staring at him.

He stared back at the World Bank guys. "Damage from carbon dioxide emission costs about $35 per ton. But in your model, no-one pays it. The carbon that British Petroleum burns per year by sale and by operation runs up a damage bill of $50 billion dollars. BP reported a profit of $20 billion so actually its $30 billion in the red, every year.

"Shell reported a profit of $23 billion but if you added the damage cost it would be $8 billion in the red. These companies should be bankrupt. You support their exteriorizing of costs so your accounting is bullshit. You are helping to bring on the biggest catastrophe in human history.

"If the oil companies burn the 500 gigatons of carbon that you are describing as inevitable, because of your financial shell games, then two-thirds of the species on the planet will be endangered, including humans. But you keep talking about fiscal discipline and competitive edges and profit differentials. It's the stupidest head-in-the-sand response possible."

The World Bank guys flinched at this. "Well, we don't see it that way."

 

— Kim Stanley Robinson, Sixty Days and Counting: Science in the Capitol (2007).

 While the story coming out of the White House Press Room this week was phrased as a temporary moratorium on new coal mining leases on federal lands, the bigger story was in the details of the review that the President had ordered. Like Robinson's character in Sixty Days, the White House recognized that the real cost of coal is not currently accounted for in its price, so the new review will tally the environmental impacts, including destruction of public lands from air and water pollution from strip mining and failed mine reclamation, public health impacts from transporting and burning coal, damage from ash spills, greenhouse gas emissions and climate change. It will set a price on future leases based on this thoroughgoing review that brings the cost of coal in line with the reality of the actual costs.

If this had to be run through Congress, powerful coal-state Senators like Mitch McConnell would derail it before it got out of committee. As merely Bureau of Land Management regulatory policy, it falls under the Executive Branch, where the President's is the only opinion that counts.

Tomorrow senior politicians, digiratti activists and Hollywood stars ski into the Swiss resort of Davos for the annual World Economic Forum. The theme was to have been the 4th Industrial Revolution – robots, AI and the  biotechno singularity — but the buzz is all about the latest crash of the world economy.

The trigger for all this change may have been what happened in Paris but could not stay in Paris. In December we reported from the United Nations climate meeting where many of these same characters — John Kerry, Leonardo DiCaprio, Justin Trudeau, Angela Merkel — were on stage. We described then how an amazing role reversal was in progress and how it had transformed COP-21, midway through the second week of deadlocked negotiations.

The roles that switched were between the dominants, like Exxon-Mobil, Shell and BP, and the submissives — the entire renewables industry. Renewables are largely a digital world, enjoying advancements in crystal structure, solid state controllers, neodymium and other rare earth metallurgy that follow the proscribed arc of Moore's law, doubling in efficiency and halving in cost at close intervals, driving exponential adoption and dissemination.

Fossils, in contrast, are an analog industry, trying to wring the last drops of intoxicating elixir from the carpet of the pub after closing time. In 2015 those two curves crossed, and renewables are now cheaper (even free at some hours for select consumers in certain markets) while coal, oil and gas are queuing up outside bankruptcy court.
 

Salvaging beer from the bar floor after last rounds

The US Department of Energy reported this week:
 

The Short-Term Energy Outlook (STEO) released on January 12 forecasts that Brent crude oil prices will average $40 per barrel (b) in 2016 and $50/b in 2017. This is the first STEO to include forecasts for 2017. Forecast West Texas Intermediate (WTI) crude oil prices average $2/b lower than Brent in 2016 and $3/b lower in 2017. However, the current values of futures and options contracts continue to suggest high uncertainty in the price outlook. For example, EIA's forecast for the average WTI price in April 2016 of $37/b should be considered in the context of recent contract values for April 2016 delivery, suggesting that the market expects WTI prices to range from $25/b to $56/b (at the 95% confidence interval).

The decline in oil price is too little, too late. It cannot keep pace with the price decline we are seeing in the clean tech revolution. Consequently, more people now work in the US solar industry than in oil and gas at the wellhead. In 2015, for the third straight year, the solar workforce grew 20 percent. Clean tech employs far more women than fossil, and 5 percent of the workforce is African American, 11 percent Latino, and 9 percent Asian/Pacific Islander.

At the same time, rear-guard action by the Coal-Baron-selected legislatures in Arizona and Nevada —  states that could be leading the nation in solar power production — have led to layoffs in the renewables sector. The pushback over solar and wind fees by grid owners, punitive taxes, and net metering promise to keep those states in the Dark Ages, as they did the United States for the past four decades.

In a famous L'il Abner cartoon, Pappy Yokum tells L'il Abner, "Any fool can knock down a barn, it takes a carpenter to build one." To which L'il Abner replies, "Any fool? Let me try!"

Listening to the Republican presidential candidates debate is like watching a Fox-den full of L'il Abners.
 

US Solar Power 2010-2015

So it is not surprising that at the stroke of a pen, three Republican appointees on the Nevada Power Utility Commission decided the fates of millions of ratepayers when they killed solar feed-in-tariffs in that state. It was not unlike Michigan governor Rick Snyder deciding to kill and maim thousands of Detroit residents by switching their water to a polluted source and then covering up the damage. You might say no-one gets killed or maimed from solar energy, and that's closer to true, but plenty more get poisoned every year from the fossil alternative.

The numbers being parsed in Davos will be puzzling to many attending that meeting. From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth. The research group Genscape said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill.”

Just 5 years ago investors clamored for more tank cars to pick up the slack from overwhelmed pipeline capacity. Now those cars sit idle on sidings and no one is ordering more. Pipelines are idle too, as refineries on the coasts have found that it is cheaper to buy crude of higher quality than shale oil, shipped by ocean tanker from Canada, Nigeria and Azerbaijan.
 

Junk bond sales are all that supports
the fracked gas Ponzi scheme.

A Congress desperate to please its oil masters in an election year abolished four-decade-old restrictions on exporting domestic crude. While some tankers now take crude from the Gulf Coast to refineries in Venezuela, where the heavy sludges and half-formed keragens can be more economically processed because of fewer environmental restrictions, the US then imports back the finished products at a hefty mark-up.

The idling of rail, barge, ship and pipeline traffic is the biggest change of its kind in 30 years. And while the shift away from coal-powered energy, the long recession, and the petering out of the fracking and shale Ponzi real estate play would obviously lead to fewer tons, barrels and cubic feet being moved, it doesn't explain the full depth of the stoppage. The rail and barge slowdown is now spreading to more consumer-oriented segments. Intermodal carloads typically related to consumer goods fell 1.7 percent in the final quarter of last year.

"We believe rail data may be signaling a warning for the broader economy," the recent note from Bank of America says.
 

"Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009."


“When people get hungry, governments fall” — Stuart Scott, Through A Dark Portal, Radio Ecoshock, January 13, 2016

If you can read the tea leaves, or even if you can't, we are now in the long slide. We will examine the financial road ahead, and the Paris Effect on that, in greater detail next week.

 

 

 

 

 

 

 

 

 

 

 

 

Stranded Expectations

Off the keyboard of Albert Bates

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Published on Peak Surfer on July 19, 2015

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 One of the birthplaces of civilization is having its cradle rocked again. Apart from the subjugation of women, children and slaves, Greece's beta version, going back 2500 years, was pretty cool – men in togas strolling though olive groves asking existential questions about life, the universe and all that. An updated version, without the wars, slaves and chauvinism, might not be half bad.

Today Greece is the European Union's current favorite whipping boy – the example to be made in order to keep all the other Ponzi'd patsies in line. It is no small irony that despite street protest bringing a new, defiant Syriza  (“from the roots”) government to Athens and a resounding No! Icelandic-style referendum placing Greece in technical default, the realities of needing a cash drip to keep pensioners breathing and buses running have given the upper hand to German, French and British banksters. 

The irony is compounded when one glances at the score sheet for total debt to GDP, with China at 250%, Germany 302%, Greece 353%, USA 370%, Britain 546%, Japan 646% and Ireland at an enchanted 1,000%.

Commented Dmitry Orlov:

The IMF won't lend to Greece because it requires some assurance of repayment; but it will continue to lend to the Ukraine, which is in default and collapsing rapidly, without any such assurances because, you see, the decision is a political one.


After the US-controlled International Monetary Fund acknowledged that Greece has no possibility of ever repaying its debts, the central bankers’ bank, the Bank of International Settlements, recently issued a very blunt warning

“[T]he world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crisis."


If neoliberalism has a Hall of Fame, surely China has a bronze bust somewhere near the entrance. Literally millions of Chinese, newly employed and making consumerist wages, have opened stock trading accounts. For them, its the Roaring Twenties. What changed? China took extreme measures to increase the liquidity in their financial system – precisely what the European Central Bank denied to Greece. 

Liquidity is what pays off the account holders in the event of a run on the bank, because in reality, banks don't store money or any other assets, they only record accounts of running debts. Liquidity builds confidence. Liquidity is what Ben Bernacke forced down the throats of the Wall Street cabal to staunch the bloodletting in 2008. When Europe pulled the liquidity backstop away from Greek banks, ATMs ran dry and depositors took a haircut on their holdings, but systemically, it was much worse than that.

 


 

Greece, Spain, Portugal, Italy and other debtor countries have been under the same mode of attack that was waged by the IMF and its austerity doctrine that bankrupted Latin America from the 1970s onward.

–Michael Hudson

Currently, the average USAnian's net worth is at a record high, but if you were to try to find that average person, it could take you quite a while. Seventy million US citizens are teetering on the edge of financial ruin. They’re one paycheck away from default on their mortgage or health insurance premium. How does one explain their record high net worth? (a) concentrations of extreme wealth at the top of the pyramid; (b) inflated real estate and other asset valuations; and (c) inflated valuation of the dollar, backed by nothing more than vivid imagination. Fantasy is infectious, so there has been a capital flight to Turtle Island on the expectation that it would be a bastion of stability, its deregulated regulators standing as a tall cliff over the tsunami about to engulf the world economy.
 

