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An interview with Stoneleigh - the case for deflation
Posted by Euan Mearns on October 31, 2009 - 10:57am in The Oil Drum: Europe
At the ASPO conference in Denver, October 2009, I had the good fortune to meet Stoneleigh, former editor of The Oil Drum Canada, who left the The Oil Drum crew with colleague Ilargi to set up The Automatic Earth where they publish stories, news and analysis of the unfolding financial crisis. I spent a couple of days chatting with Stoneleigh where she recounted her rather gloomy prospects for the immediate future of the global economy. The following interview is a summary of her analysis of the unfolding situation. Note that in a departure from convention, my questions are set in "blockquotes" to distinguish these from Stoneleigh's responses.
Stoneleigh, the world economy seems to be suffering from two great structural woes at present, namely stubbornly high energy prices that are linked to demand that is persistently ahead of the supply curve, and a level of debt that has destabilized the global finance and banking systems. Can you explain for us the scale and structure of this debt and to what extent write-downs and quantitative easing (QE) have solved this problem?
Firstly, I would say that the energy prices that currently seem stubbornly high should fall substantially as the speculative premium evaporates and demand falls on a resumption of the credit crunch. The sucker rally that has spawned all the talk of green shoots is essentially over in my opinion. The result should be a reversal of a number of trends that depend on the ebb and flow of liquidity - we should see stock markets and commodity prices fall, a significant resurgence in the US dollar and a large contraction of credit. The scale of the reversal should be substantial, as should its effects on energy demand. Demand is not what one wants, but what one is ready, willing and able to pay for, and in a severe credit crunch the capacity to pay for supplies of most things will be severely reduced.
As demand falls, and with it prices, investment in the energy sector is likely to dry up. Many projects will be uneconomic at much lower prices, meaning that the projects which might have cushioned the downslope of Hubbert’s curve (and the much steeper net energy curve), are unlikely to be developed. In this way a demand collapse sets the stage for a supply collapse that could place a hard ceiling on any prospect of economic recovery. That is a recipe for extremely high energy prices in the future.
Secondly, our vulnerability to the consequences of debt is extremely high at the moment. The scale of that debt is staggeringly large. The global credit hyper-expansion has been decades in the making and is now significantly larger than notable events of the past such as the South Sea Bubble of the 1720s and the Tulip Bubble of the 1630s. It dwarfs the excesses that led to the Great Depression.
Credit bubbles are inherently self-limiting, proceeding until the debt they generate can no longer be supported. We have already passed that point, and we are now two years into a contraction phase that is about to accelerate. As the aftermath of a credit bubble is typically proportional to the scale of the excesses that preceded it, we should be in for the largest economic contraction in at least several hundred years, and it will be global.
Real estate, which is a major focus of the mania, should do particularly badly in the coming years (in fact the coming decades or longer). There is still so much deleveraging ahead, and so many danger signals, such as the scale of the coming interest resets on US mortgages between now and 2012 (below). While the subprime resets are ending, Alt A and Option ARMs are just beginning.
There will be a very significant undershoot of historically average values, as there always is following a mania (much more than the Case-Shiller projection below suggests). In my opinion, housing prices are likely to fall at least 90% on average. For those who own property on margin, this will be a disaster.
For evidence that this crisis is indeed global, look, for instance, at European housing bubbles, which were worse than in the US.
Unlike inflation, which divides the underlying real wealth pie into smaller and smaller pieces, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. Once a credit expansion reaches its maximum extent, and contraction begins, these excess claims begin to be extinguished. Unfortunately, the leverage is such that there are probably over a hundred claims to each piece of pie. While contraction begins slowly, as is the nature of positive feedback loops, it picks up momentum until a cascade point is reached, whereupon one can expect the excess claims to be extinguished in a rapid and chaotic process. This amounts to a rapid collapse in the supply of money and credit relative to available goods and services, which is the definition of deflation.
The scale of the problem has been temporarily concealed by a market rally and the shovelling of tens of trillions of dollars of taxpayer’s money into a giant black hole of credit destruction. This has done nothing to reignite lending, but the temporary (and entirely irrational) resurgence of confidence has restored a measure of liquidity. As that confidence evaporates with the end of the rally, that liquidity will also disappear
Banks hold extremely large amounts of illiquid ‘assets’ which are currently marked-to-make-believe. So long as large-scale price discovery events can be avoided, this fiction can continue. Unfortunately, a large-scale loss of confidence is exactly the kind of circumstance that is likely to result in a fire-sale of distressed assets. The structure of the credit default swap component of the derivatives market makes this very much more likely.
The CDS market allowed large bets to be placed on certain prices falling, and by entities which did not have to own those assets. This creates a perverse incentive for some parties to cause others to fail for profit (akin to me being able to take out fire insurance on your house and thereby give me an incentive to burn it down). An added complication is the extreme degree of counterparty risk that resulted from a complete lack of capital adequacy regulation. Many parties with winning bets will not be able to collect, so they may cause financial mayhem for nothing. The CDS market is worth some $62 trillion, and a meltdown is very likely in my opinion.
A large-scale mark-to-market event of banks illiquid ‘assets’ would reprice entire asset classes across the board, probably at pennies on the dollar. This would amount to a very rapid destruction of staggering amounts of putative value. This is the essence of deflation.
I have for a long time argued and believed that there are so many interests vested in protecting our current system that national governments, the IMF and institutions working together would keep the market flooded with liquidity in order to ward off the threat of deflation. In fact, it seems that a prolonged period of inflation is the only way to diminish our debts. I sensed at ASPO International in Denver that this was the majority view. Do you agree that inflation is the most likely near term outcome of current monetary policy?
Absolutely not. I agree that this is the consensus opinion, but I see it as fundamentally mistaken. The debt monetization that is going on has done nothing to increase the supply of money and credit relative to available goods and services, which is the definition of inflation. Credit contraction dwarfs debt monetization, leaving us in a state of net contraction, even though we have just experienced a large rally lasting months, which should have been the most favourable condition for reigniting lending if such a thing were in fact possible. I would argue that it is simply not possible and that deflation is inevitable.
Credit bubbles always end this way, with the mass extinguishing of the excess claims debt represents. They are essentially Ponzi schemes, crucially dependent on the continued buy-in of new entrants. Globalized finance brought a flood of new entrants following the liberalization of the early 1980s, but there are now no more new sources of wealth to tap. Deregulation allowed the reckless to gamble away virtually everything, including bank deposits and pension funds. Globalized finance has created a giant Enron, which while appearing robust is actually almost completely hollowed out. Such structures implode, often without much notice.
In my opinion, deflationary deleveraging will continue until the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. Until that point, there can be no lasting return of the confidence required to rebuild shattered credit markets. Deflation is ultimately psychological. Without trust we will see hoarding of the cash which will be very scarce in the absence of the credit that currently comprises the vast majority of the effective money supply. The combination of scarce cash and a very low velocity of money will be toxic.
