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Published on the Doomstead Diner on December 13, 2014
…and the WINNER is…The ENVELOPE Please!…
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Coming Soon to a Laptop Near You: Oil Crash!!! Part 2
HYPERINFLATION OR DEFLATION
For the last 7 years since I began chronicling Collapse on the pages of the Peak Oil Forum, one debate has resurfaced over and over again, whether the monetary system would collapse in a Hyperinflationary Vesuvius of Wheelbarrows Full of Worthless Weimar-Zimbabwe style Dollars, or descend into a Deflationary Black Hole. On the Diner Forum, the Hyperinflation vs Deflation thread runs some 33 pages long now, over 450 posts and that is just since we opened the Diner in February of 2012!
For most of the time on the Econ websites, the Hyperinflationistas Ruled the Roost, as Helicopter Ben rolled out one QE Ship after another to salvage the imploding banking system. People like John Williams of Shadow Stats and Speedy Gonzalo Lira predicted imminent Hyperinflation as the virtual printing presses went into hyperdrive. I personally had numerous arguments with Jim Quinn of The Burning Platform, who produced an endless stream of articles making an Inflationary case. Sorry Jimmy Boy, you lose.
All during the time this was ongoing, a few of us, most notably Nicole Foss of The Automatic Earth, Steve Ludlum of Economic Undertow and myself made the Deflationary case. Now that Deflation has grabbed hold and just about everyone from the Central Banksters to Ambrose Evans-Pritchard and even to the Inflationista camp at Zero Hedge has joined this bandwagon, I took the opportunity to claim VICTORY for the Deflationatos on the pages of the Diner Forum.
One of the Diners asked me to PROVE my History as a Deflationato, which sent me back into the archives of my Reverse Engineering Yahoo Group to look for posting I made on this topic. There are many, but I came up with these posts from 2009 & 2011 which make the case quite clearly:
FLASHBACK! BLASTS FROM THE PAST…
Popping the Inflationista Bubble Theory
July 13, 2009
One of the pervading fears many people have is of the Hyperinflation they believe will come as a result of the non-stop printing of Funny Money by Helicopter Ben and Turbo Timmy. The images of Weimar Germany and Zimbabwe are fixated in many people’s minds as the inevitable outcome of this explosion of debt based fiat currency.
What the Inflationistas fail to consider is the fact that MOST of the money in the money supply of Dollars is NOT in the form of FRNs. It is MOSTLY in the form of debits and credits lodged on the computers of our biggest banks. Though the Fed is creating money to drop onto Banks to keep them numerically solvent and able to resolve the transactions you do with your debit card, the US Mint is not insofar as I know currently printing up an equal supply of FRNs to the amount of digital money they are loaning out through the discount window to the Banks.
What is happening to all that money? Well a large part of it is just sitting on the disk drives of these banks as part of the Capital Reserve they are required to hold here. However, with the exception of Goldman and to a lesser extent JP Morgan Chase all these banks continue to bleed red ink as fewer of their mortgages are serviced and fewer of their investments of all types pay interest. The result here of course is the interest they pay out to YOU these days for keeping your FRNs in their “safe” keeping is virtually non-existent. Maybe you get 1% annualized if you will lock up your money in a 90 day CD. Forget interest on Checking or Savings accounts, its well below 1% now. What is the benefit to J6P other than some perceived “security” of having your money held by a bank now? Keeping a months worth in the bank to facilitate your bill paying makes sense, but beyond that I can’t see why anyone would leave money in the hands of the banksters these days.
So anyhow, the banks will continue to push more digital bits around in a big circle jerk, but there aren’t that many more FRNs out in circulation now than there were 2 years ago before they ramped up QE. Beyond that, more Digital Bits are not being deposited into J6Ps account either, in fact quite a few less are going that way as J6Ps all over the place lose their jobs. Since an economy that is based at least 70% on consumer spending requires all those J6Ps to have money to spend, such an economy HAS to deflate here. It cannot inflate in the sense most people think of wheelbarrows of money to buy a loaf of bread unless you find some way to actually GET the wheelbarrow of money out there somehow. Such a means has not yet made itself apparent. When Da Goobermint puts EVERYBODY on the Dole and starts handing out Stimulus payments on a monthly basis, THEN you could get price inflation, but that solution is not yet on the table.