Hellenistic Greece "Diadochen1" by Captain_Blood – Own work.
Licensed under CC BY-SA 3.0 via Wikimedia Commons

The Greeks invented modern banking a couple millennia ago – credit based trade, hedge funds, options, foreign exchange, and so on. And, as we might expect, what's happening in Greece now is nothing new. Athens suffered a land and agrarian crisis in the late 7th century BCE and its citizens took to the streets, throwing bottles and protesting food prices. The Archon (city manager) Draco made severe reforms in 621 BCE ("Draconian" they were called), but these failed to quell the conflict. The crisis lasted another 27 years until the moderate reforms of Solon (594 BCE) lifted austerity while paying off creditors, with the added benefit of firmly entrenching the aristocracy.

The first financial crisis happened in Greece around 600 BC. Since then, Greece has defaulted on their loans more often than any other country in the modern world. In the past 200 years or so, Greece has defaulted about half the time.

Even though Greece has already received $284 billion in bailout money over the past five years, they still couldn’t get it together. One reason why was because most of that money went to financial institutions, and only a small portion went to the people.

Another reason why was due to their pension system. By now, everyone has heard the stories of the hairdresser example… That is, someone who’s worked as a hairdresser for three years, then retires around age 50-55 and receives nearly a full pension. Multiply this by more than two million pensioners, along with a whole lot of other financial problems, and you see why Greece is in such deep trouble.

Aden Forecast
 


Our spider senses tingle when we hear someone reading from one of Ronald Reagan's index cards about mooching welfare mamas driving a Cadillac. Those spendthrift pensioners! Originally the Greek debt was owed to French, Dutch and German banks but now is owed mainly to agencies like the European Financial Stability Facility, run on behalf of 19 governments, that most recently lent Greece (to kick the can down the road) 145 billion euros borrowed from the bond markets at high interest. Hmmm. Sounds a lot like the sub-prime market of, say, 2005, with European banks in the position of Countrywide and AIG.
Brian Davey writing for Feasta says:

If you kick the can down the road repeatedly you eventually run out of road. What should have happened much earlier in this process was an admission that the French, Dutch and German banks had made a mistake lending to Greece and they should have taken their loss. Perhaps Greek officials and Goldman Sachs, which helped to hide the fact that Greece could not pay, should have been prosecuted.


Davies goes on to draw the crucial link between energy and economy:

[W]hile Greece (and Spain and Italy and Ireland) was growing there were good reasons to send money to Greece – to invest in the building of holiday hotels for example, or in the building and civil engineering companies that built the hotels and the roads to the resorts. This was not buying and importing Greek goods – but it was putting money back into the pockets of Greeks in the form of investment in the business activities of a growing economy. If deficit countries are growing then mechanisms will exist to recycle purchasing power internationally. Once growth stops then there is no reason to send money to deficit countries and they are in trouble – as has happened throughout southern Europe and Ireland. I think that this is the most plausible way of seeing things. And the reason that growth began to fall off was rising energy prices because of depletion, because we are reaching the limits to economic growth. Because energy enters into all economic activities this undermines growth because people and companies struggle to service their debts AND pay the higher energy prices. That’s the ultimate reason that interest rates had to come down through quantitative easing.

 
Looking at a historical chart of US debt, one sees that it remained virtually unchanged from first ill-fated settlement in the 16th century, showing only slight bumps with each major war, until approximately 1970 when it went ballistic. What happened then? Gold bugs will tell you it was Nixon taking the dollar off the gold standard, unleashing the beast of fractional reserve banking and fiat currency. Rather, we find it more plausible that 1969 was the year US oil production peaked and, like their Greek counterparts, US companies began to struggle to service their debts AND pay the higher energy prices.

The US trashed Bretton Woods when it took the dollar to the oil standard by getting Saudi Arabia and other producers to sell their oil for dollars only. If you wanted to buy oil you needed dollars, and so dollars flowed back into the US, favorable trade balances masked the dollar's inflation (and the massive debt to sustain cheap energy) and American banks laughed all the way to the voting booths.

Meanwhile, life in Greece goes on, amid the financial wreckage. As Jan Lundberg, who has been trying to revive commercial sail transport in the Mediterranean (to replace more than four million fishing and small cargo vessels now spewing oil smoke and bilge) reports:
 

The jump in homelessness, many of the housed doing without heat in winter, and foregoing improvements in life that people had grown accustomed to, are well known. So it is no wonder that money is almost universally seen as the problem and the solution. The once hopeful consumer population has been ravaged: 1.3 million people, or 26% of the workforce, are without a job (and most of them without benefits); wages are down by 38% since 2009, pensions by 45%, GDP by a quarter; 18% of the country’s population unable to meet their food needs; 32% below the poverty line. Almost 3.1 million people, 33% of the population, are without national health insurance.


The ECB could solve Greece’s problem with a few computer keystrokes. The effect would actually be to stimulate the European economy.
 
Instead, Greece remains a whipping boy to keep the rest of the periphery in line. If either side decides to reject the latest deal, we could see an exit from the European Union, and a return to the drachma. This would likely be good for Greece but not for the EU, which could then see so many countries exit that the central currency tumbles into obscurity.

If Greece switches to drachmas, the funding possibilities are even greater. It could generate the money for a national dividend, guaranteed employment for all, expanded social services, and widespread investment in infrastructure, clean energy, and local business. Freed from its Eurocrat oppressors, Greece could model for the world what can be achieved by a sovereign country using publicly-owned banks and publicly-issued currency for the benefit of its own economy and its own people.

 Jan Lundberg says:

There are two kinds of people, whether in Greece or elsewhere: those who welcome or understand that fundamental change and discontinuity are inevitable, perhaps on the way too soon for convenience, and, those who fervently want the level of income and consumption of the past — regardless of economic and ecological realities. Fortunately for Greeks, they have a continuous and ancient society under the surface of the unstable transnational corporate state.


Summer in Greece often brings wildfires and this year is no different, although climate change doesn't help. In 2007 one fire covered 25.000 hectares north of Athens and as we write this flames are again creeping towards Athens from the North and the government has called out the Air Force and Army to help fight 34 separate fires. Isn't it lucky they still have organized fire departments and emergency responders there? They have come very close to not having that.

Greece is retracing its steps back through the ascent of Western Civilization to an earlier era when the best hedge was a good olive press. Many there, as elsewhere, cannot imagine losing the perks of advanced civilization. Stranded expectations – whether in Athens or Brussels – cloud peoples' thoughts. We are all Greeks. Harder lessons are coming. 

Greece…One Way…or the OTHER!

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on July 9, 2015

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European Leaders Promise The Greek Debt Crisis Will Be Resolved One Way Or Another On Sunday

The wait will soon be over.  Greece submitted a final compromise plan to its eurozone creditors on Thursday, European finance ministers will meet on Saturday to discuss the proposal, and an emergency summit of all 28 EU nations on Sunday will make a final decision on what to do.  The summit on Sunday is being billed as a “final deadline” and a “last chance” by EU officials.  In essence, Greece is being given one more opportunity to embrace the austerity measures that are being demanded of them by their creditors.  So has Greece gone far enough with this new proposal?  We shall find out on Sunday.

For months, the entire planet has been following this seemingly endless Greek debt saga.  Global financial markets have gyrated with every twist and turn of this ongoing drama, and many people have wondered if it would ever come to an end.  But now European leaders are promising us that the uncertainty is finally going to be over this weekend

This time, the leaders’ summit called for Sunday is being billed by all concerned as the definitive moment that will determine Greece’s future in the euro. It’s “really and truly the final wake-up call for Greece, but also for us — our last chance,” EU President Donald Tusk said on Wednesday, the day after the most recent emergency session.

So what is the general mood of European leaders as they head into this summit?

Overall, it does not appear to be overly optimistic.

For example, just consider what the head of the Bundesbank is saying

Bundesbank Chief Jens Weidmann, meanwhile, said that central banks have no mandate to safeguard the solvency of banks or governments, and stressed that emergency liquidity to Greece should not be increased.

And even normally upbeat leaders such as ECB President Mario Draghi are sounding quite sullen

Just how uncertain the coming days are was highlighted when ECB President Mario Draghi voiced highly unusual doubts about the chances of rescuing Greece.

Italian daily Il Sole 24 Ore quoted the ECB chief, under growing fire in Germany for keeping Greek banks afloat, as saying he was not sure a solution would be found for Greece and he did not believe Russia would come to Athens’ rescue.

Asked if a deal to save Greece could be wrapped up, Draghi said: “I don’t know, this time it’s really difficult.

That certainly does not sound promising.

It isn’t as if the Greeks are not trying to find a compromise.  Their latest offer reportedly contains some very painful austerity measures

Greece is seeking another bailout totaling at least 50 billion euros ($55 billion) from its European creditors and offering to make painful spending cuts and tax increases as it races to avert a financial meltdown, according to government sources.

Under a 10-page blueprint completed late Thursday, the country said it would undertake austerity measures worth between 12 billion and 13 billion euros ($13 billion to $14 billion), including raising taxes on cafes, bars and restaurants.

But once again, it appears that pensions may be a major sticking point.  The following comes from a Zero Hedge report about the latest Greek proposal…

The biggest surprise is once again in the biggest hurdle: pensions. Recall that as we accurately predicted two weeks ago, it was the government’s unwillingness to directly cut pensions that led to the IMF refusing to even negotiate the Greek proposal.

As a further reminder, this is what IMF’s chief economist Olivier Blanchard said almost a month ago on the topic:

Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners

Fast forward to today when MNI reports that “there are no pension cuts in the draft of the proposal.”

And if recent experience is indicative, this likely means that the Troika will once again refuse to move on with the draft.

We shall see what happens on Sunday.

I have a feeling that it is all going to come down to what Germany wants to do.  At this point, the Greeks owe the Germans approximately 86.7 billion euros.  The German people are overwhelmingly against pouring more money down a financial black hole, and German leaders have taken a very hard line with Greece in recent days.

If Germany does not like this new Greek proposal, it will almost certainly fail.  And if there is no deal, Greek government finances will totally freeze up, the Greek banking system will utterly collapse, and the Greeks will probably be forced to switch back to the drachma.

Speaking of the drachma, check out what Bloomberg is reporting

Between June 28 and July 4 at a Hilton hotel in Athens, transactions on a Bloomberg reporter’s Visa credit card issued by Citigroup Inc. were posted as being carried out in “Drachma EQ.”