Money is the lubricant in the economic engine and without enough of it that engine will seize up as it did in the 1930s, when farmers dumped milk they couldn’t sell into ditches while others were starving for want of the money to buy food. There was plenty of everything except money, and without money, one cannot connect buyers and sellers. Potential buyers will have no purchasing power as they will have lost access to credit and their ability to earn an income will be hit by spiking unemployment. Those who still have jobs will find that they have no bargaining power and there is therefore no wage support. Sellers and producers will have no market and will themselves lose the means to purchase supplies or raw materials for the things they would like to produce. If conditions remain frozen for any length of time, they will go out of business. The deeper the collapse, the more protracted the trough and the more difficult the eventual recovery.
I would argue that we have no need to fear inflation until we have reached a trough - until the deleveraging impulse is spent. We can expect to spend a long time in the liquidity trap, where real interest rates will be much higher than nominal rates, leaving central bankers “pushing on a string”.
Some would argue that faced with the unimaginable specter of deflation that governments will seize control of interest rates from the bond market. Why do you think this may not happen?
The bond market is far more powerful than governments at this point. While the international debt financing model remains, the bond market will retain its power to prevent money printing. Even though governments are not succeeding in increasing the effective money supply for reasons already discussed, they are nevertheless increasing systemic risk with their activities. This is a recipe for very much higher interest rates as a risk premium. Governments do not set interest rates, they decide what rate to defend, but if that rate is substantially different from what the bond market requires, then defending it would be ruinous.
I think we are headed (not imminently but eventually) for a bond market dislocation, with nominal interest rates on government debt spiking into the double digits. This will amount to hitting the emergency stop button on the economy, especially since real interest rates will be substantially higher (the nominal rate minus negative inflation). I am in fact expecting interest rates on private debt to rise before we see problems in the market for government debt, as the latter should benefit substantially in the shorter term from a flight to safety. The risk premium on private debt is already rising, which is a serious danger signal for such thoroughly indebted societies as we see in the developed world.
But stock markets are booming again, several OECD economies are emerging from recession, unemployment has stabilized, there are green shoots everywhere. Surely the current QE strategy is working?
The green shoots are gangrenous. Some of the largest market rallies on record happened during the course of the Great Depression, as depressions are associated with very high volatility. Look for instance at the great sucker rally of 1930. There are always rallies of all different sizes in any bear market, just as there are pullbacks of all sizes in bull markets. No market ever moves in only one direction.
People tend to extrapolate recent trends forward, but this amounts to stepping on the gas while looking only in the rearview mirror. This is one reason why major trend changes are so rarely anticipated. Another is that the prevailing view of markets is fundamentally wrong. There is no perfect information, perfect competition, stabilizing negative feedback, rational utility maximization or efficient markets. Markets are irrational, driven by swings of optimism and pessimism, or greed and fear, in an endless tug of war, and largely in an information vacuum. Investors chase momentum by jumping on passing bandwagons, hence demand for financial assets increases when prices are rising and falls when prices are falling, in classic positive feedback loops.
We have just lived through a period of several months when greed and complacency were in the ascendancy, but that trend is about to reverse in my opinion. Looking at markets as constructs of human herding behaviour allows them to be probabilistically predictable, permitting the forecasting of trend changes. For anyone who is interested in pursuing this idea further, I suggest looking into Bob Prechter’s socionomics - a fascinating subject which delves into the many effects of changes in collective mood.
For instance, as pessimism deepens, driving economic contraction, one would expect to see many manifestations of collective anger and mistrust. As this progresses it is likely to lead to xenophobia and a blame-game, with skillful manipulators (such as the fascist BNP leader Nick Griffin in the UK) poised to direct the anger of the herd towards their own chosen targets. The potential for serious social fragmentation is very high when expectations have been dashed and there is not enough to go around. Having lived through a very long period of manic optimism and increasing inclusion, we in the developed world are not used to expressions of the dark side of human nature, except for entertainment purposes in popular television programmes. It will come as a considerable shock.
Would you care to give your opinion on where the Dow Jones Industrial Average is headed in the near (1 year) and medium terms (2 to 5 years)?
I think the market will fall hard (intervening short rallies notwithstanding) for perhaps 18 months. This was the length of the first leg down (October 2007-March 2009) and so represents a reasonable first guess at how long the next leg at the same degree of trend might last. I think we will see falls of thousands of points in a series of cascades. I don’t see the markets reaching a lasting bottom until probably the middle of the next decade, and even then I don’t expect it to be a final bottom. This has been the largest credit bubble in history, and the aftermath of a major bubble always undershoots where it began before any kind of recovery begins.
The aftermath of the last major mania - the South Sea Bubble in the 1720s - lasted decades and culminated in a series of revolutions.
We are still relatively near the beginning of our own crisis, but already it compares with the Great Depression.
How do you see the US$, gold and oil trading in the same time frame?
I think almost all assets will fall as price support is knocked out from underneath them, but the dollar should rise initially on a flight to safety. Scarce cash will be king for a long time, and the value of one’s currency relative to available goods and services domestically will matter much more for most people than its value relative to other currencies internationally.
In a deflationary scenario, prices fall, but purchasing power typically falls even faster, meaning that everything becomes less affordable despite the lower nominal prices. Prices in real terms, adjusted for changes in the supply of money and credit, are what matter. In a world where almost everything is becoming rapidly less affordable, the essentials will be the least affordable of all, as a much larger percentage of a much smaller money supply will be chasing them. This will confer relative price support.
Although we could initially see a large glut in energy supply as demand falls off a cliff, this is likely to lead to supply collapse as investment dries up, hence I expect energy prices to bottom early in this depression. Both financial and physical risks to energy exploration are likely to increase substantially in a destabilized and capital constrained world, and even maintaining existing assets could become very difficult. This is a recipe for much greater state involvement in ownership and exploitation of (probably deteriorating) energy assets, with increasing conflict over those assets as supply gets dramatically tighter with lack of investment.
As for gold, I expect it to fall initially as people sell not what they would like to, but what they can, in order to raise the cash they need for living expenses and debt servicing. Owning gold is likely to become illegal again (as it did in the Great Depression) in my opinion. This wouldn’t necessarily stop you owning it, but would stop you trading it (at least without taking major risks) for other things you might need. Owning gold now therefore only makes sense if one is confident of being able to sit on it for a very long time, as it will hold its value over the long term as it has for thousands of years.
What will be the consequences for unemployment levels and services provided by government?
Unemployment will go through the roof as the prospects for selling most goods and services decline dramatically. In the developed world we are nations of middle men - generally service economies where we make a living figuratively taking in each other’s laundry. Most of us produce relatively little. Even those who do will find almost no market for their exports, and those who could find buyers may not be able to send shipments as credit contraction prevents shippers from getting the letters of credit they need to ship goods. A glance at what has happened to the Baltic Dry Index (below) indicates the difficulties already facing shipping companies.
Unfortunately middlemen are almost completely expendable, and the services of others are likely to become unaffordable for the majority very quickly. While there will be a huge surplus of labour, and the few who retain purchasing power will be able to hire anyone they want for very little, most people will have to do everything for themselves, as poor people have done throughout history and as most of the population of the world does now. Not only will we lose access to the paid labour of others, but we will lose our virtual energy slaves as well. This will represent an enormous fall in the standard of living for the vast majority.
Whereas inflation can conceal a fall in purchasing power, so that people may not even realize it is happening, deflation brutally exposes it. Wages would have to fall just to keep purchasing power the same, but keeping it the same will not be an option for cash-strapped employers. In addition, with a large surplus of labour, workers will have no bargaining power. This is a recipe for exploitation the likes of which we have not seen for a very long time, but in the intervening adjustment period it is likely to lead first to war in the labour markets.