What will happen here is the debts will eventually be resolved through Bankruptcy of all parties involved, Creditors and Debtors alike. MOST of the recently created money will disappear from existence in these bankruptcies. The Trillion or so we owe the Chinese and Japanese is basically toast. They are never going to get back most of that money, and they can’t spend it either because trying to do so will just push down the value of the money all that much quicker. They have much more ability to flood the market with Dollars than the Fed does, but in their case also it doesn’t help them unless that money gets into the hands of Consumers who will then again recycle it to buy more worthless Chinese Toys.
After all is said and done, in the absence of a Revolution and dissolution of the US Goobermint, you’ll still have FRNs being used as Money. The Dollar never went away in the Great Depression, it just became very scarce and hard to come by. Many people lost their life savings because they had their FRNs stored in Banks which shut their doors one day and they were SOL. Right now, the FDIC continues to backstop banks, but they will become insolvent also, and in the end unable to ship FRNs to every person with an Insured FDIC account.
My guess is that for about a year or so after the banking system of Credits and Debits collapses, the FRNs will continue to work in local commerce, at least for whatever is actually available to BUY in local commerce, mostly people selling stuff in Garage Sales. The Food Economy is another story entirely, if you actually HAVE a Twinkie would you sell it for an FRN?
My guess here is the Food Economy goes off the grid as Da Goobermint grapples with a complete loss of faith and function in Banking. The industrial food apparatus will be Nationalized, along with the Transportation system. In the Great Depression this came in the form of Soup Kitchens, in today’s world I imagine they will utilize the Walmarts as Food DCs, and you go to the Walmart with your weekly allotment of Food Stamps to buy some seriously rationed food. There also will be Gas Coupons for your seriously rationed Gas. Black Markets of course will develop here in both areas, and fraud will be a problem as well. Even more insidiously evil things will occur, as some J6Ps will trade away food coupons for their children to get one last 6-Pack. If you have a Victory Garden going though, you might actually be able to save up Food Coupons, and then use them for trade for other things you need.
In any event, I am firmly in the Deflationato Camp, and I believe the Inflationistas are quite wrong here. The inflation they are worried about ALREADY OCCURRED, it occured in the inflation of housing prices and the inflation of goods and services that for the most part we do not really NEED. Asset Values became OUTRAGEOUSLY inflated, for Assets that are essentially quite WORTHLESS, such as McMansions, Malls, Auto Factories….the WORKS here in terms of assets that are ALL dependent on the availability of cheap energy. All of this was fueled on Fiat Money in the Debt Game, but it is collapsing here as we speak, and you cannot inflate it anymore. The mere printing of money is NOT inflation. It can only inflate an economy if the surface of the bubble still has enough integrity to hold the air. Our economy no longer has such integrity, there are too many places where the air leaks out as soon as it is put in. Obama can Stimulate from now till the Cows come home, but the money disappears as quick as you print it. Its not inflating ANYTHING here, just look around you at the closed Biznesses, the Unemployed and the Foreclosed on Houses.
Inflationistas have their heads up their collective assholes IMHO. Even if eventually the Fed finds a way to print up enough FRNs so you would need a wheelbarrow to buy a loaf of bread, there will be no Trucks on the road to ship those FRNs out to the population to spend. We are in a Deflationary Depression, or rather the endgame of that which is a Monetary Sytem Collapse. 300 years in the making since Master of the Mint Sir Isaac Newton and the Bank of England came up with this scheme, now the End is upon us. We are not going to inflate our way out of this one with any bubble. Game OVER.
Here’s one on China from 2011. Note the closing line:
Realities of Exponential Growth
Dec 26 8:59 AM
While all eyes remain focused on Europe, the next “wave” of the Crisis looks more and more like it will come from Asia and the Chinese. Of course, some of this may be the usual Zero Hedge Hyperbole, but one thing is for certain, China’s “growth” miracle is a fucking Ponzi that makes Subprime Mortgages all over the rest of the world look like ants from the top of the Empire State Building.