The inexplicable notation — bear in mind, the euro remains Greece’s official currency — flummoxed two very polite customer service representatives and spokesmen for the companies involved. It depicts a currency changeover that the Greek government and European officials have been working for over six months to avoid.

Banks around the world are bracing for the increasingly real possibility that Greece may be forced to abandon the euro, a currency it shares with 18 other European countries.

Could plans to roll out the drachma already be in motion behind the scenes?

The next few days promise to be extremely interesting.

Meanwhile, there are all sorts of other indications that big economic trouble is ahead for the entire planet.  For instance, global commodity prices have been plunging big time

While market commentators worry whether an economic collapse in Greece could trigger turmoil in financial markets, a slump in commodity markets may be signaling the world is already in a deep recession.

The slump in the Chinese stock market and concern over the Greek debt crisis sent commodities towards multiyear lows. The S&P GSCI—an index which represents a diversified basket of commodities—has been down nearly 40% over the past year and had slumped by more than six percent as of Wednesday, July 8th.

We witnessed a similar pattern just prior to the financial crisis of 2008.

And in addition to the problems that have erupted in China, Greece and Puerto RicoCNN is reporting that every major economy in Latin America “is slowing down or shrinking”…

Every major Latin American economy is slowing down or shrinking. The World Bank predicts this will be Latin America’s worst year of growth since the financial crisis. As if that’s not dire enough, the world’s two worst performing stock markets are in the region as well.

Very few people are talking about Latin America right now, but the truth is that the region is in the midst of a slow-motion economic implosion.  Here is more from CNN

Venezuela is arguably the world’s worst economy with sky-high inflation. Next door, Colombia has the world’s worst stock market this year. Its index is down 13% so far this year. The second worst is Peru, down 12.5%.

Right now, trouble signs are emerging all over the planet.  That is why we shouldn’t just focus on Greece.  Yes, if Greece is kicked out of the euro that is going to greatly accelerate things.  But no matter what happens with Greece, the truth is that we are steamrolling toward another major worldwide financial crisis.  Perhaps you didn’t notice, but I purposely did not use the word “Greece” once in my recent article entitled “The Economic Collapse Blog Has Issued A RED ALERT For The Last Six Months Of 2015“.

Yes, I am taking what is happening over in Europe very seriously.  I believe that we are about to see some things happen over there that we have never seen before.

But the Greek crisis is only part of the picture.  Everywhere on the globe that you look, red flags are going up.

Sadly, just like in 2008, most people have chosen to be willingly blind to what is happening right in front of their eyes.

The Crash of 2015: Going Global

Off the keyboard of Thomas Lewis

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Published on the Daily Impact on May 26, 2015

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Titanic_sinking,_painting_by_Willy_StöwerJust in the past week, the headlines have been coming like triphammer blows: in Bloomberg News, “Something has gone wrong with the global consumer,” (according to JP Morgan); in International Business Times, “G7 Finance Ministers to address faltering global growth;” in London’s Telegraph, “HSBC fears world recession with no lifeboats left;” in OilPrice.com, “Clock running out for struggling oil companies;” and even in the mainstream vanilla Washington Post, a column by Robert Samuelson predicts “China’s coming crash,” then puts a question mark at the end to make sure we don’t worry too much.

When you add these concerns to longer standing ones about wild gyrations in the world’s stock and bond markets; the advent of peak oil in pretty much every oil-exporting country in the world; the onset of the effects of global climate change in California, the Middle East, North Africa, Brazil and elsewhere; it becomes apparent that optimism ought to be listed as a disorder requiring medical intervention.

What’s wrong with the global consumer? In the imortal words of Howard Davidowitz, a leading expert on retail, consumers “don’t have any f’ing money.” It is slowly — way too late — dawning on the Masters of the Universe that unless ordinary people have money to spend — and by that we mean real money, not more credit cards or a third mortgage — the Masters are toast.

According to J.P. Morgan economist Joseph Lupton, “It would be difficult to overstate the recent downside surprise in global consumer spending.” Lower gas prices were supposed to stimulate spending. They didn’t. The high stock markets were supposed to encourage enough job creation to seriously dent unemployment rates and stimulate spending. They didn’t. The lackluster numbers of early spring were supposed to be the result of bad weather. They weren’t. “Clearly,” says Lupton, “something is off track.”

Indeed. International shipping is at historic lows. Energy consumption is declining. In the US, the trucking industry is starting to show weakness. At the same time rail-freight shipments are declining sharply. Retail stores are closing by the thousands. While, obliviously, the stock market soars to new heights.  

Meanwhile, says International Business Times, “Finance ministers from the world’s largest developed economies meet in Germany this week against a backdrop of faltering global growth, scant inflationary pressures and a bond market in turmoil.” They’ll get to all this after they have figured out how to keep Greece from nuking the European Union by defaulting on its obligations because Greece hasn’t got any f’’ing money, either. Even if they can figure out how to amputate Greece without getting an infection, they will still be looking at either anemic growth or actual contraction in the powerhouse economies of the United States, China, Canada and Europe.

Now, even if you believe, as I do, that the notion of infinite growth on a finite planet is ridiculous, and the notion that all growth is always good is suicidal, you still live, as I do, in a system that will crash if its faith on growth is broken. So pay attention to these idiots. They’re driving.

Meanwhile, a report written by and for HSBC, the world’s third largest bank, likens the world economy to the Titanic, “sailing across the ocean without any lifeboats.” In fact the report is titled “The World Economy’s Titanic Problem,” and was written by a writer of financial horror stories appropriately named Stephen King. In his relentless account, the world’s central bankers have expended every bit of ammunition they have to stop the approaching iceberg of debt and depression, and the iceberg is bigger and closer than ever. You will stifle a scream as you read.

This gathering emergency is only invisible to those whose paychecks require that they do not see it. Unfortunately, that includes many journalists and virtually all politicians. The rest of us need to take another look at the pile of boards on the aft deck of the Titanic and get to work on our personal lifeboats. Now.

Limits to Hopium

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on April 22, 2015

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Hopium: How Far Can Irrational Optimism Take The U.S. Economy?

Thought Bubble - Public DomainIf enough people truly believe that things will get better, will that actually cause them to get better?  There is certainly something to be said for being positive and thinking that anything is possible.  And as Americans, optimism seems to come naturally for us.  However, no amount of positive thinking is ever going to turn the sun into a block of wood or turn the moon into a block of cheese.  Any good counselor will tell you that one of the first steps toward recovery is to stop being delusional and to come to grips with how bad things really are.  When we deny reality and engage in irrational wishful thinking, we are engaging in something called “hopium”.  This is a difficult term to define, but the favorite definition of hopium that I have come across so far goes like this: “The irrational belief that, despite all evidence to the contrary, things will turn out for the best.”  In hundreds of articles, I have documented how the U.S. economy is mired in a long-term decline which is about to get a lot worse.  But most Americans see things very differently.  In fact, according to a brand new CNN/ORC poll, 52 percent of Americans describe the U.S. economy as “very” or “somewhat good”, and more than two-thirds of all Americans believe that the U.S. economy will be in “good shape” a year from right now.  But if you asked most of those people why they are so optimistic, they would probably mumble something about “Obama” or about how “we’re Americans and we always bounce back” or some other such gibberish.  Well, it’s wonderful that so many people are feeling good and looking forward to the future, but are those beliefs rational?

We witnessed a perfect example of this “hopium” on Wednesday.  Sales at McDonald’s restaurants have been in decline for quite a while, and the numbers for the first quarter of 2015 were just abysmal

The ubiquitous burger-and-fries chain said US sales, the largest share of global income, fell 2.6 percent from a year ago for comparable outlets.

Sales in the Asia-Pacific and Middle East region dropped 8.3 percent, helping bring overall global sales down 2.3 percent, “reflecting negative guest traffic in all segments,” the company said.

Total revenue sank 11 percent to $5.96 billion in the quarter to March 31, and net income plunged 32.6 percent to $812 million, or 84 cents a share (-31 percent).

So you would think that the stock price would have tanked on Wednesday, right?

Wrong.

Thanks to news that a “turnaround plan” would be announced on May 4th, McDonald’s stock actually skyrocketed

McDonald’s closed up 3.13 percent after spiking more than 4.5 percent in early trade as investors cheered a turnaround plan expected on May 4. However, the fast food chain’s earnings missed on both the top and bottom lines.

This is pure hopium.  Why don’t McDonald’s executives just tell us what the plan is now?  But instead, the mystery of a “secret turnaround plan” gives people just enough hope to keep the stock from tumbling – at least for the moment.

And of course there are all sorts of other stocks that are being massively inflated by hopium right now.

Many years ago, when I was an undergraduate, I was taught that a price to earnings ratio of more than 20 was really, really high.

But these days that is the norm on Wall Street, and at the moment there are quite a few stocks that actually have price to earnings ratios that are greater than 100

There are 10 stocks in the Standard & Poor’s 500, including industrial giant General Electric, video-streamer Netflix and oil and gas explorer Cabot Oil & Gas that are trading for 100 times their diluted earnings the past 12 months excluding extraordinary items, according to a USA TODAY analysis of data from S&P Capital IQ.

And if you can believe it, General Electric has a PE on its training earnings of more than 200

Take General Electric, the industrial giant that’s swiftly selling off banking assets so it can return to its manufacturing roots. GE sports a PE on its trailing earnings of 227, says S&P Capital IQ.

This is completely and totally irrational.  General Electric is a giant mess and is being very badly mismanaged.  But investors continue to pay a massive premium for GE stock because they hope that things will turn around eventually.

Look, hope will get you a lot of things in life, but it won’t put money in your pockets or dinner on the table.

Our politicians and the mainstream media continue to sell us hard on the idea that things are getting better in America, but meanwhile our economic infrastructure continues to decay.  Just check out what is happening in the steel industry

United States Steel Corporation issued layoff notices to 1,404 workers in the latest sign of struggle for the American steel industry. The missives went out in recent days to workers producing pipe and tube products that are used in the oil and gas sector. Job cuts could come as early as June for 17 to 579 employees at a plant in Lone Star, Texas, 166 at a factory in Houston, 255 at a mill in Pine Bluff, Arkansas, and 404 managers across the company’s tubular operations nationwide.