I would expect general strikes and a breakdown in the reliability of centralized services such as healthcare, education, power systems, water treatment, garbage (and snow) removal etc. This will be exacerbated by plunging tax revenues for all levels of government, which governments will try to compensate for by raising taxes, on anyone still capable of paying, to punitive levels. We would thus expect rapidly deteriorating services at much higher cost.
Many people are at risk of being eventually priced out of the market for goods and services, and particularly the essential ones, entirely. In my opinion, we stand on the brink of truly tragic circumstances.
End note:
The day before the ASPO conference began in Denver, Stoneleigh, Rembrandt Koppelaar and myself took a drive into the Rocky Mountains National Park providing the opportunity to discuss and reflect upon the current global situation. As the week unfolded I realised that I was in denial about the gravity of the global financial situation. In what has become a situation of complexity that is beyond the ken of most folks, I find it simpler to break this down into smaller components that I can relate to.
In the UK, we have an escalating burden of government debt that we can unlikely ever repay. Unemployment is rising, tax receipts are plunging whilst expenditure on social security, health and the elderly go through the roof. We have been living way beyond our means, which with the peaking of UK oil and gas have suddenly become more meagre. We have an election in May 2010. The new government will want to raise taxes and cut public spending. The current reversal in global growth is sending energy prices higher. Higher unemployment, higher taxes, higher energy prices and reduced public services are a toxic mixture for an ailing economy. If the bond market decides to price in the risk premium for escalating debt it will be game over. The questions are if and when? Figure 13 is one of the more interesting for me.
That's me on the left and Rembrandt Koppelaar on the right, contemplating our future after a most enlightening, if not very cold day in the Rocky Mountains. Photographer - Stoneleigh.
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Dumb question - what prevents governments from coercing banks from lending? Not that they should need coercion after a certain stage, after all, it isn't in their best interest to see things get to the stage where municipalities are unable to maintain basic services such as water distribution or sewage treatment. Such a situation unfolding in the developed world would be disastrous for their very existence; perhaps remedies to this situation are being hashed out behind the curtains, a rather Star Chamber or NWO scenario I admit.
Also, as a lame appeal to historicity, John Michael Greer wrote about how the alternative press was aflame with assurances that the world economy was on the verges of completely unraveling in the wake of the '87 stock market crash. This is a facet I always keep in mind reading analysis of energy/environmental/economic issues, and prognostications of dire collapse. I do recognize that the current recession is qualitatively worse than anything since the GD; is there no way out, however? People have shown to have an unquenchable thirst for mania, perhaps that can be met with some new hot market, Green tech, for instance. Or informal avenues of getting business done will take over where the FIRE sector has left people in the lurch.
I guess Stoneleigh's post above could be summarized as: Too much paper money everywhere! That has been a rallying cry since paper money first existed. However, I don't think it is the core problem. Free markets adjust to too much paper money with inflation and changes in exchange rates.
In terms of the immediate possibility of deflation and ensuing economic calamity: while in 2009 M2 money supply in the US is not growing and US private credit growth is declining, money supply and credit in the fastest growing part of the world is expanding. Look at Chinese M2 money supply growing and the massive Chinese credit expansion since the beginning of 2009.
In other words, are credit and money supply contracting globally? No. What is playing out a regional shift with the developed world deleveraging and the developing world leveraging. Global deflation is not likely in this scenario.
The lynchpin in all of this (if you believe that monetery policy has created the current situation) is that one of the largest economies in the world has been growing rapidly since the early 1990s in percentage terms and absolute terms while keeping their currency effectively pegged to a devaluing US dollar.
China's Yuan peg to the US dollar created the cheap credit flow in the developed world. It has hamstrung US monetary policy and free market adjustment. It allowed the Chinese to win jobs from every country in the world as the cost of production in China kept going down with the Yuan-dollar peg. Other developed word currencies (EUR, GBP, AUD etc.) all had to follow the descent in the USD (with the resultant cheap credit) in order to maintain relative competitiveness with the US. These developed currency devaluations were free-market driven but their core driver was also ultimately the Yuan-US Dollar fix.
This beggar-thy-neighbor monetary policy (China taking growth from the rest of the world with an ever cheapening currency) can only last so long before it creates unsustainable distortions in credit markets and global employment/manufacturing. The credit crisis in 2008 was the first sign of a market convulsing under the Yuan-Dollar restraint.
If China decoupled (as they will have to do eventually), their currency would strengthen, global inflation would increase (as producing goods in China would become more expensive) and the monetary (a key part of which is credit) world could rebalance.
If China doesn't de-couple then the only solution is for all other countries to raise trade barriers to prevent the flow of capital to China.
The fixed Yuan is THE core of our current monetary problem.
Buster - not so by a long shot. It's not just credit - it's credit vs real resources per unit time.
The Chinese add even more credit based on air than OECD does. How much super high EROI energy is left to service the debts that China has entered into? And I don't think Stoneleighs point is that there was 'too much paper money everywhere' but that credit (now digital money) has too strong of a role in the foundations of our financial system. This situation has happened many times before - what most people see as inflation is the natural response to seeing lots more money/credit being thrown at the problem by governments - and if the world system stayed the same as it had the last 30 years then inflation would be the natural result - but credit/debt and interest are part and parcel of (the current) economic pyramid - we now have a debt imperative that in turn results in a growth imperative - this then creates a giant beggar-thy-neighbor tug of war where debtors vie with eachother in the market to capture enough of a finite supply of credit to repay their loans with interest. It is far far greater than a problem of US or China or various currencies - in the end it gets down to available energy gain per unit time relative to total debt (not paper money) supply. Virtual wealth far exceeds real productive capacity, and until this is recognized and equilibrated it will likely get worse (e.g. China and G20 nations throwing more debt at problem).
When looking at this situation from vantage point of whether oil or gold prices will go up or down as opposed to whether current distribution system can handle this extreme of systemic problem will lead one to different conclusions. I think these problems are solvable, but in likely only in unconventional ways -i.e. we have lots of natural resources remaining but not enough to service the ongoing claims structures-
How much debt is too much, though? I always imagine the prospective person wanting to start up a new business; give them just enough liquidity to get a start. Helicopter Ben seems OK with his money drops, is he insane? Indifferent? Deliberately engineering something sinister?
We seem to have concluded that energy can only consume so many percent of the economy before smoke begins to come out of the engine - ca. 6% - how monstrous a tab can we rack up on our children without the walls of the global Potemkin village keeling over? The global aspect of it all seems to be a strong qualification. Rather than an Argentina or Indonesia burning out in isolation, this all seems more like...what's the appropriate analogy, an episode of Gilligan's Island? The Stanford prison experiment? Collaboration between parties is essential, otherwise things will go sideways overnight, harming everyone involved. So this collapse will be catabolic and long duration. Or the patient will spend a long time in the hospital recovering.
On the subject of China, these are quite shocking images: Amazing Pictures, Pollution in China | ChinaHush
This is best explained by the Minsky moment that Herman Minsky came up with,
So basically when investors start having cash flow problems in keeping up with debt repayments and investors, people can't take on any more debt relative to income as their wages simply can't support the interest payments.
