Foreign speculation on our currency is a bubble set to burst October 26, 2009
The pooh-bahs running US and British hedge funds and the banks supporting them are more than capable of reading the minutes of the Reserve Bank of Australia board meetings and coming to the conclusion that RBA Governor Glenn Stevens is committed to pushing up the cash rate from the present 3.25 per cent to 4 to 5 per cent if necessary.
And they are already betting tens of billions of dollars on what has so far been a sure bet. These foreign financial institutions are up to their old tricks. After getting trillions of dollars out of their respective governments to avoid GFC-induced bankruptcy - which was largely engineered by their criminal greed - because they are ''too big to fail'', they are already using their influence to maintain ''business as usual''.
Why funnel the money gouged out of American and British taxpayers into lending to their national economies to maintain employment when there are richer pickings elsewhere? Two of those destinations are Brazil and Australia. Their resource-rich economies are still doing well compared with most other countries because they are riding in the slipstream of the strong demand for commodities from China and India.
Cash is pouring into these economies, not for development, but to speculate on the local currency and the sharemarket. The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries' non-commodity export and import competing industries. Brazil's popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.
Arguably, the monetary strategy adopted by Stevens has compounded Australia's lack of international competitiveness for our manufacturing and service industries, especially tourism. Since the end of 2008 our dollar has appreciated 27 per cent (as of last week). This means that financial institutions that invested money at the beginning of January are enjoying an annual rate of return on their investments of 35 per cent.
The flows of money heading toward high- rate countries don't find themselves supporting innovation or relief from oil depletion but for speculation in finance. Here's another take from Andy Xie:
Before the Asian Financial Crisis, the ASEAN region was touted as a "miracle" by international financial institutions for maintaining high GDP growth rates for more than two decades. But some of that growth was built on a bubble that diverted business away from production and toward asset speculation. This developed after credit expansion, driven by the pegging of regional currencies to the U.S. dollar, encouraged land speculation. ASEAN's emerging economies absorbed massive cross-border capital due to a weak dollar, which slumped after the Federal Reserve responded to a U.S. banking crisis in the early 1990s by maintaining low interest rates.
Back then, I visited companies in the region that produced goods for export. I found that, despite all the talk of miracles, many were making money on financial games -- not business. At that time, China was building an export sector that had started exerting downward pressure on tradable goods prices. Instead of focusing on competitiveness, the region hid behind a financial bubble and postponed a resolution. Indeed, ASEAN's GDP was higher than China's before the Asian financial crunch; now China's GDP is three times ASEAN's.
China today faces challenges similar to those confronting ASEAN before the crisis. While visiting manufacturers in China, I've often been discovering that their profits come from property development, lending or outright speculation. While asset prices rise, these practices are effectively subsidizing manufacturing operations – an asset game that can work wonderfully in the short term, as the U.S. experience demonstrates. When property and stock markets are worth more than twice GDP, 20 percent appreciation would be equivalent to four years of business profits in a normal economy. You can't blame businesses for shifting their attention to the asset game in a bubbly environment. Yet as they focus on finance rather than manufacturing, their competitiveness erodes. And you know where that leads.
In China, the speculation bubble arises from sterilized hot- money flows lent into asset markets by the PBOC and large, government- run banks. In Australia, the bubble is inflated by cheap US dollars sold short. The result is the same in both countries, investments of non- existent productive return. There is nothing gained on the dollar- or- yuan flows save hollow finance profits. With the passage of time, the bubbles deflate, leaving ordinary citizens holding the bag.
One investment opportunity neglected is renewable energy. As conventional supply decreases, the infrastructure that supports the oil platform becomes stranded. This represents a significant cost as the platform provides returns for the entire economy. What is needed is a new kind of platform that is not dependent upon conventional liquid fuels.
This investment in all its guises would provide real returns to capital as well as provide employment/spending/capital formation. "Non, non," say the energy provocateurs shaking their heads. "We must focus on growth and expanding consumer marketplaces!"
Of all the follies that will return to bite us on the collective rear end, this must be the greatest of all. We need desperately a commercial life that is less energy- dependent. We know what to do and how much to invest but the investment initiative is never made.
Instead there are carry- and hot money- trades.
Davidson notes the Brazilian approach to the dollar carry; tax capital inflow!. Brazil knows it needs to develop commercial activities in addition to resource extraction. Pushing up the Real in relation to other currencies would make Brazilian products that much more expensive.
The Fed raising funds rate 2% would do the same thing applied to the source. Of course, finance would lose the greater part of its profitability and banks would fail. Whether the banks deserve to fail is another matter, but the Fed has taken the position to support the banks regardless of cost to the rest of the country.
Andy Xie suggests a large, pan- Asia free trade zone. This would assist Japan which teeters on the edge of debt- deflation catastrophe. Both Japan and China have saturated their US customer base; at the same timee China needs better technology to address its greenhouse gas and other pollution problems. A trade zone outside the reach of US energy- crisis denying ideologues might have the benefit of directing more investment toward renewables somewhere on Planet Earth.
In reality, the carry is likely to continue until it cannot sustain itself and the ideologues will lead the rest of the US off the cliff. If this wasn't so tragic it would be humorous ...
Global Confidence Dips as Policy Makers Begin Exit Strategies Share Business Exchange
By Shamim Adam and Shobhana Chandra
Nov. 12 (Bloomberg) -- Confidence in the world economy dipped in November as central banks’ actions to withdraw some emergency measures sparked concern about the strength of the recovery, a Bloomberg survey of users on six continents showed.
The Bloomberg Professional Global Confidence Index fell to 60.3 from 61.7 in October, the highest level in the series that began two years ago. The index exceeded 50 for a fourth month, which means there were more optimists than pessimists.
The survey follows steps by central banks including the Federal Reserve to start unwinding stimulus, seeking to avoid market distortions that may spur bubbles in assets from stocks and commodities to real estate. The shift comes at a time when job losses are still rising in the U.S. and Europe, threatening a nascent recovery as consumers limit spending.
If there is less stimulus - low cost cash loans and grants for finance - there will be no further recovery.
Yet ... if there is continuing stimulus, low cost cash loans will start to become more and more expensive. Borrowing from our grandchildren acts in this way: they cannot deny us the loans but they can indeed refuse to pay them.
Finance claims the economy is fixed and markets have returned to rubust health. Finance also claims it is old and broken and needs continued help. Well ... which is it?
Like all things financial, stimulus is an actor within a dynamic. The interest rate tension marks the evolution of this dynamic. The transformation is from the panic levels of cash lending during the height of the crisis to today's increased desire for yield and the accompanying appetite for risk. The flood of stimulus was the policy response to the freezing of credit and the overpricing of repayment risk by the markets during last year's hysteria. The immediate risk appeared to dissipate, instead it was pushed forward. There is the dawning realization that the flood of cash loans will reach a point where they can never be repaid. The evolution of the dynamic is from where we are now - at the glorious 60.3 level - to the period of default and repudiation, when we are flat- lining at a tepid 15 or so.
There is also the realization that the increase in derivative claims will never see conversion to cash. If the loans cannot be repaid 0r repaid in kind, why continue to lend?
What is interesting about this dialog is that the largest player in this Danse Macabre has lost control over its own destiny. The crisis emerged in the US - our appetite for fuel to waste is legendary. The American 'waste crisis' manifested itself in mortgage- backed securities. The establishment's policy response has fixed itself around keeping intact offsetting hedges against increasing fuel costs. At issue is whether the rest of the world sees it in their interest to maintain the (futile) status quo in light of shrinking oil availability.
Is the rest of the world as unrealistic about US waste and energy consumption as is the US itself?
The rationalization the US offers up is that it consumes the world's products and is therefore entitled to waste the world's energy as part of the process. The US also claims entitlement to more and more stimulus from the rest of the world to facilitate that waste.
Unfortunately, other countries such as those in Europe not to mention up- and- coming neo- wasters such as Brazil and China also demand a share of the cornucopia. It is this demand that runs counter to finance's desire for ever- greater stimulus. The concern grows that US stimulus requires parallel stimulus in all countries in order to maintain a level of competitive consumption.
If US customers require subsidy in order to buy goods and services, the rest of the world's rising middle class requires equal subsidies as well. Fair is fair!
It is foolish therefore to 'go long' on the rest of the world forever subsidizing middle- class indulgences, particularly in one country. Americans at all economic levels have already come to this conclusion on their own and are cutting back. The cutback is reflected in the exorbitant interest rates being charged to unsecured consumer creditors. The solvent have no desire to borrow leaving only those who desperately need credit ... and who lack the means to repay it.