“Money”, in the form of rehypothecated DEBT from the West has been flowing steadily into Asia for the last decade. The chinese, “honest” bizmen that they are proceeded to take the Trillions in worthless debt thrown at them and leverage THAT up a few dozen times at least.
So now the Chinese, having just a bit of trouble meeting coupon payments on all the bonds they issued to build vacant cities, bridges to nowhere and Halloween Lawn Ornament Factories are looking to borrow money from their oh-so-flush neighbors, the fucking JAPANESE. Yes, that’s the same set of islands currently at a 200% Debt to GDP ratio not INCLUDING the Off Balance sheet costs of basically waiting until one or all of the Fuk-U-shima reactors goes Supercritical.
Apparent to anyone now who is not completely BRAIN DEAD is that the Money Masters are Circle Jerking themselves around the world, with one Insolvent Nation-State after another buying up ever more irredeemable debt at positively EXPONENTIAL rates, with absolutely NOBODY wanting to be the first one to CRY UNCLE and call it quits on the game.
Now, thing is here, exponential math has a way of blowing up into INCREDIBLE numbers very fast, once you reach a critical point, which we passed a while back here ont he monetary level. The thing is also, that its not until the very LAST of the Doublings that people tend to recognize the problem, because of real ignorance of exponential math.
Here’s how it works. I’ll reference Albert Bartlett here for those of you who have not watched his vids, Google them up.
Right up until the last doubling time, there seems to be PLENTY of energy/money to go round. In just the last MINUTE though of the Clock when the next doubling occurs, all that you consumed in the prior time put together is consumed in the very last MINUTE.
This is a metaphorical “Minute” of course, since Doubling Times can be in the years here, and around a 7% increase translates to about a 10 year doubling time this wa the case for Oil per capita consumption right up until around 2010 or so. At this point, the growth STOPPED far as per capita energy consumption was concerned, but it did NOT stop the legacy of such doublings in money supply. For without that, you also do not keep up with the increasing population, also a lagging indicator here behind the collapse of Oil production doubling rates. You must continue to increase Money supply to the population at eqaul rate to population increase, elsewise of course everyone has less money to work with.
The “Crash” as it were comes when you no longer have the rate of doubling in the per capita energy supply you do in the population, at which point the CB tries to KEEP inflating the money supply to keep pace with population, but of course less energy is available to buy. The value of the money created relative to the energy supply drops, no matter how much money gets created.
This is where we are at NOW on the “curve”. If the CBs do keep trying to inflate the money supply to match the population, it will decrease in value relative to the per capita energy available. If they do not increase the money supply, then not only will money become very scarce to buy energy, but beyond that legacy debt based on future production will all implode. So in the last “minute” or so of the doubling time, on a monetary level either you will get a MASSIVE Hyperinflation or a Hyperdeflation.
There are a few Caveats to this on a Global Level. First off, both Hyperinflationary and hyperdeflationary events can be Localized. Essentially this is Triage, as some areas are CUT OFF from energy distribution, and if those are high population zones then this leaves a lot more per capita energy for remaining zones not so cut off.
Second of course, any increase in the Death Rate globally will slow the doubling time on per capita energy expenditure, so long as the energy harvesting remains constant. Also, conservation of energy on any large scale will slow the doubling time.
In real terms globally, to maintain the value of money in any individual location, it has to shrink into the envelope of the available energy for that community. So as long as say the FSofA can keep available energy from rapidly disappearing per capita, the Dollar will hold value UNLESS it is produced at a rapid clip to stave of BKs of the TBTF and so forth.
Globally also though, all nations are in competition for the last Minute’s worth of fossil fuel energy, which means there is no great assurance the FSofA can even keep this constant, though TPTB will no doubt try to do this by drilling anywhere some geologist says there might be some positive EROEI Oil still in the ground.
The end result here is that at least at the Beginning, the Die Off will come in the most overpopulated regions with the least amount of available energy they can acess locally. India and china with large populations and low energy reserves locally seem destined for the largest by percentage and in absolute number Die Offs. Africa is also likely to be hit hard here, since they will have their Oil stolen from them.