The last 30 years have seen real median wages in the US remain stagnant while debt has risen dramatically courtesy of Wars, excessive and often fraudulent lending and a collective mood of optimism. Now we see that people have overextended themselves and there simply isn't enough cash circulating in the economy to repay the debts.
My fundamental difference in view is that I think we have two challenges which happen to be coincidental: a monetary problem and an energy/resource predicament.
The monetary problem can be solved with time, patience, inflation and free exchange rates. These debts/currencies are tokens/markers with no intrinsic long term value. Their value is short-term and market restrictions, such as China's fixed exchange rate, can distort these short term values quite significantly.
The energy/resource predicament has no readily apparent solution. This predicament was not caused by the monetary system.
Reality check on income: In 2008 dollars (i.e. real inflation adjusted terms), the median household income in the US in 1980 was US$44,059. In 2008 it was US$50,303. (source: US Census Bureau)
I wouldn't disagee with you that absolute debt and debt/income may be higher now than 30 years ago. However, bear in mind that interest rates have been extremely low over the past ten years and so the burden of servicing that debt has been relatively less than 30 years ago.
What I am trying to convey is that this period of very low interest rates in the developed world has been caused by a distortion of the global monetary system resulting from China's fixed exchange rate policy. This monetary problem is solveable.
We've been in a 30 year treasury bull market, usually these are cyclical, each bear and bull market in treasuries lasts about 25-30 years. So we are now entering the final swan song of low treasury rates followed by rising rates.
Also as per Nate Hagens 147 page slide show here - http://www.theoildrum.com/node/5567
On page 109 and 110, real wages have been stagnant for 35 years after rising for 150.
The monetary problem is not solvable, the root of the problem is not China's fixed exchange rate, rather it has been the hyperexpansion of credit relative to the real, income producing assets in the economy. There was extreme malinvestment across all sectors of the global economy.
The correction is always equal and opposite to the deception that preceded it
The mathematics of debt vs income are irrefutable. This will end badly, all government intervention has served to do is to make the underlying crisis greater with it's asymmetric policies.
The problem is excessive debt and insolvency, countering this with more debt in the form of trillion dollar deficits and adding liquidity is foolhardy. The only way a credit induced depression can be solved is by making it worse as opposed to the garden variety inventory led recessions. As the bad debt must be cleared as it acts as a toxic sludge choking the whole system.
What about the almost 50% of the world economy (developing nations) that have extremely little debt compared to the developed world?
What about the vast majority of people in the developed world that are not defaulting on their debts?
What about the huge growth in real wages for those living in the developing world?
Yet.
When oil goes up again, the economy will contract further, putting the next tranche of debt-holders in trouble and so on.
There is a pattern here forming. We're just at the beginning of it and most people won't see it until it's too late.
The one thing governments can do that you or I can't is inflate away their debts - and ours along with them - through monetization.
No they can't. We are stuck in the liquidity trap, where the velocity of money is low (ie it is hoarded) and real interest rates will be punishingly high. Increasing the money supply, especially the supply in circulation, is not possible under those circumstances. The bond market will also keep a lid on such efforts while the international debt financing model still exists, which will be a while yet.
One begins to get the distinct impression that the massive potlatch of bailout money over the past year was not really about any sort of real assistance to the macro economy, but rather just a matter of simply throwing a life ring to the favored few with good political connections. The entire economy, and most of the people, may be going down, but they, at least, will be saved from the full consequences.
The best government that money can buy.
I agree. Bailouts are only ever for the well-connected few, although they are sold as being for the little guy. It's no surprise given the revolving door between Goldman Sachs and the treasury. Wall Street took over Washington a long time ago and is effectively using public money as its own private slush fund.
Oh where is Jeppin so s/he can show all of you up and explain how you are wrong about 'Wall Street took over Washington'.
Stoneleigh
'No they can't. We are stuck in the liquidity trap, where the velocity of money is low (ie it is hoarded) '
diagree. even michael panzer whose books u like says; they can put $/debit cards in our hands, & accounts electronically.
& i believe will do so when the chips are down for politicians, & they can no longer cater to the bankers. this is what is different than before.
blow the bond market/dollar, probably. maybe a war in the midst of such would provide some cover.
Why? What makes you think they give a damn that you have lost your home? Or about anything else? There is a reason some wealthy people are building lifeboats. And their lifeboats will be a hell of a lot seaworthy than most of ours.
This assumption that the wealthy and powerful are afraid of social chaos is silly to me. It seems fairly obvious to me they consider themselves above it all. After all, they just screwed the global pooch, sold us all their losses, bought up all the assets with any value with money we gave them, gave themselves huge bonuses with the same money, then started crowing about all the profits they were making because of all the money we gave them and debt we bought from them.
They will not be fighting any wars, either. Draft dodgers make the best war hawks, after all.
Where in all that do you see any concern for you and yours?
Cheers
ccpo
no assuming any concern, political reality i am talking about. probably endgame; only a matter of months at that point, but Nothin to do w/ concern for me or u or ours.
bankers & the wealthy will be against but til elections are voided fully then the politicians have to be at certain addresses some at times[read violence]; & they sometimes are not rich yet so party/politics is the main game for them.
thanks for the response.
I don't think the point of politics and a few people not being rich means much.
Cheers
i agree. the basic point to me stands; i. e. politicians are very short sighted & will ultimately take care of themselves doing anything that keeps them in office. bankers won't be in charge then; but endgame will be well underway.
And so long as an external force like FedGov needs tax payments via hard currency the well off will be able to exchange what they (Feel they) need from the non wealthy so that for the non wealthy have a shot at keeping FedGov at arms lenght.
Creg,
Governments are not going to put a significant amount of spending power into people's hands, except perhaps for food stamps as a means to prevent rioting. Bailouts are NEVER for the little guy. The bond market wields the power for the time being, although not in perpetuity. While it does there will be no inflation.
I agree that a war as cover is very likely.
They can't just print paper to pay off their debts? I wasn't talking about increasing the money supply through lending. I thought the threat of monetization was what earned Helicopter Ben his moniker...
Or is that what you meant by:
Here's where my understanding is lacking... wouldn't it be the foreign exchange markets that keep them in line by devaluing the currency? Although, if all the developed countries are doing the same then wouldn't we just see declines relative to developing countries' currencies and a shift in relative purchasing power between the two sets of currencies?
The Fed doesn't print paper, it midwifes credit expansion, but it can only do that if there are wiling borrowers and lenders. That will not be the case going forward. Helicopter Ben didn't drop free money, he dropped free debt (ie debt at negative real interest rates for several years), but that period is essentially over now.
After the initial flight to safety phase, with the US dollar as the primary beneficiary, I think we will see a chaotic currency regime with beggar-thy-neighbour competitive devaluations. I wrote about this in The Special Relativity of Currencies.
As some 80% of the derivatives market is based on currency and interest rate bets, both currencies and interest rates are likely to go haywire in the not too distant future, and counter-party risk in derivatives is huge, a metldown in the derivatives market is highly likely.
No, No, No!
If one starts with what might be considered 'original debt' or what I call to myself 'barn raising' then it is impossible to inflate away debt without an ill effect on the society.