It isn't hard to make the connections between the insolvent consumer borrowers forcing credit costs higher and insolvent institutions doing the same on a larger stage. Repayment risk in the 'future' is becoming repayment risk of the now.
It appears that stimulus will not be available very much longer regardless of economic conditions or the desires of the finance community. Perhaps I am wrong, but - absent another deleveraging panic starting right about now - the trend in rates is beginning to pull upward. Money costs will rise to accurately reflect the 'hard' input costs of stimulus'.
Another way to view stimulus is to consider when the market begins to discount it. At that point, it becomes more expensive.
The cost of money relates directly to the cost of oil in dollars. In 2004 the US Fed had little choice but to raise rates responding to steady increases in oil price. For a refresher, please read 'Further Evidence of the Influence of Energy on the U.S. Economy'
Increasing oil demand by commerce - here and abroad - pulls demand for cash funds away from finance. At some price level, funds are diverted to oil companies and national producers and away from securities and derivatives. Absent a 'shock' effecting oil supply such as a hurricane or military action, the contest between the demands of commerce on one hand and those of finance on the other can only be resolved by increasing money costs ... so as to attract cash toward banks and money markets. Oil in turn becomes more pricey to pull funds back from finance and toward producers. The game becomes a tug- of- war. In 2004, the rise in oil prices forced money costs higher which in turn made mortgages more expensive. This shifted mortgage lending toward even higher cost products which, by design, were unaffordable. Mortgage borrowers defaulted and the increasing mortgage defaults made securities based on mortgages unprofitable. Businesses selling these mortgage products failed as a consequence.
There was a cascading decline in mortgage- derived values that has not ended. Relative to energy, finance products are worth less. This is our 'crisis' in eight words.
Since energy/gravity is attracting funds away from finance the upward pressure on rates is a reasonable consequence. There is little or aught for central banks to do but follow the trend or reinforce it and defend the higher rates at perhaps a lower level.
At a higher level than what finance would desire.
Keep in mind that while this interest rate arbitrage is taking place, the carry trade in dollars is accelerating; Ben Bernanke's efforts to force all rates lower by open market activities, quantitative easing and purchases of GSE debt has made the US dollar the currency of choice for borrowing here and investing elsewhere. While funds flow into finance from governments and central banks, the actions of the Fed allows funds to flow right out again!
Way to go, Ben! Let's all invest in America's future by shorting the dollar and sending funds to Australia!
Regular citizens cannot avail themselves of this bonanza, only banks that have access to the near- zero Fed funds rate can afford this trade. The banks 'invest' (sell) the cheap dollars in securities issued in countries where interest rates are rising ahead of US rates. The fact of the flow of funds is revealing; the target countries are simply ahead of the same rate curve the US finds itself on; either the carry will assist in the decline in the dollar to the point where energy prices bolt or the US Fed itself and the bond market will price dollar rates higher. Either will end the carry trade.
This will be interesting, as in 'learning experience' interesting. The 'lower' the dollar is priced relative to other currencies, the more dollars will be borrowed and sold in an accelerating feedback loop. When rates finally rise, the dollar- short positions will have to be unwound and dollars returned to central banks from whence they were borrowed. Alternatively, dollars will be demanded from borrowers by central banks as margin calls. The consequence will be the 'Mother of All Short Squeezes'. The dollar will become very much in demand while the now- lowly 'risk assets' will head for the drain in he middle of the floor.
Once started the tidal flow of deleveraging will be almost impossible to stop. This seems to be the inevitable outcome of the process that has just begun. Little wonder the world's policy makers are stuck at 60.3!
The Fed cannot alter events that are unfolding; its expedients put into place over the past year and a half have reached their 'half- life'. Other central banks will call in their dollar loans. Judging from Bloomberg's poll, this process is starting to take place in a manner noticeable to finance's big shots. Look for more dollar swaps to foreign central banks, but at some point - $85 a barrel? - it will be Ben Bernanke trying to command the tides.
It seems the International Energy Agency has been fudging its world oil production figures according to a 'shocking' article published by the Guardian UK:
Key oil figures were distorted by US pressure, says whistleblower
Terry Macalister guardian.co.uk, Monday 9 November 2009 21.30 GMT
The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.
The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.
The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.
Perhaps Peak Oil actually took place sometime in the past; the peak of physical oil production, that is. Peak oil measured in dollars- per- barrel took place in the end of 1998. Perhaps the beginning of the decline in production from existing oil fields actually took place around that time rather than six years later as suggested by Matt Simmons.
Simmons claim is derived from the same statistics at issue here. It is likely the Energy Information Agency's figures are also 'fudged'. Better to let the market provide the real data; the participants follow their analysis with hard cash, not the case with the watchdogs.
Ilargi: I’d like to take another look at Sunday's post, The Jobs Doom Loop , which addressed two separate sets of (un-)employment numbers emerging from the US administration. First, there is the issue of the jobs allegedly saved/created by the $787 billion stimulus plan, which turn out to be highly questionable and in all likelihood wildly exaggerated to make the current White House look good/better. Giving someone a pay raise is not the same as creating a job, guys. And saving jobs that are not threatened doesn't count either. Second, in what goes way beyond the current White House, but is happily embraced regardless, the reporting of monthly and yearly job losses by the Bureau of Labor Statistics. For October, 192,000 lost jobs were reported, but only after 86,000 were added just about entirely arbitrarily through the moot-in-a-recession birth/death model. If we disregard the birth/death model, October saw 25,000 MORE job losses (a total of 278,000) than September. Still, the media widely reported LESS losses. Note that the figure of 192,000 lost jobs was arrived at through the Payroll (or Establishment) Survey, while the alternative method reported by the BLS, the Household Survey, indicates that October saw 558,000 newly unemployed. While the Payroll Survey consults more firms than the Household Survey consults households, John Williams insists the latter is a far more scientific method. And it has a much wider range:
"Where the household survey includes farm workers, the self-employed and workers in private homes, the payroll survey does not.".
Welcome to the land of endless RoseyScenarii. Follow the lead of the establishment and all is well! Particularly now that the banking industry has received some (massive) money transfusions.
Here's Sheila Bair:
Everybody lies! The credibility gap itself is the danger. Commerce and markets rely on trust, the pitch that bad news is trivial and short- lived undermines trust. The fact of the endless lies speaks more eloquently to the dangers that each lie intends to assuage.
Our current situation must be faced with ruthless honesty ... and it is not. The non- stop rationalization is the truth will destroy the markets. This is also a lie. The confidence in markets is justified: if only the establishment would show some confidence in them!
Our Potemkin stock market bubbles are lies, pumped up by central bank lending infusions to allow finance to swap its derivatives for cash. What kind of confidence in stocks does this activity generate? The intent is to show an active marketplace pricing a new run of business success, while a quick look behind the facade shows the rats fleeing a sinking ship, grabbing everything that isn't nailed down.
The situation is that we have created for ourselves over the past fifty years a profound mess. Instead of facing future constraints honestly and taking the necessary steps to provide for long- term sustainability, pleasure and equilibrium with nature, the future has been looted. After the emergence of last year's 'crisis of the moment', the looting accelerated blessed by the establishment. The public has supported 'conservatives' who cannot bring themselves to actually conserve. The consequence is the breakdown of the entire system.
Ilargi continues with unemployment quoting John Mauldin:
My favorite slicer and dicer of data, Greg Weldon, offers up an even more horrific number. As I have noted before, if you have not looked for work in the last four weeks, the BLS does not count you as unemployed. Quoting Greg:
"Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual 'change' in the underlying labor market situation ... in which case, October's figure of 817,000 represents the fourth LARGEST yet, behind last month's (September's) second largest figure of 1,021,000
... for a two-month combined figure of 1.838 million , in newly Unemployed, or no longer 'in' the Labor Force ...
When the tally is made the real unemployment rate stands @ the Great Depression- level of 22%. The difference between this figure and the 'official' Bureau of Labor Statistics number is simply wished out of existence.
The effect of this level of unemployment on commerce cannot be so easily wished away.
This fudging is not anything new. Employment has been the resource most likely to be cut for businesses seeking to improve profitability since the 1980's. The end product of mergers and business acquisitions was always the reductions in workforce taking place shortly after nuptials. This was done in the name of 'efficiency'; the jobs were done in, that is. There was the shipping of US jobs overseas to China and the importation of cheap, Mexican labor to perform the tasks unsuited to outsourcing. Nevertheless, the government proclaimed during the entire period that all was well with regards to jobs- creation and labor market sustainability.