Since last June, the company has informed 7,800 employees of potential job cuts, a tally from Pittsburgh Business Times indicated. U.S. Steel spokeswoman Sarah Cassella said the ongoing layoffs are the result of “challenging market conditions and global influences in the market including a high level of imports, reduced prices for oil and natural gas and reduced steel prices.”

A little over a month ago, I published an article entitled “10 Charts Which Show We Are Much Worse Off Than Just Before The Last Economic Crisis” in which I demonstrated that we are in far worse economic shape than we were just prior to the last recession, and now another great economic crisis is at our door.

Unfortunately, most Americans have no idea what is going on out there.  Most of them get their news from the giant propaganda matrix that very tightly controls the flow of ideas and information in this country.  This is something that I explain on my new DVD.  Six colossal corporations control over 90 percent of the news, information and entertainment that Americans consume, and that gives them an awesome amount of power.

And right now that propaganda matrix is assuring the American people that everything is going to be just fine.

Well, they better be right.  Because if not, they are going to have millions of people extremely angry with them when things really start falling to pieces.

From Minsk to Brussels, it’s all about Germany

Off the keyboard of Pepe Escobar
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Germany's Chancellor Angela Merkel (L) talks to France's President Francois Hollande during a meeting with the media after peace talks on resolving the Ukrainian crisis in Minsk, February 12, 2015. (Reuters / Grigory Dukor)

Germany’s Chancellor Angela Merkel (L) talks to France’s President Francois Hollande during a meeting with the media after peace talks on resolving the Ukrainian crisis in Minsk, February 12, 2015. (Reuters / Grigory Dukor)

Originally published in RT on February 13, 2015

Germany holds the key to where Europe goes next. A fragile deal may have been reached on Ukraine, but there’s still no deal with Greece. In both cases, there’s much more than meets the eye.

Let’s start with the grueling Eurogroup negotiation in Brussels over the Greek debt.

Greek officials swear they never received a draft of a possible agreement leaked by Eurogroup bureaucrats to the Financial Times. This draft, crucially, referred to an agreement “amending and extending and successfully concluding,” the current austerity-heavy bailout.

German Finance Minister Wolfgang Schaeuble cut off “amending”. This is the draft that was leaked. But then Greek Finance Minister Yanis Varoufakis called Prime Minister Tsipras – and the statement, still not signed, was rejected. So this was a top Tsipras decision.

Tsipras could not possibly balk – not after previously raising the stakes – as in promising to boost the Greek minimum wage and halt privatizations. He’s still betting the house that the Troika won’t allow a ‘Grexit’. Yet he may be wrong; the possibility of ‘Grexit’ is hovering around 35 percent to 40 percent, and it will be much higher if no deal is reached on the next crunch meeting, Monday.

Tsipras and Eurogroup President Jeroen Dijsselbloem at least agreed that Greek officials and the Troika (EC, ECB, IMF) should start talking “at a technical level.” Translation: they will be comparing the current austerity nightmare with new Greek proposals.

Athens essentially has only two choices. Either the Troika accedes to some form of debt repudiation – real or as a sleight of hand (that’s Syriza’s proposal – an arrangement that fosters growth); or ‘Grexit’ ensues, with Athens creating its own central bank and currency as an independent nation. There’s no third choice; a debt of 175 percent of Greece’s GDP is totally unpayable.

As much as the Troika and its institutional derivatives spin ‘Grexit’ won’t be a big deal, the fact is a Greek debt default could have a more devastating effect than the Lehman Brothers case. It was not the fundamentals at Lehman that caused widespread panic when it went down; but the fear that their derivative exposures would bring down the system.

And cutting through all the spin, what remains, essentially, is what European Commission President Jean-Claude Juncker told Le Figaro a few days ago; it’s out of the question to suppress the Greek debt and, most of all, “there can be no democratic option against European treaties.” There it is, crystal clear: EU institutions work against democracy.

Plan B remains a distinct possibility. Moscow has already invited Tsipras to meet with Putin. And Beijing has invited Tsipras to meet with Prime Minister Li Keqiang. These are the “R” and the “C” in BRICS in action.

It’s worth remembering Greek Defense Minister Panos Kammenos when he articulated if not a majority view, at least a substantial perception among Greek public opinion; “We want a deal. But if there is no deal, and if we see that Germany remains rigid and wants to blow Europe apart, then we will have to go to Plan B… We have other ways of finding money. It could be the United States at best, it could be Russia, it could be China or other countries.”

Alea jacta est. Troika or RC?

And it’s all about NATO

Greek Prime Minister Alexis Tsipras addresses a news conference after a European Union leaders summit in Brussels February 12, 2015. (Reuters / Francois Lenoir)

Greek Prime Minister Alexis Tsipras addresses a news conference after a European Union leaders summit in Brussels February 12, 2015. (Reuters / Francois Lenoir)

Then there’s Minsk. What was achieved after nearly 17 hours of a grueling marathon is not exactly, in French President Francois Hollande’s words, a “global” agreement and a “global ceasefire” in Ukraine.

There’s every possibility the ceasefire will be nullified only a few minutes after its implementation at midnight this Saturday – irony of ironies, at the end of Valentine’s Day. Significantly, the final statement bears no important signatures: Putin, Merkel, Hollande and Poroshenko.

German Foreign Minister Steinmeier was cautious, warning Minsk 2.0 is not exactly a breakthrough, but at least de-escalates matters. Merkel preferred to spin that Putin had to pressure the Eastern Ukraine federalists of the DNR and the LNR to agree to the ceasefire.

Predictably, like clockwork, even before the ceasefire, the IMF – under Washington’s orders – suddenly announced it would continue to rape, sorry, help bailout bankrupt, failed state Ukraine with a tranche of$17.5 billion, part of a large $40 billion, four-year “rescue” package. Translation: Kiev’s goons now have fresh cash to throw at a war they don’t want to give up on.

Poroshenko himself took no time to torpedo the ceasefire – spinning there’s no autonomy granted to the areas controlled by the federalists, and refusing to confirm Putin’s assertion that Kiev has agreed to terminate the vicious economic blockade of Donbass.

The precise contours of the demilitarized zone – bordering one frontline in September and a very different frontline five months later – remain a mystery. And Washington immediately turned the “withdrawal of foreign forces” clause into a joke. The Pentagon has already announced it will begin training Ukraine’s National Guard next month.

Minsk 2.0 hardly qualifies as a band-aid. Ukraine is unredeemable. It would only come back from the dead if a tsunami of cash – almost equivalent to the cost of German reunification – were poured in. Needless to add, no one in Europe wants to dish out even a few devalued euro.

This was, remains, and will continue to be, essentially about NATO expansion. Washington and the Kiev marionettes will never allow any constitutional reform that lets the Donbass block NATO embedded in Ukraine. So the ‘Empire of Chaos’, in a nutshell, won’t cease from using Ukraine to bully Russia. The ‘Empire of Chaos’ is not exactly in the business of nation building – quite the contrary.

Crossing the German bridge

And that brings us to the crucial role played by Germany – with France as sidekick.

Chancellor Merkel had to go to Moscow to negotiate with Putin because she saw which way the wind was blowing – counterproductive sanctions; Ukrainian economy in free fall; Kiev’s goons defeated on the battlefield. That was as much an imperative as a crucial demarcation away from the imperial NATO expansion obsession.

As Immanuel Wallerstein has observed Moscow is pursuing “a careful policy. Not totally in control of the Donetsk-Lugansk autonomists, Russia is nonetheless making sure that the autonomists cannot be eliminated militarily. The Russian price for real peace is a commitment by NATO that Ukraine is not a potential member.”

So Merkel may have defused the Obama administration’s drive to weaponize Kiev – but only for a moment. There’s no evidence – yet – that the Obama administration and its embedded neo-con cells have admitted that the self-proclaimed People’s Republics of Donetsk and Lugansk (DPR and LPR) are essentially “lost” to Kiev’s influence.

Hollande provided the perfect cover for Merkel. It was Hollande who publicly supported autonomy – as in federalization – for the DPR and the LPR. At the same time, both Merkel and Hollande know that Kiev will never de facto accept it (and even a substantial portion of the Donbass only accepts federalization as a stepping stone to eventual secession and union with Russia.)

Merkel – at least in terms of German public opinion – did manage to achieve her goal, emerging as a victor (“The world chancellor,” as the tabloid Bild coined it) after her frequent-flyer marathon. Putin also emerged a victor of sorts – as Merkel essentially rehashed proposals he made months ago. So yes, whichever angle we look at it, this was in fact a Moscow-Berlin deal.It’s easy to see who is extremely disgruntled and will do everything to bomb it; Washington, Kiev, London, Warsaw and the hysterical “Russia is invading” Baltic states.

Last but not least, let’s call attention to the monumental white elephant in the room. Minsk 2.0 was conducted in the total absence of the ‘Empire of Chaos’ and the (increasingly irrelevant) “special relationship” British minions.

Slowly but surely, public opinion across Europe – and especially Germany – is experiencing a tectonic shift. The obsession by the ‘Empire of Chaos’ to further weaponize Kiev has horrified millions – resurrecting the specter of a war in Europe’s eastern borderlands. Not only in Germany but also in France, Italy, Spain, there is a growing continental consensus against NATO.

Even at the height of a vicious Russia demonization campaign unleashed by virtually the whole German corporate media, a Deutschland Trend survey revealed that most Germans are against NATO troops in Eastern Europe. And no less than 49 percent would rather see Germany position itself as a bridge between East and West. The leadership in Beijing definitely took note.

So it’s tempting to hop on the Merkel/Hollande peace train as the heart of Europe finally exercising their sovereignty and frontally defying the ‘Empire of Chaos’. Perhaps that could be the embryo of a German-French partnership for peace in Europe and even beyond, from the Middle East to Africa.

That would frontally antagonize NATO’s screenplay – which implies the ’Empire of Chaos’ ruling uncontested over Europe, the Middle East and even across Eurasia, with continental European powers, especially Germany, France and yes, Russia, at the margins.

Sooner or later European politicians will have to wake up and smell the coffee; the notion of a German-French-Russian pan-European peace/trade partnership is way more popular than reflected in failed corporate media.