By 'barn raising', I mean that this is where one farmer borrows from his neighbours their labour (energy) to raise his barn and later pays it back in similar manner. These debts are stored in the memory of a small community.
When the community becomes too large for that memory it moves to other increasingly complex means of debt memory as in our present world class community (ho ho). I suppose in the original barn raising situation the debt could be eliminated by the farmer dying or being caused to die (possibly due to a reluctance on his part to reciprocate), but that would be of great consequence to the debt holders of that community. In a similar neither would debt inflation be a solution that any sane government would enable.
Oops I think I've just destroyed my argument, what the hell does Summers and Geithner and pal Paulson care about all us riff raff, hoy polloi and assorted neer'- do- wells.! Stomp em, marginalize em, and tax their foul brood.
...but if the barn was owned by the whole community then there would be no debt, only a newly built communal barn. Oh! Darn! I just used a word suspiciously close to 'communist'. Better call Jo McCarthy, can't have subversives like me mouthing off...the rich deserve their 'own' barns...
;)
I don't recall saying anything about doing it without harm to society. I merely said they could do it.
That is because there are more wage earners per household than there used to be. Here is hourly wages, which had increased, adjusted for inflation since 1830 until peaking in 1974.
By the way I could argue the Chinese credit situation is WORSE than US. They grew private credit 17% in 2008 and are on pace for 35% in 2009 which would mean that private-non-financial credit is 150% of GDP for China (roughly 150% in US) so in a few years they are reaching same levels as we are - how will these huge amounts of assets, which tricked our global economic system into thinking things were affordable and thus pulled resources forward in time, be able to be serviced/paid back? I just don't see it.
And the monetary problem facing the world started long before China was on world scene. Based on your comments I detect that either we really disagree on the problem or more likely I am doing a bad job of explaining it. I'm trying to write a post that will make it clearer. One thing I agree is that the money situation can be fixed - but it will result in a great disappearance of what people thought they were entitled to and new rules (i.e. worldwide banking will not run on fractional reserves but gradually towards 100% reserve requirements)
Nate, you are right in that the number of income earners per households has increased so that while household income increased, income per worker declined. More money for each household but less for each worker. Just in case I miss timely responses on TOD, I will always tip my data hat to Nate Hagens (as a reliable data source).
On money/debt being an issue we need to be concered about: I just don't think monetary policy has ever been a long term problem except for those believing that money is a long term store of value or that debts defined in those monetary (rather than hard resource) terms are long term fixed obligations.
In other words, if the US owed China 20 million barrels per day of oil for 10 years then the US should be freaked out. But given that the US owes China a Trillion dollars, then that obligation is only worth the paper it is written on so long as the US economy remains strong. If the US is in real economic trouble then it could print a single Trillion dollar note, hand it to China and say thanks for your trust in the past.
Hey Buster don't come round my joint with your Trillion dollar note, I will cry havoc and set my dogs on you! Heh, love the smell of sundered flesh of a morning.
Here's my FRoEI chart which I'm pretty sure is related to your chart with some time lags and market distortions:
It comes down to the cost of energy slaves. If you have to pay more for the energy, then you have to pay the appliers of energy less.
http://www.theoildrum.com/node/5495
Funny thats exactly the "peak oil" time I came up with.
My opinion is that was the real peak in oil production just slightly masked by on going technical advances and some spare capacity. We sort of missed it.
Ahh posted in June I don't think I had really resolved this at that point.
What you need to do is show the expansion of debt on top of this curve.
Then "peak" is in my opinion obvious. There is a almost perfect divergence in the 1997-2000 time frame.
Figure 21: shows this.
IMHO that was peak oil.
Please provide a reference link to somewhere that you have stated a specific peak oil time. You are once again bluffing.
So you realize that someone will call you on it so you retract the statement.
Typical. These statements are essentially content-free.
Hmmm ...
Don't beat up Memmel, he's a good guy. Very smart. He gets it and there aren't alot out there that do.
Nevertheless, lookie here:
There are other peak oils, all in the past.
The modern world can do without the current interation of money or credit, it cannot run without cheap energy. Expensive energy is just as bad as no energy at all. Those who can afford expensive energy have little need for it, they can afford other slaves. To the rest, value added to labor must leave a residual. Otherwise, the 'invisible hand' flicks the offender into insolvency.
Aren't we ... having a lot of insolvencies??? Seems I've noticed this, myself. Hmmm ...
Stoneleigh is absolutely right about the unwinding of credit, described as eloquently and simply as can be done.
Credit is a problem, a 'laundry' is needed to turn it into real, cash money. Since laundries can only wash so- many shirts at any given time, it takes (a whole lot) longer to launder massive and gigantic dollops of credit into cash.
What am I talking about??? This is not a credit crisis, rather the long running 'Crisis Of Credit', the existential dilemma of what do do with credit after it's created.
If you buy a $1 million dollar house with a $950,000 mortgage, you are leveraged; that leverage is credit. If you sell the house for $1.4 million and pay off the mortgage you have laundered credit into cash; your $50,000 down payment has been turned into a $450,000 cash profit. Unfortunately, this cannot be done anymore; the $1 million house is only worth $600,000. The real estate market has turned against credit.
This is the 'market failure' the bobbleheads on CNBC talk about. Non- existant or malfunctioning markets (not going up) means no laundries for credit. Credit is thence marooned. The owner who spent a $1 million on his house might recoup in twenty years ... or never!
Laundering is buying on credit and selling for cash. The Fed is trying to create some liquid cash to facilitate the laundering process, this is the back- story of the stock market rising (and rising more because finance makes its own credit). Finance cannot create base money or cash; it can create unlimited credit, which is also a problem as it outruns any ability to launder it into cash in any combination of markets.
Unfortunately, the banking system is hoarding this new base money because the same Fed has ordered/wheedled them to do so; the banks are insolvent and need the cash reserves to keep the doors open. The liquidity trap exists not by what the Fed says, but by what the Fed does - by the Fed's actions.
Also, the banks' actions constrain markets and credit laundering; the banks don't lend anew. They are saddled with old loans turning bad by the day - an outcome of the market failures - and there are no new good loans to offset the bad.
It would be better to kill off the banks and their bad loans with them and conjure some new banks with new capital.
What Stoneleigh doesn't mention is the level of corruption and criminality in the finance system. Read Stoneleigh to get the clarified deflation case and Denninger to get the idea of how corrupt the 'system' really is.
Extend and pretend is a way to institutionalize marooned credit. If there is no press to 'properly value' the various claims that credit represents, the claims can remain marooned for a long time. Chris Martinsen wrote an article about this not too long ago but I can't find it right this second.
Eventually, monetary expansion solves the problem represented by redundant claims.
Monetary and credit expansion is an artifact of modernity and trade. There have been deflationary spasms but inflation is the background noise of human 'progress'. Currencies always lose value, they have to. Only currencies that aren't in circulation hold their value. The remainder lose value because the act of circulation itself - velocity - devalues each unit of currency. The myth that some form of currency does not devalue is just that.
This is the gold 'phenomenon'; gold currency is held out of circulation - hoarded - requiring the addition of more gold into circulation by the authorities so as to have enough liquidity to conduct ordinary business. The addition is inflationary. Nevertheless, kings and bankers both learned long ago that the gains in trade outweighed the losses in 'monetary integrity'.