Can anyone make the connection to the oil lies revealed by the Guardian and the ongoing employment disaster? It's likely that increases in energy costs have been offset by reducing wage expenses. Cutting workers is an expedient, not a solution. Reductions in force cut businesses' customers at the same time so- called labor productivity is increased. The consequences of this shortsightedness are playing out across the country. Real buying power has been sacrificed for phantom 'productivity'. Without customers with money in their wallets, there is no business!
Better to put greater numbers of workers to useful, remunerative work. A problem is the establishment does not know how to do this. Current management practice is schooled toward firing. It is easy to find managers to lay off thousands, easier to find a plasterer than to engage a manager who can hire and organize multitudes.
The greater obstacle is the comforting lies the establishment tells itself. Why change anything when the scenario is rosy?
The blog- o- sphere's pundits and seers are no less guilty of waffling than their establishment alter- egos.
James Kwak says:
BREAKING-UP TOO BIG TO FAIL INSTITUTIONS. Notwithstanding any other provision of law, beginning 1 year after the date of enactment of this Act, the Secretary of the Treasury shall break up entities included on the Too Big To Fail List, so that their failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout.
When Wall Street’s total value of assets rose to a “mind-boggling 36.6 percent of GDP” in late 2006, The Elliott Wave Financial Forecast published a chart of U.S. financial assets literally rising off the page.
“In the financial context,” say Prechter and Parker, “knowing what you think is not enough; you have to try to guess what everyone else will think.” We do know one thing: When everyone is thinking the same, the opposite will happen.
Why would the primary dealers demand relief from Tier Capital requirements in order to engage in reverse repos with The Fed, when they were recipients of the original "excess reserves" that occurred when the money was printed in the first place?
The answer is simple: those "excess reserves" no longer exist, having been sucked into the vortex of debt deflation.
Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.
Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".
The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.
In other words, adding debt on top of debt renders the whole blatantly unpayable which will cause a catastrophic effect. Add a mini- hurricane in the Gulf of Mexico and inquiring minds are wondering, "When are the bad things going to happen?"
Everyone from Stoneleigh to Nouriel Roubini to David Rosenberg have been promising disaster for a long time! Yet 'it' never takes place! It's always, "eventually", or "at some point", or "as a consequence". What dies is not the economy but the credibility of economic analysts.
There are powerful forces arrayed against collapse.
The world's governments have vastly expanded their borrowing and spending. Banking and finance have together expanded their collective balance sheet to a corresponding - and monumental - scale. Capitalist governments have have inserted themselves into activities long considered outside their reach and have done so to an extraordinary degree. This is 'Key Man Insurance' with an attitude; the US Federal government is not allowing any dominoes to fall. It is bailing out State governments and the economies of other nations. The US has provided balm and subsidy for the domestic auto industry, for home- building, for commercial real estate, for money- center and commercial banking, for securities backing all kinds of mortgages; it subsidizes student lending as well as is vastly increasing its investment in health- care spending - the part of it not already subsidized, that is.
All of this is taking place while the Pentagon is running two large- scale wars far from home and aiming to start another ... or even two or three more ...
There is the disturbing sense that the US government has taken on too many commitments, that the center is losing its grip as its focus is divided. The happy- talk is a mask that disguises a rapidly deteriorating ability of the establishment to shape events or arrive at resolutions.
Nevertheless ... happy talk, prevails. The markets increase - finance soars, there is no breakdown ...
Should this breakdown occur, it will certainly be a 'Black Swan'! Who would've known!?
Right now the S&P is @ 1087; Nymex crude is @ $79.79. Finance's soaring is a way of dividing the pie of financial wealth, dividing the number of claims set against the physical world. This increase means some of the increase will be redeemed while the rest are abandoned. The massive expansion of finance's balance sheet cannot be met by an increase in base money, despite the strenuous efforts of central banks. Increasing base money adds upward pressure against interest rates. As a consequence, a delicate balancing act is taking place. Happy talk and Potemkin Markets have been enlisted to facilitate the endgame that is unwinding right under our noses.
Finance is dividing its wealth because their are no further places for wealth to 'grow' out of. The actions of finance and the markets say this is so, even as the apologists for finance declare the redemtion and resumption of growth. Wealth comes from energy and effort. The oil price indicates that the ability of energy to create industrial wealth has effectively ended. Finance is consequently creating a finance bubble to allow the claims to be laundered into cash - lifeboats for the wealthy.
The question is often raised when or will central banks increase interest rates to reflect inflation concerns.
The better question is when will central banks take action to re- direct the flow of funds away from oil producers and toward financial speculators? The funding at issue is that base money; claims are swapped for it. Markets need to function a certain way for the swaps to take place. At the same time, people pay base- money cash for fuel, they do not swap complex derivatives for it. Cash in circulation is held mostly by ordinary citizens. To redirect the funds, higher nominal rates are required, rather than the deflated- high real interest rates. Higher nominal rates are required to pull funds away from citizens toward institutions where the funds can then be swapped to financiers for otherwise- worthless claims.
Potemkin Finance is vicious circle; as it succeeds in raising markets, it allows the withdrawal of wealth from them.
The next deleveraging leg will begin when real rates prove unaffordable by some highly- leveraged institution. Which institution? One that is unable to converts its claims to cash. One that is too bid to bail; the failures of the past six months have been successfully swept under the rug to support the markets. Under the current regime, neither of Bear- Stearn's mortgage- backed securities hedge funds would have been publicly closed, Bear itself would have survived as a commercial bank and Lehman Brothers would have been bailed out rather than allowed to enter bankruptcy. The current regime has seen a timely array of rescues and papered- over help- downs. Catastrophic effects are averted, one at a time; consider GM/Chrysler, CIT, Fannie/Freddie, the major banks' fraudulent profits, the re- inflation of the REITs. There are no 'runs on the banks' despite ongoing reasons for such.
This theater cannot be sustained for long as the process of swapping claims for cash is self- eliminating. A too- big to bail entity could be Fannie Mae ... or Japan.
What to look for is something different and new. Not a bank run per se but some minor panic that increases the ratio of claims to cash. The event could take place in Eastern Europe or in the UK. It could be an international insurance company failure or another hedge fund rout.
In the background will be oil priced over $80 a barrel. We are at the limit, the clock is ticking. During the Great Depression, the process was the abandonment of the gold standard; the catalyst was the failure of a bank in Austria. Look for something like this happening before the end of the year.
Stocks are trying to break into new bullish territory, fueled by a 'cheaper dollar' and slosh- over from the dollar carry trade.
Nymex crude oil futures are trading a bit over $80 a barrel,
Brent crude futures @ $78.
Talk is about the 'cratering dollar'. Cratering against what? Certainly not against crude oil. So far, the race in price from $70 to $80 a barrel has caused sell offs in stocks and supported the dollar against other currencies. The crude- to- dollar relationship - dollars priced in oil - does not allow for the further devaluation of the dollar.
Dollar strength is made manifest in the stock markets. This is the action of the markets themselves, not a machination of OPEC or central banks/governments. The stock market/ oil market arbs have taken over from the toothless and decrepit 'bond market vigilanties'.
Pay attention to the action in stock markets against oil prices. If $80 oil holds, the result will be a sell- off in stocks. The downdraft in stocks thence demands a reduction in the oil price. This has recently taken place over the past few weeks. It is also a mirror of what happened last summer, at lower stock and oil price levels.
Oil may never reach the +$100 a barrel that so many have glibly predicted. The S&P may never reach 1200.
Stocks represent an interface between the oil- consuming physical economy and credit- inflating finance economy. When a primary input in the physical economy becomes blatantly too expensive, support declines for the finance- driven securities/asset prices.
The physical economy cannot rationalize high(er) securities prices against very high input costs. This is the long- term effect of peak oil, something that took place ten years ago in money terms.
The peak of cheap oil took place in 1998. Cheap oil is needed by the physical economy; this economy is built around consuming/wasting cheap oil. Expensive oil is good for oil traders and oil producers, only.
An outcome of the process taking place right now can only be increasing awareness of the dollar as a hard currency. Instead of being backed by gold, it is de- facto backed by oil. As a hard currency, the dollar is almost impossible to short against unbacked fiat currencies or other evanescent speculations, particularly in a near- zero interest rate environment.
One reason oil producing countries are trying to diversify away from the dollar is not its weakness but its new relative strength. Oil producers have to understand that dollars may become scarce with oil prices declining as a result. This would be a consequence of declining demand, not pleasant for the producers.