Once this threshold is crossed over, its not Doubling times you are concerned with, but Halving times. In the Contraction phase, as the remaining energy reserves deplete, you’ll see the remaining population halve in size at some periodic rate probably on a similar 10 year timeline for the doubling that occurred for a few decades, until such time as the total population only uses the energy that is avaialble each day from the Sun, as opposed to using Fossil fuel energy.
All of this is just Math, and not subject to Political issues which will crop up along the way. No society will quietly go into the Good Night without trying every last means available to them of not being the first to DIE. When the problems really start to hit the big population zones of India and China, these folks will strike out in some way, and both of course have NUKES. It just remains to be seen how these weapons get used along the way.
At least at the moment though, despite the rapid descent into Fascism, the FSofA still looks to be amongst the best places to be situated as the Die Off commences. I definitely would trade it for China, regardless of China Bulls who think they are the next great Empire in waiting. IMHO, the Chinese are TOAST.
Oct 14, 2009
The more I read various armchair assessments of the impending “Dollar Crash”, the more ticked off I get at the narrow view most folks take of this monetary crisis. Clearly various policies are bein pursued here by Da US Goobermint to devalue the dollar and in so doing “rob” the citizenry of whatever wealth they might have accumulated in dollars. One of the MOST obvious things just occurred, with the Fed purchasing some $50B in SDRs, which themselves are a manufactured currency of a basket of currencies including Gold of course.
The problem here seems obvious enough to me, but perhaps its not so obvious to everyone? All the currencies are mathematically connected, and the so-called “basket” that constitutes the SDR reflects the value of all those currencies. Thing is, all those currencies are just the same thing as the Dollar is, abstract value notations. Is there any inherent reason why a Yen is more valuable than a Dollar or a Gold Coin either? None at all really, especially when the obligations they represent cannot be met by any country issuing their currency.
The policy the Chinese are following right now is to blow a bigger credit bubble than we did, but they can’t sell any of their products to anyone, especially not to anyone who has a currency devalued against the Renminby. Our armchair currency pundits are VERY provincial intheir thinking, they focus entirely on the incredibly stupid policies being followed by the Fed here in the US, while entirely IGNORING the fact that every other CB and Nation-State on EARTH is doing precisely the same things at the same time, in some cases going even further off the cliff of mathematical logic, the UK for instance.
What about the DEBT!?!?!? is the Clarion Call here for the Audit the Fed Lemmings. Lemme bring this down to a smaller situation we can understand better. What about YOUR CC debt? Are YOU worried about this debt now? I sure wouldn’t worry about it much. Run it up so long as you have a credit line, you’ll never pay it back of course. In agregate, this is what is going on EVERYWHERE. NOBODY is ever oing to pay back on this debt, which really is just a mathematical abstraction of obligation. I loan some money to my brother in law. He is broke and can’t pay me back. I am bummed I won’t get paid back, but that’s how it goes when you loan money, its a risk you take.
Of course TPTB aren’t quite so forgiving here, mainly because they use the obligation of debt as a means to enslave populations. Its really quite simple, en masse you just repudiate the debt! Of course also, they won’t let you repudiate it, they use the force of “law” and the military to tax it out of you if you won’t willingly cough up the interest on your Option ARM Mortgage. Unfortunately, if your population isn’t actually making ANY money or producin anything, there is nothing here to TAX. System Implosion.
The underlying REASON for this type of collapse comes from compound interest, which persistently accrues more debt obligation than you can actually produce. Its a function of Capitalism and a function of the Banking system which supports it. As long as you pay Interest and then Interest on Interest, in a fairly short amount of time by Geologic standards the monetary system will implode, that is even WITHOUT the restriction of a planet with diminishing resources and expanding population. Add those into the mix, and the monetary system is just TOAST no matter WHAT you do.
Devaluation of the currencies involved here is inevitable, and mainly its a race to the bottom and some folks are playing a carry trade between the currencies betting on which one is the last to fall here. IMHO, betting on the Dollar as the last one to fall is a bad bet.Too much of the world wealth is denominated and held in dollars, so some value must be maintained here in that currency. The Pound Sterling could go down the Toilet and only a few Limeys would get their clocks cleaned. A whole lot harder for the wealthy of the world to sell off all their dollar holdins here and maintain wealth and power. The dollar will devalue, but it won’t TANK entirely. Some other currencies will. The Renminby is likely to be one of them, for the simple reason that the Chinese have 1.3B mouths to feed in a country with serious water shortage problems. Buying Chinese is an exercise in financial suicide IMHO.