What matters as much as the amount of currency in circulation is what any particular currency can buy. The latter is generally more important than the former, this is my personal observation.
The desperation by central banks to expand monetary bases overnight suggests there are other issues behind the maturing of claims represented by credit. It is this press to 'instantly monetize' and the frenzied bubble- making in the US and China that suggests that there is more a resource issue and less a money/credit issue.
Time solves credit problems - debts cannot be collected from the dead - but resources are running out fast, particularly oil. Here, time is of the essense! When Mexico/Cantarell ceases exportable production in a year or two, there will be a collective heart attack in this country. A million- plus barrels per day - gone - is a lot of oil to simply disappear!
See Jeffrey Brown/westexas on this site and elsewhere ...
You can have all the money in the world, but if there is nothing to buy with it you may as well be penniless.
During the Depression, at issue was the change from agrarian America to urban/manufacturing ... that and the long- overdue abandonment of the gold standard. The crisis was more social and less economic. Manufacturing in the US wasn't comprehensive enough to employ the masses migrating from the countryside with few skills. Our current 'Niewe Depression' is the shift from shrinking energy productivity - lots of fuel guzzling machines earning little or nothing - toward shrinking labor productivity. Shrinking labor productivity means lots of hands working with simpler tools within less complex systems with less labor efficiency. As in the 1930's, the shift is as much social as economic, it is largely about how we fashion ourselves.
The Depression exposed a shortage of vocations at any wage; note all the artists and writers working for the Works Progress Administration. This country currently has an immense 'skill gap'. There lots of lawyers and administrators and folks sitting in offices sending emails to others sitting in indentical offices elsewhere - and lots of others who cannot imagine any other way of living. Those who do not work in this manner fantasize about doing so, not just in the US but around the world. This perception is enabled by cheap energy. Because the energy component is in the background, the participants believe the center orbits around the periphery; resumes or office locations or software or finance or legalisms or other outliers.
The crisis is really a process which is embedded within a social paradigm shift. Whether it is calamatous depends on how we define this shift and whether we have the courage to embrace it.
I remember this post.
The question is was oil production forced via economic means i.e the ever expanding fiat bubble.
If it was forced see my long post the forcing function was over about a 27 year period.
And if this resulted in over extraction of oil then we will see production basically collapse.
Nate has several posts on the economic side of the problem I don't think the economic situation is in
question. However the question is what was its effect on oil production ?
If the combination of a forced expansion of the economy and and effectively wartime advancement of technology was
able to extract oil at such a rate that we manage to maintain production rates at the expense of ever faster depletion then we should see production drop off rapidly once this forcing fails.
My opinion is there is nothing in any of the production data that indicates that we where not able to do just that.
In a private email I said if a system is set up to allow fraud to occur it will occur. By fraud in this statement I mean a complex system is capable of looking stable right to the point of collapse.
Thus using this concept if we are capable of over extraction then we did it.
Since I was unable to prove we did not and since we had a system that obviously would encourage it then we did.
Theoretically the probable should be to try and prove we didn't and about the only way to do that is to accept claimed reserve levels and also to accept that they a significant portion of the remaining reserves can be produced at rates close to our current production rates.
So by taking the approach of assuming guilt and proving innocence I was unable to really justify the reserve claims and much less convince myself of future production rates.
Any reasonable review of oil production suggest we have a lot of worn out old fields exploited to the max and any new finds are small or expensive to extract and are extracted rapidly once brought into production. No way could I even see us producing close to our current rate in say ten years.
Also of course the symmetric peak models that include the reserves with little adjustment suggest the same i.e production has peaked. So accepting the reserves still results in a peak.
So if the economic model suggests the system was forced. And the symmetric models suggest peak and we had the technology to distort the peak then its hard to dismiss asymmetric production.
And of course given my "rule of fraud" to disprove it I had to prove it could not happen unable to do that I had to accept it did.
Will I ever produce a post proving everyone else wrong I doubt it but I don't believe I have to thats simply the wrong question. Its up to others to prove that and asymmetric peak is impossible once enough data exists to make it probable.
And one more time it does not matter if we are asymmetric then we are past peak and production is in rapid decline and we will know the truth in months not years. Again most symmetric models and the asymmetric say peak oil is in the past its over the difference is the post peak decline rate.
What I don't understand is why people don't simply wait a bit see what happens over the next nine months and see if I'm right or wrong. If I'm right then things will get really crappy really fast if I'm wrong then we probably have at least 5-10 years to deal with slowly declining oil supplies.
Its a bit ridiculous given how long we have looked at peak oil to bash a model that either succeeds or fails in a matter of months.
I'll repeat my very short term prediction. If we are in a fast crash then as best I can tell global oil production is declining at the rate of 500kbd-1mbd per month. Since the "cliff" was actually curved we accelerated into this decline rate over the period from 2007-2008. I think we where in this zone if you will by the first part of 2009.
Getting this exact does not matter because if we are crashing then we are at the terminal decline rate right now.
Its high enough that it does not matter when we hit it exactly just that given the price movements if we are crashing then we are now in terminal decline. We can pick Oct 1 2009 as the date.
So taking the low estimate of 500kbd per month of declining production. Within three months of Oct 1 2009 then we would be down by 1.5 mbd globally so oil prices should be under serious strain by December and storage levels should be drawing down at a health clip. By March down another 1.5mbd so things should be getting really intresting and we should be entering a new price spike by that point perhaps even having past the old high.
By June 2010 and another 1.5mbd of declines we hit the point that outright shortages are becoming a serious issue god knows what the price will be.
Now of course these are just guesses and they can of course not be accurate but given that I believe that price has signaled a fundamental change if its fast decline then sometime in the next nine months at most we should be in a situation similar to what I outlined given the speed of decline and the expected high rate if your off wait a month :)
No matter what if collapse is correct and then any high decline rate pinned via the market price to now ensures very tight oil supplies within nine months. And I have not choice but to use market data or price to pin since now production figures are completely unreliable. Certainly there is wiggle room a brief unsustainable surge by KSA for example could temper prices for a few months perhaps a economic blowup could retard the system etc. However barring another rapid global collapse on the scale we had in 2008 then no other factor can retard the advance for more than a few months at most before its back into a tight supply situation.
Now I don't think that our economy can withstand another blow of the magnitude it took in 2008 its simply to weak.
So the only thing that prevents me from proving or disproving fast collapse of oil production then TSHTF is if TSHTF before we feel the full effects of collapsing oil production.
And again it does not matter I'm either completely wrong or right its pretty black and white and I think my predictions are near term enough and bold enough and I've stuck my neck far enough out on the chopping block that arguing my methodology can safely be reserved for nine months from now.
I see no real reason for people to blast me I'm in my opinion wide open. If I'm wrong then no real reason to look at what I've said its garbage.
If I'm right then it makes sense to really investigate the situation to see if better approaches are possible.
They may well be but at its heart the difficulty is corrupted data and I don't see a easy way around that.
Not that its not possible just not trivial. The solution is effectively a lie detector.
Not impossible but also not obvious lies by their nature are generally hard to detect much less prove.