The stock/oil paradigm is turning Ben Bernanke's inflation strategy inside out. A hard dollar has severe implications worldwide: the dollar short- carry trade which has 'stimulated' the past few month's world- wide economic rebound is in jeopardy. The oil market is telling the other markets the dollar is worth more than the Federal Reserve and Wall Street suggest. People will ignore the markets for awhile as 'noise' but as the correlation between stocks and oil prices becomes more obvious, it will get traders attention.
When speculators come to the same conclusion I have here, the dollar shorts will start to unwind their positions and the dollar carry trade will come to an end. Since almost all speculators are on the 'dollar short' side of the trade, the first to close their positions will pocket a nice profit.
The rest will be guillotined. There will be a massive dollar short squeeze. There simply aren't enough cash dollars in circulation to support the scaffolding of dollar speculation built on top of the small money base.
I believe the next deleveraging leg is beginning right now. $80 oil is the new $147.
George Washington has a few good points for all to keep in mind during this Autumn of Distraction. These could be considered economic or marketplace fundamentals:
Economist Blake LeBaron has discovered an important cause of stock market crashes:
During the run-up to a crash, population diversity falls. Agents begin using very similar trading strategies as their common good performance is reinforced. This makes the population very brittle...
In other words, when everyone is making the same trade, it will likely lead to a crash.
Tyler Durden summarizes this idea even more succinctly:
When everyone is on the same side of the boat, it always inevitably capsizes.
If we had a deflationary consensus at the moment I would distrust it, as the herd is always on the wrong side of the bet at major inflection points. Consensus takes time to establish, meaning that the more established it is, the later one is in the trend and the nearer to a trend reversal.
At the present time we have an incorrect inflationary consensus, which is causing people to dump cash in favour of hard assets and disregard the consequences of indebtedness at a critical juncture. Deflation is NOT a hoax. It is a very real threat that very few recognize. Timely warnings are by definition contrarian, and therefore never sound credible at the point where they would actually be useful.
The consensus is that the dollar will collapse, the Chinese yuan is undervalued, that the economy is recovering, and that our crisis is founded in credit rather than energy. This consensus is wrong. At some point the various consensi will unwind and realizations will be unpleasant.
Outcomes include a massive short- squeeze on the dollar, hyperinflation in China, a 'double- dip' recession, and stock markets hitting the ceiling @ $80 - 85 oil price level.
Should the stock markets repeatedly stall at this price level, the establishment strategy of dollar devaluation will be at its end and so will the stock market rally.
That is, if some other 'event' does not cause the next leg of deleveraging to take place first.
Nouriel Roubini's rather simple - and fundamental - analysis was also brought to my attention by GW.
Ultimately, deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem (Dr. Roubini). Important case study: Japan back into deflationary territory despite huge public debt and QE (Chinn). Rather than a sign of inflation, higher long-term yields may be pointing to higher real interest rates which are compatible with a deflationary environment ...
As deflation takes hold, real interest rates rise. Not only does the rate reflect the increase in real, or principal indebtedness but also the increasing repayment or funding risk. In other words, as real rates rise, the increase creates a positive feedback loop that renders borrowers less able to repay. This risk increases exponentially to the increase in real rates.
An example of this is underwater homeowners walking away from their mortgages.
This is why it is so important right now to get out of debt by any means necessary. The debts are already compounding. At some point repayment will become impossible, rather than merely difficult.
The forces of deflation are intensifying. Prices - and the collateral values - of goods are declining. The consequence is the credit that can be supported by collateral values shrinks alongside the declining prices.
Americans alive today have little experience with anything other than inflation and 'growth'. Deflation takes some getting used to.
In an inflationary environment, finance creates - lends into existence - increasing amounts of liquidity, which is used to purchase assets, goods and services. The increase in the amount of liquidity presses asset prices higher; at the same time, the low 'rental' cost of liquidity allows the 'real' or relative cost of goods to remain low enough to expand business profits. Increasing asset values provide collateral to increase liquidity; the number of those with access to liquidity increases. In this 'best of all worlds', the incentive of higher real profits encourages the production of more goods and services, while the low cost of finance makes these same goods accessible to more and more 'liquid' customers. The entire process is a 'virtuous cycle', where assets generate liquidity which finances more goods and services ... and more jobs and more customers with access to liquidity to buy even more goods.
In deflation, the virtuous cycle is short- circuited. Finance creates liquidity, but it isn't used to purchase more goods and services. it is used to backstop the existing claims that the liquidity represents (or fund carry trades). Asset inflation cycles are consequently short- lived. Liquidity users increasingly lack the means to repay finance's lending so less borrowing takes place. At the same time, the lenders themselves are constrained; the rental rate for liquidity becomes too high. The price of products falls relative to the cost to finance their purchase. The higher relative price of liquidity renders it scarce; there are many goods and services available, but liquidity to allow its purchase is not. Over time, the availability of the goods declines, as there are too few purchasers to keep production affordable. A new and more devastating cycle of decline emerges. Goods become relatively too expensive to produce or market and the industries that provide these goods and services eventually fail.
The question of whether the US and other countries are suffering from an asset or finance- driven deflation or and energy deflation is not answered by mainstream economists. One reason is because the 'symptoms' of deflation manifested themselves most fully and dramatically in finance. The 'Lairds of Finance' have the greatest claim on the public attention and on government. There was the noticeable decline of asset values, particularly in real estate along with the collapse of hedge funds investing in mortgage securities leading to the Lehman Brothers failure last year, followed by the failures of other finance legends and tycoons.
That the deflation is onrushing is impossible to deny; the credit multipliers have declined sharply:
This means less liquidity within the US economy is being created at the 'money supply' level. *
Less liquidity results in less purchases and the continuing decline in asset values. This decline is also self- reinforcing; spurned assets add to asset supply at the same time potential purchasers are removed from the marketplace.
This one is from Michael Becker, a mortgage consultant in Maryland. Michael writes ...
Hello Mish,
I wanted to let you know that I deeply appreciate your post on strategic defaults. I get people calling me all of the time looking to refinance and when I find out how underwater they are I tell them it might be wise to walk away from the property.
I also tell them the consequences of walking away. Like the article said, a foreclosure will stay on your credit report for 10 years. However, if you walk away it will only be 3 years before you can buy a home again. (It used to be 2 years but Fannie, Freddie, and the FHA made it longer to discourage people from walking away.)
I tell them if they choose to walk away they need to make sure they have a decent car, and at least one credit card. The reason for the car is that it may be hard to get a decent rate on a car loan for a while if they have a recent foreclosure, and the credit card is needed to help you re-establish your credit after the foreclosure. One of the biggest mistakes people make after a bankruptcy or foreclosure is not re-establishing their credit.
While finance difficulties are centered around banking/lending and credit creation and accompanying market disruptions, energy difficulties are focused on ground level production and wages. It is therefore unsurprising that little attention has been paid to the effects of energy price increases on the lower levels of the economy.
Noteworthy is the general decline in US wages over the past 20 years. This is considered an outgrowth of increased offshoring of domestic jobs, particularly in manufacturing, as well as the importation of millions of low- wage immigrants for jobs that cannot be easily transferred overseas. This consideration takes the 'wrong end of the telescope' view; there is a compelling competitive reason to ship jobs across US borders. The fact of the transfer is important but more so is the reason for it.
The outcome of offshoring has been the loss of domestic purchasing power. Good jobs lost are good customers also lost. Low- wage immigrants cannot afford to buy expensive products such as houses, regardless of financing - loans that cannot be repaid.
It is reasonable that the deflation began with the increase in energy prices beginning in 2003, while the energy dependence of the US on imports has been in the background of the domestic economy since 1970. Likewise, dependence upon imported energy has been in the background of the entire OECD since that time:
Over the last two decades, the US economy experienced a boom in offshoring and a doubling of imports of manufactured goods from low-wage countries. Over this same period, roughly 6 million jobs were lost in manufacturing and income inequality increased sharply.
These parallel developments led many critics of globalisation to conclude that “good” manufacturing jobs were being shipped overseas at the expense of the domestic labour force, putting downward pressure on wages of American workers. Concern over these developments led the US Congress to pass the American Jobs Creation Act of 2004. Yet whether these changes in the US labour market are a result of rising import competition or relocation by multinationals to other countries (known as “offshoring”) is not clear.
Table 1 shows that some occupations experienced enormous increases in exposure to international trade during the sample period. These included shoe machine operators, for whom occupation-specific import penetration increased from 37% in 1983 to 77% in 2002. Table 2 shows those occupations where export activity increased the most. However, many individuals were in occupations where there was no exposure at all. These occupations included teachers, therapists, sales workers, judges, dancers, and many others.