Now it’s up to Germany to clean up its act on Greece. The choice is stark. The EU may embark on a quadruple-dip recession as the ECB further destroys what is left of the European middle class. Or Germany, reflecting the thinking among its captains of industry, may tell the EU – Troika included – that the way to go is to shift the strategic, trade and political focus from West to the East. That would start by stuffing the corporate US-devised TTIP treaty – that’s NATO on trade. After all, this is going to be the Eurasian century – and this train has already left the station.

 

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).

Mainstream Money Mess

Off the keyboard of Graham Barnes

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Published on FEASTA on February 2, 2015

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The Mainstream Money Mess – three aspects… and what they mean for new money-forms

Background

This article looks at three of the most poisonous aspects of Mainstream Money from the perspective of a currency designer exploring new money-forms:

i) the interest on debt – 97% of money issued is created as interest bearing debt with horrendous consequences
ii) capital misallocation – most of that credit is allocated away from the real economy, and with no strategic guidance on priorities
iii) the monetisation of everything – the implicit narrative that anything that cannot be expressed in quantitative (monetary) terms has no worth

Many books and articles have been written about these three factors, and they are thankfully receiving increasing amounts of mainstream media coverage. This article attempts to briefly summarise the state of play in each area, from a particular perspective – that of the currency designer envisioning new currencies that might avoid the excoriating societal, economic and ecological impacts of such built-in dysfunction on future generations.

The Problem with Interest

Interest can be seen as capital-rent. Funds flow from a lender with more money than they curently need to a borrower with less money than they need. By definition the interest flow is from the poorer to the richer. So rather than the ‘trickle-down’ effect once postulated, we have a ‘trickle-up’ effect. In previous ages the power imbalance in the borrower-lender relationship has been partially addressed via debt forgiveness (jubilees) and through bankruptcy law. The current neoliberal-designed narrative emphasises the primacy of the debt – the ‘free will’ of the borrower and the unfairness of any write-downs to the lender. Thereby all lenders have licence to be predatory.

Now if the lender is a hard working self-made person, simply ‘parking’ money for a period of time until it is needed, then there is perhaps some rationale for capital-rent. At a guess, such loans might account for perhaps 0.1% of credit. Typically 99.9% of loans will come from two source-types – the smaller portion from inherited wealth pools where the initial accumulation of wealth is a result of historical serendipity, the smart commerce of previous generations or malfeasance (or a combination thereof), and where wealth-possession implies no merit for the current holder whatsoever; and the larger portion from private banks who create the credit out of thin air [1].

This latter category is the subject of monetary reform proposals which would see the state reclaim (at least partially) the right to issue money [2] – a right it has outsourced to the commercial banks as part of an undocumented and opaque ‘bargain’. The bargain appears to be based on two foundations – the banking sector’s ‘agreement’ to operate payment and settlement systems (which could in fact be handled via a neutral third party); and the political attraction of the state being able to wash its hands of difficult strategic decision making and leave all investment decisions to the ‘market’ (or the banks as a proxy for the market) – which is the subject of the following section. (I say ‘appears’ because to my knowledge the exact nature of this bargain has never been formally described.) It has been estimated that in the UK alone GBP 192 million is paid by the nation to the banks in interest every day [3]. This ongoing seignorage represents a wealth transfer into the pockets of the high priests and gatekeepers of finance – a key factor in the creation of a terminally divisive society. And a factor which is relegating the real economy to a smaller and smaller corner of the casino.

For chapter and verse on the truly horrific effects of debt+interest, the reader is referred to the writings of Tarek el Diwani[4] and the late Margrit Kennedy [5].

Kennedy has debunked one particular myth about interest – that it only affects those who borrow. Her work calculated the embedded interest accumulated in the supply chain of various goods and services and showed that it is quite common for 50% of a price to be due to interest costs.

At this point we will resist the temptation to disentangle the idea that the cost of money – i.e. the interest rate – is related to the level of risk involved for the lender. Suffice to say its complete b******s. Interest rates are more a measure of insider-status than of forensically-assessed-risk.

Interest in Currency Design

The two functions of means of exchange and store of value should be clearly separated when it comes to the design of new money-forms. For a ‘pure’ exchange currency the primary interest-related issue is the question of whether to implement a negative interest (demurrage) regime (or to design-in alternative treatment of relatively inactive currency units).

The underlying assumption to this line of thinking is that increased ‘local-GDP’ is good. (Note: ‘Local’ here needn’t necessarily mean local-geographic – more Preferenced-Domain [6] specific). In other words more trade is good, so the velocity (frequency of exchange) of money-forms needs attending to. But we know all about the Growth Illusion [7], the impossibility of infinite growth and the disconnect between GDP type measures and well-being. So it can be argued that buying in to this underlying assumption is itself to take on board some of the neoliberal ideology we are aiming to dump. However if a new currency is predicated on preferencing real world ‘core’ transactions (food, shelter, energy, society) then perhaps growth in currency turnover could be a meaningful metric. With this proviso, we can explore further.

The basic premise of demurrage, as anticipated by Gesell [8] and others, is that if carrying money incurs a cost it incentivises spending. As I see it there are three potential problems, (other than the spending=always good axiom) :
i) The approach implies that all purchases are equal (this can be addressed via the definition of the Preferenced Domain)
ii) There may be (especially in the early stages of a new currency) nothing that the holder wants to purchase available. Thus incorporation of demurrage in immature currencies is probably ill-advised.
iii) It can be gamed. Especially with digital currencies, trade ‘cycles’ ( e.g. A->B B->C C->A ) can be used to generate fictitious trades to avoid demurrage. (Note: An embedded transaction fee could mitigate against this. Further discussion below.)

Given these issues, plus the danger of succumbing to growth fetishism (or the ‘ideology of the cancer cell'[9] as it has been described), caution is advised. Successful use of demurrage has been reported by the German Chiemgauer currency but this appears to be measured in terms of velocity – three times that of the Euro as reported in 2009 [10]. However, it is possible that the currency is being used for local transactions that would have taken place otherwise in euros, so that the overall velocity of exchange in the local economy is in fact unchanged.

Proving real ‘additionality’ looks to be tricky. But then maybe it’s not necessary to do so. The demurrage creates a small revenue stream that can be partially diverted (as with the Chiemgauer), to non-profits. And with the recent conversion of the previously dismissive European Central bankers to the idea of negative interest, maybe Gesell was ahead of his time.

In a store-of-value context, interest can be used as a mechanism for incentivising the setting-aside of money – as an asset class in its own right. But the money thus set aside is then further invested (by someone) in other asset classes, so in currency design terms I prefer to see store-of-value currencies backed by something tangible and of enduring use-value, ideally energy.

Lastly, all currencies will need working capital at some point. For digital currencies this is best achieved via the transaction fee mechanism. Interestingly this mechanism is part of the smart incentive design of Bitcoin. At present mining incentives are the major reward, but as the currency matures, transaction fees will gradually overtake them in importance. Creating a separate store-of-value companion currency for a designed exchange currency might well be an interesting direction, but not with interest as its key value enhancement device.

Misallocation of Capital

As noted above, the lion’s share of issued money appears in the form of credit allocated by private banks. It may be harsh to say these funds are allocated on a whim, but there is certainly a herd-mentality, and the idea that there is a competitive money-rental market mediated by independent minded banks via the interest rate charged is an illusion. The end result is that insufficient funds are made available to the real economy. Most goes to the financial sector and to secured personal loans, largely mortgages. In theory this allocation is guided by a risk-weighting process underpinned by the Basel agreements. Different weightings are defined for different generic asset categories – government bonds being the ‘safest’.

Click to enlarge

The key point here is that there is no strategic guidance on capital allocation. Governments therefore are showing an implicit blind faith in the ability of markets (or banks as their proxy) to determine what is best for us and for following generations. This ‘social experiment’ has lasted now for around 45 years and in the words of Wren’s epitaph at St Pauls ‘si monumentum requiris circumspice’ [11].

Thanks to the reforming efforts of Positive Money and other pressure groups, the case for so-called ‘sovereign money’ is reaching a wider audience but the inertia of entrenched vested interest and the political expediency of being able to delegate national investment strategy to the ‘markets’ represent enormous obstacles to change. We must hope that this market supremacist phase of capital is temporary.

Capital Allocation in new currencies

As noted above all new money-forms will have need of capital at some point for development. If at this stage they are forced to return to fiat currency markets to borrow, they immediately become dependent on a competitor. Whether this dependency prevents the new money-form from achieving its objectives will depend on those objectives, but it is likely to act as a constraining influence.

The gradual accumulation of capital via embedded transaction fees is preferred but this means that the hard yards have to be put in to achieving critical mass in an old-fashioned save-and-invest sort of way; and that unless goods and services can be sourced via payments in the new currency, they are not acquired. Development is postponed. In this context smart strategies for bootstrapping a currency into sustainable existence are clearly needed.

When sufficient capital has been accumulated, the focus then turns to governance. New currencies must design-in governance mechanisms that are transparent and fit for purpose.

The ‘Proxy Pounds’ or Transition Currencies are backed by fiat – that is the Brixton/ Bristol pounds are issued in exchange for sterling. The sterling received is then ‘banked’ and a proportion can be loaned out to local borrowers. But unless interest is charged on those loans, the lending risk cannot be covered and scheme costs (which are generally payable in sterling) cannot be met. The interest ‘problem’ is linked to the capital accumulation ‘problem’.

The Monetisation of Everything (TMOE)

The TMOE mindset is related to the 1980s consulting mantra that ‘if you can’t measure it you can’t manage it’. Both display a complete disregard for the ineffable. It is difficult to argue a case for the complete abolition of metrics, but it is a rare metric that is widely accepted as an unambiguous measure of something that matters. Putting a numeric value to an entity can lead to unintended and unpredictable side-effects as experience (for example with the NHS) has shown. Numbers can also be gamed by insiders with a vested interest in specific outcomes.

Money’s function as a unit of account – as a yardstick – a measure of comparative economic value – shares some of these challenges. Perhaps the two main money-related metrics are personal-wealth and GDP. The first has become a fetishised proxy for personal-worth; the second is widely accepted to be unrelated to happiness/ well-being. War and car crashes are good for GDP. Attempts to identify a more meaningful index have led to work on the ISEW [12], GPI and the German NWI [13]. This process normally involves putting a numeric value (in money terms) on social and ecological parameters.