And also I've said this before but I'll repeat it I have three kids 2,5,7 I personally hope I'm wrong I'd much rather have my kids growing up in a world were oil production is slowly declining and alternatives have time to grow.
It may not be a easy world the financial issues are not going away but its going to far far better then what I'm afraid will happen if I'm right. I'm probably my own worst critic since I really really want to be wrong.
But the harder I tried to prove my self wrong the more it became evident I could be right.
So I'm in the same boat as everyone else waiting patiently to see if I'm right or wrong and hoping I just chased a red herring.
If I'm wrong then prices will rise until this trillion barrels of oil is profitable to produce by all measure todays prices are already high enough if they hold steady. OPEC really has 4 mbd of spare capacity and can manage price for a few years at least. By then new projects based on say a 60 floor price will be coming on stream project delayed by the crash will be up and probably accelerated and although oil production will be tight and prices high that are endurable.
If prices fall some all the better it means supply exceeds demand and OPEC will hold even more oil offline to bolster prices. The longer the better. If we even made it five years then my kids would be 7,10,12 and even then decline would probably be slow so perhaps they will enjoy a good bit of their childhood in a relatively comfortable middle class world. I hope so. As and adult I hate what we have done but I had a fun time as a kid and I hope my kids get a chance to enjoy their lives and I'm not running around desperately trying to feed them. So literally from the bottom of my heart I want to be wrong. My brain remains unconvinced.
Does anybody else see what kind of mumbo jumbo this is?
This is not logic from any planet that I came from. Anyway, since when have you tried to "prove" anything on this forum. Another in the unending stream from the Miss Ann Elk school of nonsense. "My theory #2, which is the second theory that I have."
Cripes, I just quoted in another comment that you are working the Chewbacca Defense as well. I wouldn't be able to make this up, as it is so bizarre. "If Chewbacca lives on Endor, you must acquit! The defense rests."
and then it starts to get even more convoluted:
Egad, no one talks in negative logic and expects to be understood!
The problem is Memmel, that you make absolutely no sense, and so whatever your deeper point is gets completely lost by everyone trying to read your words.
WHT - It seems clear that your admirably analytical mind is incapable of comprehending the subtleties of memmels thought process but that is no reason to keep attacking him.
He has consistently sussed out several valid elements of this unbelievably complex trifecta (quadfecta, quint...?).
Try and take it with a grain, or maybe 70 proof grain.
Cheers!
Jef
One issue is that these problems are not entirely complex. That people make them excessively complex, and further the complexity through convoluted language really drives me up the wall.
Plus you claim that I am not taking it with a grain of salt. The fact that I bring up South Park and Monty Python analogies describes the level I treat my exasperation. It's not like I am getting all Freudian about it. In other words, it drives me up the wall while being entertaining as hell.
I will have a contributed story to TOD coming up in the near future on complexity. I am somewhat prepping for it by monitoring all the spew I see being tossed around.
WHT,
It's quite clear to outside observers that you are on a crusade.
If you don't like what Mike is saying, just skip what he writes and move to the next comment. There is a really simple solution to this and you are making it more difficult that it needs to be. I and it seems several other people get value out of what Mike is saying even if you are not.
Please accept my and others' requests and stop your crusade.
Another common rhetorical argument is to claim that you speak for other people. On the list of fallacies, it is called "Appeal to Popularity"
http://www.nizkor.org/features/fallacies/
It would seem that a site like this would not be prone to such a belief.
I agree with aangel. Not a fallacy. Besides, at least one other person had already posted a concurring opinion.
Also, the part you quoted above calling negative logic, I think it was? It was completely clear. Evidence enough you're on a crusade. We've seen it before. Suggest you get over it.
As an example of aangel's advice, I don't read memmel's posts much simply because they are too long and his lack of grammatical structure and, more particularly, punctuation causes me to have to re-read. Given the already-voluminous length, I just don't read most of what he posts.
But that doesn't mean it's not good or not useful.
Chill.
Cheers
aangel speaks for me too.
I always look for Memmels post first. They're fragmented, tangential but are painting a picture of the whole. They touch upon the overwhelming corruption that can skew the best devised statistics. WHT may be a painter like Rembrandt but the world may be more like a Dali.
OK, I look forward to the day when Memmel comes up with something that knocks us for a loop.
WHT, I agree with you.
WHT,
I agree with you. I spend so little time on TOD that I don't want to read a bunch of Jabberwocky and Memmel is a master at it.
This sounds harsh but in corporate life I have seen many of his style. Far too many. Pretenders and wannabes. Folks who got there by pure bullshit. Ones who somehow seem to get into the ranks of management and cause great harm.
Airdale
I gave up reading Memmels posts after he claimed the falling oil price at the end of last year was manipulation in the markets in order to prepare for an attack on Iran. The attack never happened and it became obvious the fall in prices was due to falling demand.
It is a shame really because sometimes memmel comes up with some interesting ideas. Unfortunately you have to read an incredible amount of drivel to get the odd gem.
I can understand WHTs frustration, however, the answer is simple. Just don't read the posts.
LOL that one is not over.
http://www.nowpublic.com/world/u-s-bush-rejected-israeli-plea-attack-ira...
Probably the only smart move Bush made.
Will we probably when ? Dunno I'm sure it came very very close and who knows why we pulled back.
One time we won't. We where like a cat with a mouse playing with Iraq for years before the second invasion.
But war is a go/no go decision once your committed your committed for now its a no go.
But that can change in a hurry.
I too side with WHT. I remember what they told us about math in grade school:
Show your work.
If you present a result (in this case, Memmel's prediction) without showing your assumptions and sources, and the calculations you used to arrive at your conclusion, you're guessing.
It's fiction.
That said, note that even his supporters don't necessarily read his posts. Frequently, your rebuttals make him post again. Is this good for anybody? (I will admit that I usually only read the rebuttals after the initial post. Kinda like the Reader's Digest, only angrier.)
I'm with WHT.
Aangel,
Agreed,WHT needs to just ignore Memmel.There are a couple of regulars I ignore no matter what-its better for the site.
But Memmel-I must admit that WHT IS RIGHT IN ONE RESPECT-YOUR COMMENTS CAN BE VERY HARD TO FOLLOW-you could make your case much better by going over your comments and "tightening up"- your writing style is a sort of "stream on consciousness" and reminds me of Faulkner-one of our very best writers and yet one of the very hardest to read.
This works just fine in conversation but in a conversation you get continious feedback and minor little corrections and interjections continiously and that makes it possible to follow the speakers train of thought easily.
But please hang in there -there are a lot of gold nuggets in your comments.But a lot of dirt and gravel too.
I've offered to edit his posts, iirc. That aside, whether or not any of us agree with WHT or not is irrelevent. His attacks on memmel are personal and pointless.
And, again, not the first person he's done this with.
Seems to me the proper handling here is for WHT to use the inappropriate flag or for Leanan to force editing on memmel's part.
WHT's screeds are unpleasant and achieve nothing but to spill his bile over the site.
Cheers
Thank you for the honest appraisal. I didn't realize I come off that bad. My close associates say I can be "edgy". I guess that turns into bile when converted to the printed word.
Same here. My comments are observations.