Table 1. Exposure to international trade across selected occupations
1983
2002
Tool and die makers
0.097
0.189
Patternmakers, lay-out workers, and cutters
0.092
0.19
Miscellaneous textile machine operators
0.071
0.192
Miscellaneous precision woodworkers
0.061
0.195
Lathe and turning machine set-up operators
0.109
0.197
Precision assemblers, metal
0.084
0.201
Assemblers
0.1
0.203
Tool and die maker apprentices
0.104
0.204
Knitting, looping, taping, and weaving machine operators
0.046
0.205
Production testers
0.072
0.206
Numerical control machine operators
0.103
0.207
Solderers and brazers
0.094
0.218
Electrical and electronic equipment assemblers
0.09
0.219
Textile cutting machine operators
0.085
0.226
Textile sewing machine operators
0.136
0.304
Shoe repairers
0.182
0.379
Shoe machine operators
0.372
0.774
Table 2. Sectors with large increases in export shares
1983
2002
Assemblers
0.091
0.171
Miscellaneous textile machine operators
0.033
0.171
Winding and twisting machine operators
0.037
0.174
Metal plating machine operators
0.084
0.176
Patternmakers and model makers, metal
0.107
0.177
Lathe and turning machine set-up operators
0.089
0.178
Drilling and boring machine operators
0.112
0.184
Tool programmers, numerical control
0.116
0.185
Lathe and turning machine operators
0.112
0.188
Miscellaneous precision workers
0.118
0.191
Tool and die makers
0.097
0.191
Mechanical engineering technicians
0.126
0.193
Production testers
0.108
0.2
Aerospace Engineers
0.18
0.219
Milling and planing machine operators
0.132
0.219
Precision assemblers, metal
0.152
0.223
Knitting, looping, taping, and weaving machine operators
0.027
0.224
Solderers and brazers
0.105
0.225
Numerical control machine operators
0.116
0.23
Tool and die maker apprentices
0.113
0.232
Electrical and electronic equipment assemblers
0.113
0.241
Shoe machine operators
0.023
0.261
What we find is that a one percentage point increase in occupation-specific import competition is associated with a 0.25 percentage point decline in real wages. (Emphasis mine) While some occupations have experienced no increase in import competition (such as teachers), import competition in some occupations (such as shoe manufacturing) have increased by as much as 40 percentage points. The contrasting experiences of workers in textiles and apparel-related sectors compared to many service sector employees such as teachers helps to explain why some parts of the US economy have been deeply affected by globalisation while others have not.
Jobs that have seen the greatest exposure to overseas competition are also heavily energy- intensive. The list of jobs charted by Ebenstein, Harrison Et Al are the tasks of industry: Tool and die makers, patternmakers, lay-out workers, and cutters, textile machine operators, precision woodworkers and lathe and turning machine set-up operators, among others. The rising cost of petroleum has had the effect of making energy- intensive operations more expensive in real terms. In a broad view, product sales can support high wages and cheap fuel inputs but cannot support high wages and expensive fuel - something has to give! This is where other business inputs remain at stable levels.
The energy costs to business have driven jobs overseas. Only the demand destruction accompanying last summer's $145 oil temporarily suspended the shift.
Real energy costs tend to fall in low wage countries relative to high- wage countries; there is small relative 'leisure' demand for fuel along with less energy- intensive transport and manufacturing in these countries. The result is less price competition for fuel. China aims to lock in lower prices by purchasing production at the wellhead. Lower wages constraining demand against increased relative supply depresses real energy costs further.
Removing well- head production from world markets adds to oil price pressure in the US and elsewhere. Higher wage countries have higher and increasing real energy costs; US inflation and 'growth' is now counterproductive. Regardless of wage cuts and unemployment, real US wages are still higher than in low- wage countries and the difference propels real energy costs upward.
Since the structural advantage of low wages remains, there is an accelerating wage race to the bottom. The advantage remains until trade vanishes, at which point any benefits of trade are lost and deflation intensifies further.
Businesses exported manufacturing jobs beginning in the early 1980's to preserve brand or nameplate profits. The 'value added' of retail was intended to supersede the value added in the manufacturing processes. The dependence of industry falls upon cheap energy and labor. The dependence on retail is upon financing and credit. From a manufacturing economy that celebrated high manufacturing wages and low real energy costs, the US descended into a middleman economy with relentlessly increasing real energy costs amplified by finance driven over- consumption.
It is the transition from manufacturing to service in the US that identifies the source of deflation rather than failures in finance. By this metric, the ground for the current deflation was prepared in the early 1980's during the energy crisis of that period.
Energy costs are the propellant of the current deflation. With cheap energy - $30 or less per barrel - there would still be credit expansion. There would still be sufficient domestic demand - from high real wage income to pay for goods. Cheap energy allowing the high wages would support sales. At the same time, the burden upon finance would be small as customers would pay the low rent on liquidity out of wages ... rather than 'rolling over' or financing service costs. Finance would thence remain solvent, liquidity would be sufficient at low real cost to finance both business investments as well as additional purchases which would drive further lending in the virtuous cycle.
Escape from this conundrum by conventional means requires competition with low real- wage and energy consuming countries. Most of the high- technology industries in the US use proportionately much larger amounts of energy for units of output than do to low- wage countries. Even the removal of wasteful leisure consumption of energy leaves high- wage countries consuming too much where it counts the most.
The implications of this are severe and sobering. US energy costs make wage labor uncompetitive at just about any wage level, even against at what is posted as 'Chinese minimum wages'. This reduction is self- limiting: wage levels eventually fall too low to support the industries themselves. This is already the case in low- wage countries, which is why these countries rely on exports rather than internal consumption. US over- consumption has left the country with unsupportable wages on one hand and unsupportable industry on the other.
The US would have to somehow reduce energy consumption ... to press world consumption and prices - not simply US (OECD) consumption - lower. The effect of energy price 'spikes' is noticeable; there is a consequent plummet as demand is destroyed. It is clear that high and increasing energy prices are strongly deflationary.
Depletion does not give long- term relief to low wage countries. These will face greater difficulties supporting their increasingly higher real- cost industries as oil - and coal - depletion intensifies and real energy prices continue their relentless rise.
* The expansion of derivatives - currency, interest rate and other swaps - does generate liquidity but is not part of domestic money supply.
What will Obama's big gamble be? He's running out of time and space to keep the onrush of collapse at bay. He - and the economy - requires resources to backstop the hollowed out finance economy. The President needs to start taking desperate chances; will his be an invasion of Iran?
Not an air raid, an all- out invasion with intent to conquest?
There was some speculation brewing over the potential pan-Arabist unification if Israel attacks Iran, and that the potential Arab block could easily halt any global recovery via implementation of oil exporting embargo, as was done in the 1970s by King Faisal ibn-Saud during the Arab-Israeli conflict. But there is no support for such a claim, quite the opposite is true. Today the Saudi Hajj minister Fouad al-Farsi told Iranian officials not to politicise, or in any other way, disrupt the Hajj. Here is the article in which this is mentioned:
JEDDAH - Saudi Hajj Minister Fouad al-Farsi told Iran not to politicise the hajj after Tehran leaders said Iranians could experience mistreatment during the annual pilgrimage, a report said Wednesday.
Iran "should not take advantage of the pilgrimage for political purposes and its own agenda," Farsi was quoted as saying in the Al-Watan newspaper report.
Iranian President Mahmud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei recently warned that Saudi Arabia, a predominantly Sunni Muslim country, might abuse the mainly Shiite Muslim pilgrims from Iran during the hajj, which begins in November.
"If they impose restrictions on Iranian pilgrims... the Islamic Republic will take the appropriate measures," Ahmadinejad said Monday in a meeting with hajj officials, according to the official website for the Iranian presidency.
On Monday Khameini also raised the issue of alleged "insults and mistreatment against some Shiite Muslims," saying "the Saudi government must take action against such acts."
Iranian President Mahmud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei recently warned that Saudi Arabia, a predominantly Sunni Muslim country, might abuse the mainly Shiite Muslim pilgrims from Iran during the hajj, which begins in November.
"If they impose restrictions on Iranian pilgrims... the Islamic Republic will take the appropriate measures," Ahmadinejad said Monday in a meeting with hajj officials, according to the official website for the Iranian presidency.
On Monday Khameini also raised the issue of alleged "insults and mistreatment against some Shiite Muslims," saying "the Saudi government must take action against such acts."