The dominance of money-measures in the shaping of economic policy has led to this ‘quantification’ approach being applied to many aspects of life not heretofore addressed by economics – to the ‘price’ of carbon, to the ‘value’ of housework and so on. Commentators talk glibly about natural capital, social capital, human capital. The quantification juggernaut is a key facet of the extension of markets into areas not previously treated as such. The market economy has become the market society. The classic neoliberal response to a failed market is to create a new market to address the failure, and money-metrics are central to this process.

The idea of the perfectly functioning market is a deeply attractive one. The invisible hand ensures that goods and services are traded at the right price, and, like the subcontracting of money-issue to the private banks, absolves the politicians from having to trouble their tiny minds on strategic human priorities. Unpopular outcomes can be attributed to the mysterious workings of the ‘deus-ex-machina’ of the market. This cloak of machine-like impersonality in turn can be used to obscure the influence of the puppet-masters. In the process we all adopt the language of the market and its prevailing narrative without realising it. It’s a shame such a market does not exist.

Quantification is also an important ingredient for the agnotology [14] central to neoliberalism – the spreading of doubt and uncertainty in order to paralyse meaningful citizen action while strings are pulled and neoliberal ducks lined up. There’s nothing better to argue over than numbers, their meaning and consequences.

Quantification in currency design

Exchange currencies – beyond the gift economy and simple barter – need a unit of account. So, whatever that is, there is a numerical representation of an account balance. As long as the rules concerning the exchange of these units are clearly set out; that non-trade uses for the currency (e.g. exchange with other currencies, fees) are transparently understood, and the underlying payment system is secure, then this particular metric is fine.

Over and above the individual transaction, however, there is an ongoing process of development of the community-of-users of the currency. This process involves the reciprocal assessment of various soft factors, of which the most important is probably trust.

We have recently seen some hyperbolic claims that Bitcoin does away with trust, and articles on trusting vs trustless schemas. But Bitcoin has not done away with the need for trust – it has moved the trust boundary. The blockchain manipulation algorithms allow the emergence of consensus as to whether or not payment has been made. Further development of cryptocurrencies – for example the determination of embedded contract conditions – will probably move the trust boundary further out. But they will not do away with it entirely.

Some of the existing ecommerce platforms address the matter of trust via a reputation metric. Reputation can be seen as a qualifying parameter. There may be people with the goods/ services you need (or the requisite units of currency) that you choose not to do business with. The reason is usually related to some facet of reputation. I hope to cover this more fully in a later article. But when reputation is expressed via a metric, it can be gamed.

The last family of ‘gameable’ currency-related metrics relates to the use of incentives in currency design. In other articles I have suggested that one aspect of behaviour-change-via-currency is the identification of various pro-currency behaviours [15] or achievements and their reward via new currency issue. Some of these triggers might be one-off events (e.g. recruiting a new member, recommending a new local source), but much of the thinking in this area has been around increasing activity levels. This type of reward can be gamed via fictional circular trading. And we also find ourselves back at square one if we incentivise the local-GDP of the currency irrespective of transaction ‘quality’ – its correspondence with the Preferenced Domain [6].

Summary

There are a number of ‘ways-in’ to the design of new money-forms. Identifying problem areas of mainstream money and then seeking to avoid them by design is but one.

Interest payable on credit is associated with never ending growth. New currencies will need to be more attuned to stability and ‘right-sizing’ than to the ideology of the cancer cell. So different ways of accumulating capital, allocating it productively and dividing the value-added are needed. Embedding transaction fees seems a promising way of achieving this, together with fair and transparent governance that can adapt to changing circumstances. But steady incremental organic growth (or indeed degrowth) requires patience and doggedness and is culturally alien to the dominant wham-bam entrepreneur-lionising value-set.

Convertability with mainstream money can ease a start-up but it creates a dependent relationship that is difficult to break. The new money-form child never leaves home. The road less travelled will involve a purposeful separation from mainstream money with consequent challenges for building critical mass and, when maturing, some form of capital controls to isolate or at least moderate harmful interactions.

Lastly, while metrics can perform a useful input to developmental discussions, an awareness that many of the important things in life cannot be expressed numerically will be useful. Judgement must be applied – in a transparent and pre-agreed way by a community of users. We cannot, using digital technology or otherwise, create an adequate money-form that is 100% algorithmically self-managing.

References

[1]: http://www.positivemoney.org/how-money-works/how-banks-create-money/
[2]: http://www.positivemoney.org/our-proposals/sovereign-money-creation/
[3]: http://www.positivemoney.org/2014/12/change-money-change-world-talk-ben-dyson-video/
[4]: http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
[5]: http://kennedy-bibliothek.info/data/bibo/media/GeldbuchEnglisch.pdf
[6]: http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[7]: http://www.aislingmagazine.com/aislingmagazine/articles/TAM24/Sustainable.html
[8]: http://www.utopie.it/pubblicazioni/gesell.htm
[9]: Edward Abbey, The Journey Home: Some Words in Defense of the American West
[10: CHIEMGAUER REGIOMONEY:THEORY AND PRACTICE OF A LOCAL CURRENCY Christian Gelleri
https://ijccr.files.wordpress.com/2012/05/ijccrvol132009pp61-75gelleri.pdf
[11]: If you seek [its] monument [handiwork], look around yourself
[12]: http://en.wikipedia.org/wiki/Index_of_Sustainable_Economic_Welfare
[13]: http://www.wikiprogress.org/index.php/German_National_Welfare_Index
[14]: http://en.wikipedia.org/wiki/Agnotology
[15}: http://www.feasta.org/2013/07/26/designer-currencies-and-behaviour-change/

Featured image: Measuring tape. Author: Colin Broug. Source: http://www.freeimages.com/browse.phtml?f=view&id=1432929

Black Swan Dive

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on January 7, 2015

Be careful of what you wish for, you might get it.
— Proverb

Triangle of Doom 010115

Figure 1: Triangle of utility function by rational agents; by TFC Charts, (click on for big). In a cash economy the inability to afford crude oil would manifest itself as the steady decline of ‘too high prices’. Our economy is built around structured finance; once credit structures are undermined they collapse.

Discuss this article at the Energy Table inside the Diner

There is a ‘perfect storm’ underway; of insolvent customers, over-stressed finance, willful ignorance on the part of the establishment and denial. Both commodity prices and US Treasury yields are indicating another recession. Customers and drillers are asking how low will fuel prices go and how long will they stay there?

Fund manager Jeff Gundlach responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Workers have been able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, diminishing the productivity of credit.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. The borrowing requirements of the driller increase over time because he is constrained by geology while the customer is limited only by access to credit and to wasting infrastructure. At the same time, the customer must take on the drillers’ debts by bidding for- and buying fuel. The relationship between the sets of borrowers conforms to simple game theory:
Crude Game Theory 1
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrowed or didn’t borrow. Not borrowing by both meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices! During this period, there was no need to allocate between drillers or customers.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the Undertow argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Crude Game Theory 2
Figure 3: Post-1998, brutal new game theory: mutually assured (demand) destruction!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers, returns diminish and borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by costs.

The alternative is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller now compete for the same credit dollar: the customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers.

Unlike finance, petroleum is a bottom up business. At the end of the day every drop of oil/refined product has to be bought by a customer. Because there is so little return on what he does with the product he must borrow to pay for his purchase. He borrows, his boss borrows, his government borrows, his nation borrows other countries’ money (borrow by way of foreign exchange). Our economies are nothing more than interconnected daisy-chains of loans. Over time these chains have grown to amount to hundreds of trillions of dollars. As debt piles up it can only be serviced and retired by taking on more loans.

Even as the US makes less in the way of physical goods like clothing, shoes, washing machines or table radios, its Wall Street firms manufacture the bulk of the world’s credit; this is needed to substitute for absent monetary returns for just about everything else. Driving a car does not pay for the car (times- 1 billion cars), nor does it pay for the fuel, the roads, the massive governments including costly military endeavors, nor does driving pay for the ordinary costs of finance … risk premia and interest carry, which have ballooned exponentially. Other than for the smallest handful of customers — transit, construction, farming, delivery, emergency/first responder — customer use of fossil fuels and other capital is non-remunerative waste, for pleasure-fun, convenience, status, etc. The fashionable wasting processes — including fuel extraction industries — are collateral for more and more loans.

The simplest of models is all that is required to see where this ends up: subtract the costs of petroleum extraction from the small use that provides an actual return. This difference is the price that the economy can actually afford to pay without the use of credit. With extraction costs rising — which cannot be denied by anyone — and with actual returns being very small, the output of the model looks to be a negative number. What that implies is the price of fuel will fall all the way to zero with nothing to be done in the way of ‘administrative adjustments’ to alter this outcome.

Managers appear to be helpless because they have thrown everything at the economy but the kitchen sink: key men have been propped, banks bailed out; interest rates across all maturities are near zero, real rates are negative- or nearly so. Governments around the world are at the borrowing limit, there is little in the way of good collateral remaining for central banks to take on as security for new loans. Conventional marketplace fixes such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. are efforts to reclaim resource capital that no longer exists. Remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates. The capital ‘pie’ cannot be created anew or redivided, only a new and much smaller pie is to be had and carefully tended. Our smaller pie of non-renewable resources is what we have to make use of, to last us and the rest of the world’s creatures until the end of humanity.

Managers certainly understand but refuse to acknowledge that resource extraction over extended periods has consequences. Nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions. A grand civilization at the height of its power has not exhausted its prime mover since the Romans stripped their empire of firewood beginning in the first century BCE, precipitating its decline.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 48.82 +0.89 +1.86% Feb 15
Crude Oil (Brent) USD/bbl. 51.18 +0.08 +0.16% Feb 15
RBOB Gasoline USd/gal. 133.95 -1.48 -1.09% Feb 15
NYMEX Natural Gas USD/MMBtu 2.88 -0.06 -1.97% Feb 15
NYMEX Heating Oil USd/gal. 170.08 -2.54 -1.47% Feb 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,212.20 -7.20 -0.59% Feb 15
Gold Spot USD/t oz. 1,215.30 -3.28 -0.27% N/A
COMEX Silver USD/t oz. 16.54 -0.10 -0.58% Mar 15
COMEX Copper USd/lb. 276.15 -0.55 -0.20% Mar 15
Platinum Spot USD/t oz. 1,221.25 +1.81 +0.15% N/A

Graphic by Bloomberg:

– Energy deflation is when increased fuel demand relative to supply does not cause prices to rise but undermines the ability of consumers to meet the price even as it falls. This is what is taking place wherever one makes an effort to look. A component of the onrushing crash is the easy money policy in Japan/Abenomics added to the other bits of monetary stimulus in other currency regions. It isn’t the end of the policy that is causing the crash but the policy itself as purchasing power flows from customers toward big business (drillers) and lenders. More easing => more purchasing power diversion => less credit => lower fuel price => more bankruptcies => more credit distress => more easing in a vicious cycle. What drives the process is the foolishness of central bankers who do not understand the consequences of their (obsolete) policies.