Disclaimer: I am not a registered Currency Trader and hold no position in Remnimby. LOL.
…and now BACK TO THE FUTURE!
So above is the history, and it is playing out remarkably close to how I pictured it, although I will say the timeline has been a good deal longer in playing through than I thought it would be. The Central Banks up to this point have managed to keep deflationary forces at bay, although at the great cost of impoverishing the vast majority of people while enriching the very few at the top. Of course, for the people calling the shots at the top, this is not a Cost, but rather a Benefit.
Besides the general deflationary trend, another of the noted predictions was the the Chinese would end up suffering worse and harder, rather than emerging on top as the next World Superpower and Empire. My general Tag Line for that ideas has been over the years, “The Chinese are TOAST”, and I have no idea how many times I used the graphic at the right here with posts and articles on this topic, but they were many for sure.
Bad as things are for the Chinese though, things are a good deal worse over in Japan, now sinking extremely rapidly as their export market collapses and their huge overhang of debt catches up with them. On the currency level, you see the difference here and how important the RELATIVE valuations are between currencies, rather than precisely how much credit is being dished out to the TBTF Banks by the Central Banks in the form of QE. The Yen is rapidly depreciating now, having lost around 30% of its value already with no bottom in sight for that. They will experience a Hyperinflation as far as imported goods are concerned, including of course basic commodities and energy.
Similarly, the Europeans are not doing too well as the Euro collapses here, and they also are experiencing an enormous loss of wealth and ability to import Oil as a result of this. In both the cases of Japan and Europe, this explains the rapidly dropping price of Oil, which is an Internationally traded commodity. Here are two VERY large industrial societies who have seen roughly 1/4 to 1/3 of their purchasing power for Oil and its products yanked right out from under them. These folks simply do not have the MONEY anymore to keep consuming their share of the oil still being extracted, so that demand is GONE, in all likelihood permanently.
This of course leaves this portion for Amerikan Happy Motorists to consume, but despite the dropping price at the pump, they aren’t stepping up to the plate here as Consumer of Last Resort. Why not?
Well, despite the fact the Dollar has increased in relative value and buys more gas, fewer and fewer people here actually HAVE any surplus dollars to spend on gas. The slight bonus they are getting from cheaper gas prices doesn’t do much if they are already Unemployed and not driving back and forth to work every day. As a whole, these consumers are all already enormously in debt, and if they do have any extra money now as gas prices decline, they probably are using it to pay down some of that debt, not do any new consumption of other products.
What that means is that the Sales at the retail outfits continue to decline, and operations like Sears, JC Penney and Radio Shack are basically on Life Support now, and probably will go under in the next year or two the most. Who does that affect most? Our friends the Chinese, who have an enormous amount of funny money invested in overproduction, and whose economy is based on a mountain of Shadow Banking Debt that likely dwarfs even the FSoA Federal Deficit! So that one is destined to implode here also, although it looks like it will take a little longer than the Japanese and Euro regions to completely crap out.
Far as the Ruskies are concerned, between the Sanctions and the decreasing demand for their Oil, the Ruble is Cratering even faster than the Nip Yen, and that is saying a LOT.
Russophiles like Dmitry Orlov, Saker and Pepe Escobar put a Brave Spin on this, it’s all part of Vlad the Impaler’s Master Plan as a Geopolitical Chess Grand Master, but the fact of the matter is that Ivan 6 Pack ( I6P) has lost close to 50% of purchasing power with his Rubles far as imported goods are concerned. The Ruskies are in better shape than the Nips or the Eurotrash of course since they have their own domestic source of energy, along with decent food growing capability, so they may be able to weather the storm while waiting for the Western Banking system to implode.
Time for a CRAZY IVAN!