The saber rattling between Iran and Saudia is meaningful, the idea is the Saudis will supply any shortfalls that would emerge from combat activities ... from their incredible 'spare capacity'. The Saudis are caught between their ongoing and long running lies about their reserves on one hand and their perceived need to become hegemons in the Gulf on the other.
INTELLIGENCE chief Sir John Scarlett has been told that Saudi Arabia is ready to allow Israel to bomb Iran’s new nuclear site.
The head of MI6 discussed the issue in London with Mossad chief Meir Dagan and Saudi officials after British intelligence officers helped to uncover the plant, in the side of a mountain near the ancient city of Qom.
The site is seen as a major threat by Tel Aviv and Riyadh. Details of the talks emerged after John Bolton, America’s former UN ambassador, told a meeting of intelligence analysts that “Riyadh certainly approves” of Israel’s use of Saudi airspace.
This is more than sufficient resources for an invasion of Iran and occupation. Forget Goldman- Sachs, this would be the biggest theft in history. Iraq/Iran and ??? Would an invasion 'wash' with the US public?
With the US thirsty for more and more oil the answer isn't hard to determine.
I suspect there are more US/Allied troops in theater than during the height of the Vietnam war in 1969. It's the 'secret buildup' that doesn't hit the media. 'Taking' Iran and Iraq's oil would both stifle the Chinese ambitions in the area, guarantee some 'notion' of fuel security and shift the 'white shoe' balance of power from the Shiites- driven militant factions toward the Sunnis and Saudi Arabia.
The US and Europe would deplete the two countries in ten years or less and that would leave Saudia as the world's swing producer.
The 'attack' or raid or whatever it's called would require gas rationing in the US, but the curve of depletion will require rationing in a few years, anyway.
According to Jeffrey Brown, the largest producers are not only past their peak in production but face increasing domestic consumption. This 'Net Export' condition would lead to shortages in consuming countries before 2013 regardless of declines in demand in these same countries.
More support for the financial/house- price bubble, what can it all mean? Why not let real estate seek a price level that is supported by the purchasers' incomes?
The answer of course is that doing so would not make the homeowners 'wealthy'. Increased housing asset worth would be collateral enabling purchases of more 'stuff'. These purchases would be good for retailers, banks, shippers and China.
Wealth is a evanescent 'good' offset against increased petroleum prices. That increase is the hard nut that society is having greater and greater difficulties getting around. That oil costs more overall production both in absolute energy terms as well as in the efforts and imagination required to utilize the platform. Increasing oil price narrows the arena within which production itself takes place. At some point oil becomes too expensive to use for 'the general welfare' (entertainment/waste). It becomes an asset, like gold.
The criterion of “profit” has shaped our political decisions since the founding of our country, but now that we are facing peak oil, new “scientific systems” criteria must replace “profit” or our civilization will “collapse” [2] like so many others have throughout history.
In order for America to survive this crisis, a moderate, “doable” modification to our political environment is required. This paper does not attempt to describe a complete system to replace state-sponsored capitalism and market politics. My modest goal here is to show a way forward which could avoid the worst.
THE BAD NEWS
(Figure adapted from The Net Hubbert Curve)
Our present “business-as-usual” model, which requires endless economic growth and endless job creation, is no longer physically possible. Here’s why:
1. Business-as-usual depends upon jobs and markets to distribute goods and services. 2. Economic growth and increasing job availability require increasing net energy. 3. Net energy correlates with peak oil and both are expected to decrease for decades. See the “Net Hubbert Curve” in David Murphy’s graph above and read this footnote: [3] 4. Decades of decreasing net energy will cause job opportunities to decrease for decades because less and less energy will be available for economic development. 5. Globally, millions of new workers enter the job market each year, but job availability is expected to decline by millions of positions each year. Eventually, the projected high unemployment among young men will cause catastrophic political failures similar to those that led to Hitler’s takeover of German democracy. Therefore, business-as-usual is no longer a viable method of distributing goods and services and a new method must be found—and soon!
Historians will say that “peak oil” marked the end of the second free trade episode. If we don’t abandon capitalism now, we will be forced into another global war over resources ...
Very interesting subject: How to reorder society so it works better, so simple yet so ... unachievable. Those pesky humans never do the right thing! There is a balance of useful and not here, the best being the acknowledgment of how much waste is embedded in the petroleum production/use platform. With oil, the distance between worthless (in the ground) and worthless (in the atmosphere) is very short. Why not waste it?
The “bad news” is that “peak oil” marks the beginning of the end of capitalism and market politics because many decades of declining “net energy” [1] will result in many decades of declining economic activity. And since capitalism can’t run backwards, a new method of distributing goods and services must be found. The “good news” is that our “market system” is fantastically inefficient! Americans could be wasting something like two billion tonnes of oil equivalent per year!!
... and ...
Just how much energy did the American “market system” actually consume? In 2006, Americans consumed an average of 231,008 calories per day, so 231,008 minus 36,000 equals 195,008 calories wasted each day. This simple calculation suggests that Americans could be wasting something like 2 billion tonnes of oil equivalent per year! [5]That’s FAR more oil wasted than all the oil produced in the Middle East!
If we change a few of our founding beliefs and assumptions—and reorganize politically—more than enough energy remains to mitigate the worst.
Mr. Hanson confuses financialism with capitalism. Capitalism is the ongoing refinement of trade and management of surpluses. Granted, when surpluses disappear, there is nothing for capitalism to manage but that won't keep it from loitering around and refining trade while it waits for something to turn up.
Financialism, however, is a dying man's grasp at substituting credit for energy and the outcome is a foregone conclusion. It is money making money and little else, there is no product, only claims, people take them seriously because they have claims of their own and on account of tradition. So what? Times change, the old financial claimants are as relevant to our onrushing future as are the Hapsburgs.
All the debt/indentures/leases/debentures/derivatives ... etc. are falling valueless, like Confederate dollars. This is the great struggle of the banks with their ruined balance sheets. Right now, finance - and this includes that overseas failure- in- the- making China - is rushing around the world making new claims ... waving their money, acting as if their claims made from a vast distance will have meaning for anytime longer than it takes for the ink to dry on the pages of the Wall Street Journal! This is the very same thing as the Americans have done, and what the British did before them, and the Spanish and the Portuguese and Dutch before them. The Romans arrived in Gaul and Britain and Asia Minor with legions, they left farmers, baths and theaters in their wake, the money crowd leaves behind bankruptcy and tax exiles.
As for exploiting waste, if one system could not enable this, another would. Waste is the purpose of energy! Energy is priced as something almost without worth even now; bits of cash- value are added at each level of use; lower prices leave more aggregate returns to the oil investment. Oil without the users/wasters all in a chain is valueless black goo. 'Users' translates into autos, ships, planes and tractors ... plus all the other stuff created out of the natural world as an habitat for these machines. Oil has to be cheap so that the accumulated residuals across all the different uses can pay for the entire habitat as well as for the energy required to run it.
Our present method of distributing goods and services works something like this:
• Our government loans money to banks, so bankers can operate businesses (which require buildings, computers, furniture, lights, air conditioning, employees, commuting, etc.)
• The bankers then lend money to other businesses, like restaurants, real estate developers, etc. (which also require buildings, computers, commuters, advertising, accountants, etc.)
• So the employees of these restaurants, real estate developers, etc. can buy a car and drive to the store (with even more buildings, computers, commuters, etc.)
• Just to buy a loaf of bread!
This is an example of the decline in energy productivity. Productivity is a relationship; output/man- hours, for example. Here it is output/btu. Less btus means higher energy productivity, just like less man- hours means higher labor productivity.
Machines powered by petroleum energy have been substituted for human labor powered by food energy. There is a tug- of- war: substituting more machines for people increases labor productivity while shrinking energy productivity. This shrinking energy productivity is the heart of our current crisis. In other words, what Jon Hanson proposes as a solution, the dis- employment of the workforce, has already been taking place and is destroying the world's economies, both of them; physical and financial.
Finance exists as a hedge against falling energy productivity. Finance costs nothing to produce, unlike goods in the energy economy. Nevertheless, the accumulating debts must be serviced. We've been in trouble for a long while; no customers means no business. This in turn means, no debt service. I don't know how others interpret what has been happening over the past ten or fifteen years but it would appear that finance has been attempting to service itself - its own debts, that is. The result has been a colossal bubble in assets. The instability has led to a Minsky Moment. followed by a collapse of commerce.