– Drillers rely on loans, lease flipping and share offers than upon revenue from sales, this is largely because of higher costs which would otherwise leave them underwater. The fracking boom and other expensive second-generation extraction regimes are as dependent upon structured finance as the real estate plungers were in the US beginning in 2002. The ‘waterfall’ decline in oil prices suggest that financing structures are coming undone. Finance innovations such as CLOs disguise risk and shuffle it around rather than eliminating it. When risks ultimately emerge they overwhelm the structures intended to manage them; hedging strategies rebound against hedgers, those that can race for the exits, the rest suffer severe losses as the prices collapse.

– It is possible that energy companies’ hedging strategies are contributing to the ongoing crash the same way ‘portfolio insurance’ abetted the stock market swan-dive in 1987: that is, sales of contracts in futures markets in order to hedge finance losses, elsewhere.

Because the leverage structures cannot simply reconfigure themselves after they collapse, oil prices cannot ‘bounce back’; a replacement credit regime must take the place of the broken system. Shadow-banking was vaporized by the housing crash in 2008; it was imperfectly replaced by a generalized credit expansion by way of Treasury borrowing along with central bank moral hazard: both of these offer diminished- or negative returns which is why this regime looks to be failing now … with nothing to replace it.

– Every dollar of price decline cuts output. Any oil that would be available at the higher price is removed from the market when prices fall. As the price declines, the only fuel available is that which costs that amount to extract or less:

Canada oil prices 010615

Figure 4: Prices for selected petroleum-fuel plays from Scotiabank (click on for big). Sub-$50/barrel prices looks to shut in as much as 3 million barrels per day, a cutback equal to a third of Saudi Arabia’s output. Price decline is the industry’s fuel cutback mechanism, no other actions by drillers, nations or organizations such as OPEC are needed. This is another component of energy deflation; the only issue is how cuts will affect the customers.

Fuel cutbacks do not occur overnight: contracts between drillers and refiners remain in force and there is inventory in storage. Drillers will borrow as long as they are able to, hoping for a miracle. As the contracts are satisfied and inventories depleted uneconomical supplies will be shut in leaving what remains of lower-cost fuels. Under the circumstances, this remaining supply would likely be hoarded as it would be worth more than other possible uses.

– ‘Dollar Preference’, from the Debtonomics series is the convergence between the value of oil capital and the dollars that are exchanged for it. Fuel by itself is worth more than the real-world enterprises that waste it regardless of what means are used to adjust the price. Enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, gaining- and making use of credit is their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the burdens onto others.

Management is paralyzed by the internal contradictions of the debtonomy. We cannot get rid of (some of) the debt without getting rid of (all of) the wealth. We cannot get rid of the debt because we would need to take on even more ruinous debts immediately afterward to keep vital services operating such as water supply. If we get rid of the debts the prices will fall leaving debt-tending establishments without investment funds. Our debts cannot be rationalized, the absence of debts cannot be tolerated. The debt system is rule-bound. Debts that were increased because of favorable rules face annihilation because of the same rules, changing the rules threatens debt elsewhere. Nowhere are there real returns to service the debts much less retire them. Nothing remains but the arm-waving of central bankers. As the banks create more debt (against their own accounts), their efforts are felt at the gasoline pump which adversely effects debt service.

The debtonomy is Gresham’s Law applied (on purpose?) to goods and services; the bad drives out the good, the worst drives out everything else. The ‘bad’ enterprises which groan under massive obligations possess a competitive advantage over the virtuous ones that earn without taking any debts on. Debts are artificial earnings which are used to price the good companies out of business then engulf their markets. The final step is for the debt-gorged monstrosities to fall bankrupt due to their massive size, these are then bailed out by the even-more bankrupt sovereigns.

Energy guru Chris Cook uses the term ‘Upper Bound’ to describe the fuel price level that constrains economic activity. The price rise can be caused by increases in the available credit or by a decrease in the amount of available fuel relative to the current credit supply.

What happens at the other end of the bound? If the upper is tough to deal with the lower is good, right?

It goes without saying that the crude is vital. The ‘Business of debtonomy is debt’ but the presumption is of fuel waste for a ‘higher purpose’ which is embodied within our progress narrative. Without continuous waste debt becomes an unsupportable dead weight on all enterprises. Here is the confusion over the effects of fuel shortages on economies: ending waste is thrift, it is economical to do so. Ending waste is fatal to our debtonomy which needs the waste to justify its existence: economic thrift is an un-debtonomic catastrophe.

It is different this time: the decline of the fuel price means there is less fuel made available to waste, that the high cost variety is off the market. Low priced fuel means there are no businesses with credit. Lower price fuel is worth more than any enterprise that uses it, the lowest possible price means the industrial scale fuel waste enterprises are ruined, both producers and consumers.

The decrease in the dollar price of crude is ipso facto marketplace repricing more valuable dollars. The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes other currencies as well as dollar-denominated credit.

Just like the upper bound where a dollar is worth less with each increase in fuel price, the lower bound represents a dollar that is worth more because of its price in crude. A low crude price has a dollar that is worth too much to be used for carry trades or interest rate arbitrage which is the primary business activity within the debtonomy.

The lower bound is reached when currencies are discounted to dollars. A reason for this is the universality of the dollar. Because the US has been for so long the world’s consumer of last resort, goods that were sold for dollars in the US are tradeable everywhere in the world for the same dollars. The dollar purchases of the past and dollars in circulation now are the purchasing power of the future.

The dollar is also the world’s reserve currency, dollars being used to settle trade accounts. The trade of goods between countries whose currencies are illiquid may have foreign exchange risks that exceed the profit to be had by way of the trade. The exchange of the currencies for dollars bypasses the risks because the universal dollar is a liquid, stable substitute for third-party currencies. Reserve status of the dollar and its universality provide leverage that other currencies do not possess.

The trade of dollars for crude sets the worth of the dollars rather than do the central bank(s), this trade takes place millions of time a day at gasoline stations all over the world.

Motorists determine the worth of money; this strands the central banks. In their futile attempts to assert some sort of relevance the central bankers and policy makers manipulate interest rates, pillage bank depositors, ignore moral hazard and bail out their friends. They seek to reduce the worth of money relative to other money. In doing so the bank surrenders what small fragments of policy-making ability which remain to it. Bankers can set interest rates to zero but no further, can whitewash the accumulation of risk but cannot set the money price of petroleum except to make it unaffordable which precipitates the catastrophe the bankers are desperate to prevent.

The catastrophe the bankers are desperate to prevent is the destruction of demand, where fuel falls into strong hands and dollars are hoarded because they are proxies for scarce petroleum, energy in-hand.

For this reason, dollar preference effects net energy which is consumption taking place in energy producing countries. This consumption is entirely dependent upon consumer goods that are affordable because of high fuel prices. Russians produce automobiles and other Russians buy them because the national oil companies are able to sell their product for +$100 per barrel. The price subsidizes both Russia’s debts and her energy waste. Ditto for the energy consumption of Saudi Arabia, Iran, US, Kuwait, Iraq and all the rest. When energy prices fall so will energy consumption in producer countries if only because lower priced oil production will be too scarce to waste.

At $10 per barrel, Russia will produce very little fuel, only from the cheapest and easiest to produce fields and will trade it for hard currency only. Domestic sales will take place in black markets for dollars or gold, few Russians will have dollars and those that do will hold onto them for emergencies. Hard currency earned by the export of crude will be used to buy food and medicine, not imported luxury automobiles and television sets.

Diminished net exports are dependent on high prices which are in turn dependent upon constantly expanding credit. When cash is preferred over credit there is nothing to support the high prices or fuel waste. Cash is hoarded and credit is evaporated.

The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold which was necessary to settle contracts. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.

Dollar preference is self-limiting. Dollar preference in 2015 is the demise of the euro, yen, ruble, peso, real … their unraveling illuminates widespread mismanagement. Doubts about currency regimes take root. The differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the rest which starts the clock on the ultimate death of the dollar.

The Double Whammy

Off the keyboard of RE

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Published on the Doomstead Diner on November 6, 2014

black_swan

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.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/11/20141103_NKY.jpg

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.

Screen Shot 2014-10-27 at 11.57.00 AM

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.

https://alexwilgus.files.wordpress.com/2011/07/fileuss-enterprise-d-in-distant-galaxy.jpg

Going Where No Man Has Gone Before in Debt

kuroda-laughingWhat 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”.

https://firlebeaconcelebrations.files.wordpress.com/2014/10/shale-boom_0.png

http://www.postcarbon.org/wp-content/uploads/2014/10/cover_Drilling-Deeper_300w-2.pngDepending 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.

http://new.postcarbon.org/wp-content/uploads/2014/08/hughes-thumb.jpgDon’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.

CALL ALAN!

It’s the FINAL COUNTDOWN now.

RE

IEA Investment Report…

Off the keyboard of Gail Tverberg

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Published on Our Finite World on June 10, 2014

oilwell

Discuss this article at the Energy Table inside the Diner

…What is Right, What is WRONG!

Recently, the IEA published  a “Special Report” called World Energy Investment Outlook. Lets’s start with things I agree with:

1. World needs $48 trillion in investment to meet its energy needs to 2035. This is certainly true, if we assume, as the IEA assumes, that world economic growth will actually improve a bit, from 3.3% per year in the 1990 to 2011 period to 3.6% per year in the 2011 to 2035 period. It is likely that the growth in investment needs will be even higher than the IEA indicates.