More important than I6P though far as Vlad is concerned is the collection of Oligarchs that form his primary support base, and these folks are both seeing their wealth evaporate, along with having a good deal of it frozen by the Clowns & Jokers in Brussel Sprouts. Whether these folks will go to the wall with Vlad or not remains to be seen, although he certainly does better in Popularity contests than Obama-sama does here, despite the fact the FSoA so far is not suffering the worst of this collapse.
What’s left of the Major Currencies? Not too much, you got Norwegian Krone taking a beating from falling Oil Prices, and the Swiss in order to keep the Swissie from skyrocketing in value buy up endless amounts of Euro toilet paper, on basically a thimble size population base and economy, floating themselves as an ultra leveraged Financial Ponzi. Not a real good bet as a currency there either.
So the Best Dogshit in the Pound remains the FSoA Dollar, though to be sure it will puke blood too eventually here, and when it does the whole system goes Tits Up. What remains uncertain is precisely how long this will take to occur, but it definitely does not look likely that the Frackers can stay floating much past another few months or so, and that ponzi collapsing will reverberate through the whole economy, Jobs, CapEx, GDP, you name it.
All that spells further Deflation, even if Da Fed launches QE 99 or whatever the number is right now. This notional money just does not escape into the real economy, so consumption, 70% of FSoA GDP in da good old days just can’t rebound.
Can the Smartest Guys in the Room keep the Banking System floating with all of this and stave off a Bank Holiday still longer? Maybe, but it still won’t fix the deflationary spiral, since really there is no good “credit worthy” customers to lend to, and in reality the actual pie of resources is shrinking rapidly here. If they wanna get price inflation, they literally WOULD have to drop FRNs from Helicopters, because its not going to flow out from the Job Market.
Unless and until something like that occurs, deflation and diminishing liquidity in the markets will continue to rule, until there is a terminal breaking point. The currently crashing price of Oil is such a breaking point, and it looks like it has further to fall in the next week.
The bottom line on this is DEMAND DESTRUCTION, and it is neither a result of nefarious Saudis trying to destroy their competition in the Fracking Fields of the FSoA, or Da Fed pulling back on QE, both of those are SYMPTOMS, not CAUSES. It’s not even the result of Neo-Cons wanting to sink Vlad the Impaler, that is also just symptom and not a cause.
The DD is accelerating here due to the collapsing currencies of the Yen & Euro primarily, which basically has priced most people in these economies out of the Happy Motoring lifestyle. It’s not that demand in the FSoA is diminishing for Oil that is driving this, although there is diminishing demand here. What is driving this is CRASHING demand in Europe and Japan, and likely China also, although their numbers are so faked it’s impossible to have any real clue as to what is going on in real time, you only can figure it out a year or two later.
10s if not 100s of 1,000,000s of people in the European and Japanese economies are no longer customers for Petroleum, at least directly as Gas or Petrol for their own Cars. If they still do have a car, they are driving it way less. Meanwhile, due to all the credit provided to Energy Extractors over the time period, production of Oil has remained relatively steady despite ever decreasing demand for it on the consumption end. This of course results in a GLUT on the market, and the extractors are forced to sell at whatever price they can get for it once the room to store it has been filled up. It’s not just the Saudis selling at discount prices, ISIS controlled Oil facilities are doing it, and so also are frackers in the Bakken.
This of course is a classic LIQUIDATION SALE, where EVERYTHING MUST GO! before the store goes OUTTA BIZ. Credit is drying up for the extractors as it finally DAWNS on the Dimwits on Wall Street that the customers are not BUYING, and the Junk Bonds they issued out at High Yields are worthless toilet paper that won’t ever be repaid.
QE never worked to put any more credit into the hands of the CONSUMERS of Oil, it only worked to blow a bubble on the Extraction end of this economy. Unless you provide credit to the consumption end, you don’t have CUSTOMERS. There are insufficient customers of Oil now to buy what is extracted, so the extractors have to keep discounting to get rid of inventory. This is called GOING BROKE.
The only question now is precisely who will be the first to go Chapter 11, and how Da Goobermint will try to bail out or bail in banks that have extended out $TRILLIONS$ in Funny Money to the Oil Extraction industry over the last decade. It’s going to be a BLOODBATH, in more ways than one, that is for certain.
Coming Soon to a Theater Near You.
It’s the FINAL COUNTDOWN now…