Labor working at good wages is necessary so that there are customers for business and capital for 'adjustments'. Here, business is at odds with itself! It fires its customers with one hand while booking the increased labor productivity as profit with the other! This cannot last; there must be some top- line earning growth or the business fails. The 'solution' has been for businesses to borrow ever more from finance to 'tide themselves over' until something magical brings back the customers that have been laid off by the one hand!
Since the only way to provide for those without work is to extend some form of 'dole' or welfare, the next step is for the dole- provider to borrow the money from finance, since finance is the only entity that can magically create the required 'funds'. The government cannot 'make' its own dole funds out of thin air; it's trying to do that now and people who know better are laughing at it. Finance is a form of fraud, lending to itself is something that no respectable government could do and remain credible.
The modification that I am proposing could reduce natural resource consumption by something like 90% and greatly reduce, or possibly eliminate, civil violence caused by the inevitable post-peak-oil-economic collapse.
Since government is a debtor to finance, it can only act on its own when the claims against it dissolve. Since waste is the desired end product of our physical economy, eliminating waste would mean not the economy's reform but its annihilation. Government here can 'depower' itself, but that would concede to the individuals - or more localized civic units - authority it is loathe to surrender. Authority that is accumulating by the unwinding of the economies, btw.
To recap: putting labor 'on the dole' is already taking place; an outcome is the destruction of commerce. The decline in commerce is centralizing authority. According to Mr. Hanson's model, we are already 'there'. Nevertheless, resource consumption is inexorably increasing, there is no sign of any meaningful reduction in it.
With modern technology, probably less than 5% of the population could produce all the goods we really “need.” A certain number of qualified “producers” could be selected by a peer group to produce for five years. The rest can stay home and sleep, sing, dance, paint, read, write, pray, play, do minor repairs, work in the garden, and practice birth control.
Try selling that to a farmer! He would never be able to leave the 5% category. A better idea is to turn away from mass- production and automation and return to a craft regime. More hands, more employment, increasing skill base, better and more diverse education, better health - no autos or factory farms - and more business. More human inputs substituted for energy in the workshop would leave energy and other inputs in the ground. More hands might give the populace something useful and pleasant for them to experience besides more highway interchanges. The idea is to increase energy productivity and decrease labor productivity. Eliminate income tax, increase gasoline tax.
High energy gain natural resources allowed us to get so far and then as they declined, (to perhaps sub <20:1?)>
Finance brought more consumption forward, not nearly enough resources. This has been another aspect of the 'economic paradigm' of which the current crisis is a part. This is the paradox of cheap crude in the 1990's but not nearly cheap enough. It was certainly not as cheap in real terms within most of the developing world in 1998 as it was in the hey- day of American industrial growth thirty years earlier. Bringing demand forward accelerated the long increase in fuel prices beginning in 2000; and embedded that demand in previously undeveloped nations; a perfect example of unintended circumstances.
I believe that partnership frameworks will lead to existing financial intermediaries and rentiers being dis-intermediated ('Napsterised'). They will either become service providers, or go out of business.
Energy consuming nations, for their part, would gradually raise carbon fuel prices through a carbon levy, to maybe $10 per gallon of gasoline or equivalent, and they too would compensate consumers with units redeemable in energy. Part of the levy would fund a Carbon Pool, which would be used to invest directly - through interest-free "energy loans" - in renewable energy (megawatts), and in energy savings (megawatts). Such a Carbon Pool would soon be the source of an energy dividend to all.
Why not require the consumer @ $10 per gallon to invest in that production as a pre- requisite? Then price to maintain availability over time rather than squander at once. This would not require government action, but a change in price schedule by a producer! Exxon could do this on their own. or a national producer such as Mexico. They could demand $50,000 investments from consumers with the promise of oil over fifty (or a hundred) years. (Fractional shares could be sold along with fractional consumption rights.) Production would be priced to guarantee that outcome. If one producer did this, the others would have to follow, otherwise they would deplete themselves out of business. Here, the 'commons tragedy' is turned upside down. Just like fishermen with bigger boats deplete a fishery, investors with 'bigger stakes' and the means to enforce them drive out those who have no incentive to conserve; the 'consumer- investors' in oil production priced in this manner would 'get rich' by conserving rather than by consuming.
At this time, pricing energy for some other use but waste is risky for the producer, but what choice does he have? Energy only has value when it is destroyed... there is little other use for it but waste. This knowledge is what is driving the anxiety of Saudi sheikhs. Oil that is expensive enough to insure a level of production has a small/shrinking customer base because of the disconnect between investment (in production) and end use. Simply pricing oil to what the market would bear would indeed make crude gold- like ... and useless as gold is now as a currency. Like gold it would not circulate and unlike gold, one could never take possession of enough of it to become 'rich' the cost of managing such a valuable surplus would be far more costly than what the 'black gold' would be worth. The sheikhs would be stuck with their valuable/worthless oil and the rest of the world would lament the loss of ... convenience.
Unbelievable, all the world sacrificed for convenience. Convenience and higher real estate prices.
Oil is “too cheap” and should rise to $88 a barrel in coming months after the dollar’s decline against the euro, a DekaBank study suggests.
The CHART OF THE DAY shows how oil prices, in yellow, have moved in relation to the euro-dollar exchange rate, in blue. DekaBank says that at an exchange rate of $1.50, oil should cost $88 a barrel. The euro rose to $1.50 yesterday, a 14-month high, while oil cost $80 per barrel, the most in 12 months.
“Oil is too cheap at the moment,” said Christian Melzer, a Frankfurt-based foreign exchange analyst at DekaBank, which manages more than $240 billion in assets. The study shows that over the last 10 years “oil prices have adjusted to changes in the euro-dollar exchange rate,” he said.
The euro has gained 20 percent against the dollar since mid-February. In the same period, the oil price has surged 125 percent.
Trying to figure out what will happen next is difficult. One way to start is to look at finance and consider it as separate from the physical economy that is driven by oil. The oil market is where finance and the physical intersect.
Since finance creates its own liquidity by lending it into existence, there is no shortage of funds available right now to propel oil prices much higher. It matters little that the finance economy is creating more dollars than euros, they are all more or less the same thing. The cross- currency trade simply adds instability. The outcome of the three or more bodies interacting is likely to be more volatility.
The most interesting question is when will finance make the quantum move from passing interest rate derivatives back and forth to buying into the oil market with desperate fury? This could be addressed through a regression, but the question is really one of minds and opinion.
This is the NYMEX monthly chart and not quite up to date.
Will speculators believe that oil will be one of the few safe places to 'cash out' and is now the time for that belief to take hold? Open interest is very high, much more so than any year other than the past two. There are many speculators, already.
Or, the banking interests might feel the dollar/oil relationship would allow them to force a dollar devaluation that would not be available in any other dollar/currency or even any dollar/commodity trade. This would imply a vast misunderstanding of how oil has effected the current economic unwinding so far and what the outcome of this devaluation would be.
Since it is the least understood, it is probably what will be attempted. Welcome to the ironic universe! Where the outcome that causes the greatest harm to the greatest number is the most likely.
The American - and world - commercial/industrial enterprise has taken root and flowered with oil under $35 a barrel in both real and nominal price.
Petroleum does not exist outside of all that has been created to support its use. Oil is not simply an input, it is a platform. Whatever you see about you - sprawl, highways, parking; the wells, tankers, refineries and pipelines, the shopping, the incessant and pointless travel, the infrastructure and the means of its use - represents the sunk system or platform costs of petroleum. Each small rise in the cost of oil strands more of the platform, rendering claims against it other than the ongoing oil cost more difficult to pay. Oil @ $80 a barrel does not simply represent an upfront claim on GDP, it amplifies all the other claims against that part of GDP that enables petroleum use. At a certain price level - over $35 a barrel - some of the competing claims begin to be crowded out.
In the US one of these claims has been (expensive) labor. Labor has been the source of 'hard' capital- at yield and customers for goods. Removing expensive labor has been a large contributor to our current calamity. Yet, the sum- cost of petroleum has made the expensive labor unprofitable for businesses to employ.
So, it's off to China with you, Mr Expensive Labor Man, where wage slaves along with a smaller petro- platform 'subsidise' American business profits ... at least they did for a little while.
I have mentioned a number of times in the past that the economic system we grew up in is finished. It's not the sort of thing that I have necessarily wanted to harp on too much and too often, because I realize that most people simply won't understand what I mean. But I think today might be a good time to re-visit the topic. If only because my statement is starting to find more proponents.
The fiesta is over, the economy as we knew it is dead.
And adds this, as funny as it is true:
[Obama's] economic team of free market billionaires and financial hotwires includes most of those who helped Bill Clinton sell the theory that Americans didn't need jobs. Actual labor, if you will remember, was for Asian sweatshops and Latin maquiladoras.