In my view, this is a CYA report. The IEA sees trouble ahead. There is no way that investment of the needed amount (which is likely far more than $48 trillion) can be met. With the publication of this report, the IEA can say, “We told you so. You didn’t invest enough. That is why energy supply ran into huge problems.”

2. Without reform to power markets, the reliability of Europe’s electricity supply is under threat. The current pricing model, in which wind and solar PV get feed in tariffs and electricity prices for other fuels is set using merit order pricing, produces huge market distortions.

In my view, the problem is even worse than the writers of the report understand. The value of wind and solar PV are inherently difficult to determine, because they produce intermittent supply, and this is not comparable to other types of electricity. Furthermore, a big chunk of costs relate to transmission and distribution–42% of electricity investment costs in the New Policies Scenario. Many well-meaning researchers looked at wind and solar PV and thought they were a solution, but they tended to look at the situation too narrowly.

To look at the situation properly, one really needs to look at the total system cost of generating electricity with intermittent renewables (of a given amount) compared to the total system cost of generating electricity without intermittent renewables. Proper pricing needs to include all of the additional costs involved, including the additional cost for storage, the additional cost for long distance transmission, and the additional costs encountered by fossil fuel providers in ramping up and down their transmission to match changing output from intermittent renewables.

 

A study by Weissbach et al.(here or here) suggested that wind and solar PV were “an order of magnitude” less effective than fossil fuels, hydroelectric or nuclear, when full costs were considered. Broader analysis also raises questions as to whether there is any real carbon savings from wind and solar PV–did the belief they were helpful just come from underestimating true system costs?

I would raise the question as to whether competitive markets for electricity even make sense. Regulated markets allow the various players to make an adequate return, and allow utilities to collect adequate fees for infrastructure. The overseer can increase or reduce investment of a particular kind, based on the needs of the particular system. I notice a recent Bloomberg article says, Europe Faces Green Power Curbs to Stop Grids Overloading. The current system is clearly working badly.

3. Tight oil from shale deposits will need significant supplementation from other sources, if it is to be sufficient to meet our needs to 2035. This is the chart I made from data provided by the IEA in its November 2012 World Energy Outlook, with respect to its New Policies Scenario.

FIgure 1. My interpretation of IEA Forecast of Future US Oil Production under "New Policies" Scenario, based on information provided in IEA's 2012 World Energy Outlook.

The current report is not intended to be a report regarding future oil production, but one highlight is, “Meeting long-term oil demand growth depends increasingly on the Middle East, once the current rise in non-OPEC supply starts to run out of steam in the 2020s.” This implies that not only is US tight oil not going to solve our problems, neither will tight oil elsewhere. Instead IEA is back to its old plan of “calling on OPEC”–hoping that the Middle East is there to help, if no one else is around. This is wishful thinking–something I will discuss later.

4. IEA’s investment report is one documenting diminishing returns, even though it never uses that term. Diminishing returns take place if society is becoming less and less efficient at producing energy products. For oil, the issue is that the easy to extract resources were pulled out first; we must now move on to more difficult to extract resources. For electricity, the issue is that the old resources produced too much carbon; we must now move on to higher-priced approaches that (hopefully) produce less carbon.

We can see diminishing returns many places in the report. The major point of the report is that investment costs are expected to rise faster than either the amount of oil or the amount of electricity produced. There are other more specific statements, too. In US tight oil, “High production rates mean that resources are rapidly depleted, with a corresponding rise in costs per barrel as operators move out of the sweetspots to areas where the recovery per well is lower”(page 65). EU will need prices higher than today’s prices for LNG transported from America (page 76). In refineries, the drive is toward more complex and expensive technologies (page 77). There is a steady upward trajectory of the oil prices in the New Policies Scenario (page 81). Offshore wind is expected to move farther offshore, with higher expected costs (page 104).

The point that the IEA does not seem to understand is that diminishing returns affects buyers’ ability to pay higher prices for products. The IEA assumes that buyers will be able to pay higher prices (than the general rise in inflation) for energy products, without it adversely affecting the economy. This clearly isn’t true because salaries do not rise to match the higher cost of energy products. Buyers will cut back on discretionary goods, when energy prices rise. This leads to layoffs in discretionary sectors and quite possibly recession. It also leads to higher default risk.

In fact, wages tend to drop from diminishing returns, because workers are becoming, in some sense, less efficient and thus producing less goods per hour of work. Joseph Tainter in The Collapse of Complex Societies says that diminishing returns were what led to the collapse of ancient civilizations.

Points of Disagreement

1. Many OPEC countries which hold the largest, lowest-cost reserves are deliberately limiting their production rates so as to keep reserves for the longer term.  This is common misbelief, repeated by the IEA, but it not true.

The true cost of production in the Middle East is not just the cost of pulling the oil out of the ground. Instead, one has to look at the full cost of the entire system needed for the extraction, including whatever costs are needed to pacify the people in the area, plus whatever costs are needed for additional infrastructure. Even if Iraq can in theory ramp up oil production, this does not automatically happen. Even if Libya can in theory ramp up production, we shouldn’t expect fighting to stop tomorrow. With these costs, the cost per barrel is up close to, or above, today’s oil cost.

Saudi Arabia publishes high reserve numbers, but there is no indication that Saudi could, if they wanted to, greatly ramp up production. Saudi’s big recent addition was 500,000 barrels a day of refinery capacity in 2013, so that it could make use of heavy, polluted oil from Manifa field, that was supposedly part of its “spare capacity.” An additional 400,000 barrels a day at the same facility is supposed to come on line in 2014. There are declines going on elsewhere, so it is not clear that even these additions will actually add to its total oil production. Saudi Arabia’s total output was slightly lower in 2013 than in 2012, according to the EIA.

The Saudi “proven oil reserves” are unaudited numbers. Its big oil field is Ghawar, producing something like 5 million barrels a day. We don’t know how long it can continue producing. We know that horizontal wells can keep production from declining for a while, but that if a drop-off comes, it is likely to be more severe than with vertical wells. If Ghawar production starts declining significantly, world oil production is likely to drop.

We know that Saudi Arabia has some heavy oil it can in theory develop, not that different from Canadian oil sands or Venezuelan Oronoco belt heavy oil. Such oil would require large front-end investment and flow very slowly. According to the Wall Street Journal, “That the Saudis are even considering such a project shows how difficult and costly it is becoming to slake the world’s thirst for oil. It also suggests that even the Saudis may not be able to boost production quickly in the future if demand rises unexpectedly.”

2. It makes sense to find new sources of investment that will provide funds at lower rates for energy project finance. The report talks trying to find new sources of investment for energy projects other than the traditional source. In particular, it mentions the possibility of tapping funds held by institutional investors (pension funds, insurers, sovereign wealth funds and so on). Pensions and insurance companies are of course currently involved by holding stocks and bonds of oil and other energy companies.

The reason why new sources of lending are needed (besides the problem with high costs) is that the fact that prior sources are getting burned out at the same time huge amounts of new lending are needed. Governments used to be sources of funds, but can no longer be taken for granted (page 38). Changes in Basel III rules make it harder for banks to make long-term energy loans, without charging higher rates (page 39). Quite a bit of the lending in the future will be need to be to developing countries (see Figure 2 below). Many who have lent to developing countries in the past have suffered losses (page 39). With respect to oil projects, there are many examples where oil companies have made big investments, with virtually no return, such as Kazakhstan oil (page 81).

Figure 2. Energy investment required by part of the world--IEA exhibit.

Perhaps sovereign wealth funds, if they feel that the risk is appropriate, can lend in situations where past experience suggests prudence is needed. But with a background in the insurance industry, I am not sure that makes sense for insurance companies and pension funds to get into financing ports in Iraq, refineries in India, or long distance transmission lines to offshore wind turbines. If they do, it needs to be as part of program where adequate risk premiums are included in the interest rates, and the risk is distributed over a large number of participants using bonds or securitization of some form.  It seems like an intermediary such as a bank would need to be involved.

The big interest in those writing the report is getting costs down for the borrowers. If risk is going up, it is not at all clear that interest rates should be going down. Furthermore, developing an undeveloped country using $100 barrel oil is far more difficult than developing an undeveloped country using $20 barrel oil. This is a big reason that financing debt in undeveloped countries doesn’t work well.

Comment

What the IEA has inadvertently stumbled upon is the reason why oil limits are a problem, and in fact, the reason why energy limits in general are a problem. It looks like there are plenty of resources available and plenty of ways to reduce energy use through mitigation. In fact, it becomes to impossible to finance everything that needs to be done.

An energy-providing device, or an energy-saving mitigation, requires up front payment. This payment reflects the fact that oil and other scarce resources (high priced metals, for example) need to be used in creating these devices. Oil and other scarce resources need to be used in developing new oil, gas and coal fields and power plants as well. This puts pressure on both debt markets and on scarce resources. At some point, the use of scarce resources becomes too great, and debt needs become too high. The projects with high up-front costs are among the worst contributors.

The plan to keep adding more and more debt doesn’t work. The economy is growing too slowly. People’s salaries are not rising to match the higher costs involved. The locations where the debt is needed are not in the part of the world with adequate banking services. It is the inability to finance all of the investment that is needed that will bring the system down. Resource scarcity will be behind the scenes, playing a role as well, but its problems will be hidden behind the problems of financing the needed energy investments.

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Financial WWIII

Off the Microphone of RE

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Published on the Doomstead Diner on April 17, 2014

 

Snippet..

…The KEY here is the control of the Credit Creation apparatus basically centered on Wall Street and the City of London. There are other ancillary credit manufacturing franchises in places like Hong Kong, Singapore and Frankfurt, but the fact is all these places are beholden to the Demigods on Wall Street and the City of London.

For countries that are outside this apparatus, these days it is almost impossible for them to create their own Organic Credit system, this is why everybody doesn’t just Jump Ship off the Dollar tomorrow. The creation of this system took CENTURIES to develop, along with the Legal System that is attached to it that defines which contracts will be honored and under what set of laws, which actually vary somewhat between the City of London and Wall Street. Bad as Wall Street is with this shit, the City of London plays even more fast and loose with it, so you really have a bigger and more unstable House of Cards over there than on the Wall Street side of the Pond, though both are ridiculous Ponzis at this point and if either one goes, the other one goes with it…

For the rest, listen to the RANT!

RE

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