We, as a nation one third of whose population is functionally illiterate, were going to transmute ourselves into an information and transactional economy.
Ain't gonna sweat no mo' no mo' -- just drink wine and sing about Jesus all day.
As well as:
The sharks are still running the only game in town and they have never had it better. To be sure, with the economic collapse some of the financial lords won't pile quite up as many millions this year. Others will however have a record year. All are still squatting in the tall cotton.
America has lost its soul and collapse is inevitable.
Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created.
"Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people. Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies.
The [monetary] system will not be revived. We have to devise a new system
But Ron Paul makes some twisted turns in his reasoning. Which, through no intent of his own, point to where the real problems lie. Paul claims that if no banks or other corporations were bailed out last year, "we could get back on our feet again" by now.
"Yes, there would have been a lot of bankruptcies, but it would all be over now; we’d be going back to work again".
And that is very far from the truth.
(As an aside, I was thinking earlier that the government's implicit permission for Wells Fargo to present crooked and/or incomplete data is a subject that should be be put before the Supreme Court. Does the US government, from a legal point of view, have the right to endanger the financial welfare of its citizens by letting corporations omit data from their financial statements? I remembered that because I think Ron Paul's Audit the Fed initiative badly needs to go the same route: Ask the Supreme Court if Congress has the legal status to audit the Fed, and until you have the answer, stop talking about it.)
Back to where Paul misses the truth about the end of the economic system. Sure, not baling out the broke banks would have been a start. It would, however, not have solved the problem, not even close. The libertarian class, of which Paul poses as a great defender, and to which Mike Shedlock is a proud subscriber, claims that the issue is not capitalism or the free market. (After all, these are their deities.) For them the trouble all starts -and ends- with government and its rules and regulations.
But that's precisely where the issue gets all mixed up. For one, the bail-outs are not the beginning of the sorrowful saga. And we don’t need to, though we could, return to the 1913 establishing of the Fed, or the 1933-1971 steps that took the US away from gold. There is enough in the last ten years to make a solid point.
Allowing investment banks and securities firms access to taxpayer deposits, ref: the 1999 Glass-Steagall repeal (Gramm-Leach-Bliley Act), and liberating the derivatives trade, ref: the 2000 Commodity Futures Modernization Act, are the two pieces of law that directly led to a situation in which banks were allowed both to 1) become as big as they are now (too big to fail) and 2) to leverage their bets as much as they have (which wiped out their capital).
And you don't really have to be all that smart to realize that both acts are de-regulatory, and made the markets more, not less, free. Now look around you and tell me what you see 10 years later. Not what the likes of Shedlock and Ron Paul envisioned, I’ll bet.
Ilargi doesn't even get to James Galbraith. Here's (quoted) Joe Bageant:
When Barack Obama took office it seemed to some of us that his first job was to get the national silverware out of the pawn shop. Or at least maintain the world's confidence that it was possible for us to get out of debt. America is dead broke, the easy credit, phantom "growth" economy has been exposed for what it was. A credit scam. Even Hillary Clinton and Obama's best efforts have not coaxed much more dough out of foreign friends. But at least we again have a few friends abroad.
So now we must jackleg ourselves back into something resembling a productive activity. No matter how you cut it, things will not be as much fun as shopping and speculative "investing" were.
The fiesta is over, the economy as we knew it is dead. The national money shamans have danced around the carcass of our dead horse economy, chanted the recovery chant and burned fiat currency like Indian sage, enshrouding the carcass in the sacred smoke of burning cash. And indeed, they have managed to prop up the carcass to appear life-like from a distance, if you squint through the smoke just right. But it still stinks here from the inside. Clearly at some point we must find a new horse to ride, and sure as god made little green apples one is broaching the horizon. And it looks exactly like the old horse.
Here's Gail Tverberg talking about collapse, that being on the mind along with credit overhangs;
It seems to me that a "fast crash" occurs in steps, perhaps over a 20 year or more period. It is likely to be more closely tied to a decline in credit, international finance, and international trade than to geological decline. Peak oil is very closely tied to peak credit, and it is the lack of credit that start interfering with our current system.
The issue is that we live in a highly networked system. Once one part of that system starts to unwind (because of lack of credit, or lack of investment due to lack of credit), then other parts stop working as well. We are likely to find it more and more difficult to obtain imports of all types, including replacement parts for cars, electrical transmission, and oil production. Demand may drop way back as well--but because of a lack of credit.
And so it goes ...
Collapse, like gold and dollar decline is a crowded trade, best to stay clear. The debt excess is irrelevant and meaningful only to finance. 'Financialism', not capitalism is ending. When finance - which provided the service of marshaling private capital for ambitious public and private purposes - exits, it will take its overhang of pointless and useless debt with it. There is no way any of finance's claims against the physical world - or its inhabitants - can be perfected. The greatest amount of all the debt is banks lending back and forth to each other to create balance sheet entries. Much of the debt is old- rolled over and over; its point long forgotten.
Finance can raise up Lazarus's oil price and then watch Lazarus himself - the economy - fall back into his coffin. Finance's power is simply to issue claims, it requires public participation - acceptance of the claims - to make them meaningful.
The greater the amount of debt created, the less relevant to anything real it becomes. The more impoverished and plentiful the debtors become the more pointless claims against them become.
The trillions in unfunded mandates will simply not be met, promises will be unfulfilled. People will fend for themselves rather than cashing government welfare checks, which simply won't be sent; dividends will not be paid, pensions will disappear, balances due and debits will not be tendered. The banks will close and people will lose some money, but the bank- money will be of little worth so that the losses will be small.
I think the idea of 'debt leading to collapse' is a misunderstanding of how American 'Kulture' works. If something is annoying or antagonistic - a government agency, Supreme Court, investment bankers, disco, Richard Nixon - there is no violent revolution or other grand gesture; upheaval or distress raised against it in the streets, the issue is simply ignored. The problem's particular internal dynamic renders itself irrelevant.
Collapse implies a form or structure against which disorganization takes place. Irrelevance dissolves structure, there are no rules because participants refuse to acknowledge them.
Nixon's Watergate made a splash in the newspapers and in the Federal government ambit ... and people outside of Washington stopped paying attention to the government.
The government became irrelevant - where it mostly remains to this day. Nixon was the precursor to Ronald Reagan and Newt, 'political gridlock', hyper- partisanship and 'rule by lobbyist'. Government has very little traction in most peoples' lives. Their interactions take place at tax time and during retirement. People simply ignore what the governments tell them to do.
The massive debt is likewise irrelevant; there is no more care whether a person owes $500,000 to a bank on a house, thence to a second bank, then a 'servicer', then many investors overseas, etc.? The tenant squats in the house, he defies the 'owners' (lenders) to remove him which they won't because the 'loss' shows up on a 'book' somewhere, all of which become less meaningful as more and more squatters take over more and more houses, or take land and build their own houses as they please.
North America becomes more like South America, poor, semi- peaceful and disorganized, where people take over pieces of land and create whole communities, such as the favelas in Rio. Nobody has any title to any of that land, its ownership is perfected by possession. Possession is maintained by greater force; the police do not enter the favelas. The land records are incomplete or do not exist. At some point, new claims emerge which are more congruent with reality as it exists on the ground, rather than in the conceits of financiers.
I recall driving with a friend in Cuenca, Ecuador looking at all the new houses built in the main public park running through the middle of town. It would be as if some persons built some houses in the middle of Central Park.
Who was there to stop them?
The great debts are owed to other massive debtors in circular fashion, the end is to create 'liquidity' and nothing else; there is no purpose to it. The debt/liquidity is created in one building and destroyed in another building across the street. It is only those debts represented by the claims can be perfected will be made to stand. The rest will simply evaporate.
The idea of collapse represents rigidity in a system that maintains the inertia of structure even when the purpose of the structure vanishes.
Who will perfect the claims? China just gave several of the 'Mega- Banks' the stiff middle finger over oil price hedging - derivatives contracts. This is the wave of the future. How does a (hated, loathed and despised within any given community) banker remove a (heavily- armed) squatter from a property he covets. How can a lender perfect its claim when the chain of possession is hopelessly muddled as inescapable outcome of the lender's own actions? It cannot, and so the lender fails and good riddance.
Ipso facto, credit collapse means the end of what is irrelevant to most of us, the end of debts and the end of credit. Still the oil problem remains, with the (relative) value inexorably increasing.
Matisse, Fillettes Jaune Rouge