Cheers
Thanks I wish I could use english I try to communicate as best I can. I used to not write at all since I was so ashamed of my inability to grasp language but at some point I just said to hell with it and write.
My experience has been when I try and clean things up I simply make them convoluted a different way.
And yes I'm to scared to do a key post. Posting in comments I feel comfortable but its like fear of heights when I have to write "officially" I freeze up big time. Stage fright maybe. Its something I've never been able to control so.
As far as proving my numbers well the real problem is once you do the corrects the result is awful. And it has nothing to do with current events but back in the 1980's. I have posted a bit on this but the picture in paints is extreme.
The US systematically gouged its own citizens and the corruption is huge.
I see no way to not come to this conclusion yet its impossible to "prove" so I don't see any solution.
Effectively its Enron on a global scale for oil with the US government deeply involved.
Basically what happened in the 1980's is the US claimed it was using a lot less oil and the Saudi's claimed they where not shipping it however if I'm right this never happened. Not that US consumption did not decline or flatten slightly but it was no where close to what was claimed.
This of course means the expectations of large demand drops as prices increase are false and oil demand becomes very inelastic past a small drop of optional usage. Same result I claim now. But if its true now then it was true in the 1980's so your left staring at a huge lie.
My views are extreme but this conclusion is beyond extreme however I see no way around it.
In any case either we have effectively been living a lie for most of my life or not.
Thats not a comfortable conclusion. And it probably does mean that our glass house will be shattered.
In any case I'm going to take a bit of a break and probably focus on the campfire side. I think I've said enough.
If things actually start devolving like I think they will then I'll post again if its relevant.
But I need to go to London tomorrow then I have several large software projects to release I have little more to say for a while and I'm really busy so its a good time to take a break from the oildrum.
I am all for memmel posting whatever he wants to say.
Granted sometimes I have trouble digesting everything, but then again, I have trouble digesting what a lot of excellent posters have to say - especially when they talk from the scientific point of view (coming myself from a Wall Street background).
I certainly hope memmel wil be around when oil goes through $100 - which may come quicker than many even here expect.
Thanks I'll leave one last post and I really have to go.
http://www.indexmundi.com/energy.aspx?product=oil&graph=production+consu...
Take a look at the chart. And think about it.
Edit:
And I found this so the charts on oil plus this article side by side help to give the big picture.
http://www.cfr.org/publication/7175/ussaudi_love_affair_predates_bush.html
The game of 20 questions, another common ploy I see to just make everyone confused. The chart shows that crude oil production is leveling off near 72,000/day but consumption (probably of all liquids) is going up to the high 80,000's/day. I think we kind of knew that this all/crude ratio was diverging.
I imagine this is part of your conspiracy that someone is hiding production numbers. I am sorry but you can't consume more than you make, so the production has to come from somewhere. If they are hiding crude production numbers, and the all liquids is fake data, that would mean that every oil-producing country in the world would have to be involved in the conspiracy. I don't buy it, but then again, why am I getting sucked into this discussion again? Oh yeah, I only want to make some sense out of the data I see.
I don't see this at all. Any conspiracy if you will it between the US and a few select producers to channel oil into the US and divert the funds to fight the Evil Empire. Given that the evil empire died before we started to see the divergence expand then I can't see how what effectively was a hidden tax to fund the cold war effects what your saying.
Now the divergence itself suggest for years at least since sometime in the 1980's NGL's where increasingly covering expanding demand because crude supply was not expanding fast enough. This could mean a lot of things but given that debt was expanding during this period it seems the demand was there and more crude would have resulted in more real growth and less inflation monetary inflation. But the key is this suggests we where able to grow NGL's but not crude production.
So there has been strain in expanding crude production for a long time.
If you further assume that real US consumption was higher back during the cold war evil empire days and it was met by off the record Saudi production and the cash diverted to fight the good fight against the Soviet union then the expanding debt bubble and stress on oil supplies is even.
Its hard to see how we could have had a sharp drop in US consumption and the world flooded with oil and the Saudi's cutting steeply to maintain prices then not long afterwards enter a period where NGL's where covering for slow growth of oil production. The entire time debt was being steadily increased.
That by no means says the Saudi's did not cut some production just that whatever their real production number where through the 1980's is not reflected in the official numbers.
Now assuming that the US did indeed institute a hidden tax on Americans via larger crude imports and whats effectively a profit sharing agreement with corrupt countries this mechanism is probably still around if not all that useful.
Also if you look outside of crude it explains our love affair with dictators around the world they allow the US to effectively cut a deal to sell our consumption with the US getting a cut of the money. Its a hidden tariff and of course inflation allowed us to pay it. Its a win win situation the dictator gets filthy rich and the US gets its money to fight unpopular wars and whatever other scheme we wanted and bypass congressional control.
Now this of course is your typical skimming operation so its on top of whatever is normal and can't be to large or its obvious so as far as oil itself goes all this does is add uncertainty into the numbers. With Saudi my best guess is say 1-2mbd or so of excess oil over what they reported as production.
Now of course just like in Texas these hot oil sales tend to depress the price of crude regardless of attempts to control crude production so there are of course limits. But the net result is a fairly good control of prices.
At least into the 1990's esp the late 1990's when we begin to see serious divergence and NGL growth diverge from crude.
Of course it seems that there was spare capacity in the system during almost the entire time but now its hard to know how often excess capacity was diverted to off balance sheet crude sales.
Of course its hard to say or guess the changes can't be that large but with us generally using 50-60mbd or so of crude
your talking about a variable that could be as large as 2-4mbd or 4-8% of the crude market. The steady monetary inflation makes it difficult to understand but price were in general fairly stable which means you had a nice set of feedback loops that for the most party kept the party going.
For oil the net result is the pressure on oil production was probably higher than we realize for quite a while.
The problem I have with the shark fin model is that it practically requires that a significant force is fairly constantly applied to oil production in other words the demand has to be relentless and as technical advances where made the oil was used. Assuming at the highest level the force was the expanding fiat currency debt is fine but it has to be connected to oil production basically from day one. I can't see how it makes sense that we where expanding our debt and oil was not effected then suddenly it was.
The divergence of course i.e ever more debt and slower and slower oil production starts in the late 1990's 1995->
However the system would have had to already been coupled before this I don't believe it just suddenly started coupling at that point that simply does not make sense. Petrodollar recycling was already in place back in the 1970's at least maybe even back into the 1960's. This stealth tax concept probably did not start with Regan either and it seems to be a game we play with many countries and a lot of different products not just oil. Which makes sense if this was/is something we do to fund our foreign operations outside of congressional control then its probably a generic game.
So looking at US imports.
This would have to be a smooth curve or a lot smoother than it looks starting as far back as the 1960's going forward.
I'm left with not choice but to invoke evil empire conspiracy theories and the war on communism as the underlying driver and source of the oil that would smooth the curve. So for several decades production was understated and then it moved to probably be overstated as the NGL divergence started occurred. Post 1998 for a while growing NGL production offset what ever was really happening with oil production. I've reached the point I'm willing to slap a +/-10mbd on the dang production number and forget about it. It is whatever it is and I'm not sure it really matters what the exact production was in any given year. What matters is that we have a greedy mechanism that can and will consume all oil production within reported production plus some large error term.
So the coupling between oil and US consumption esp once we went to fiat was alway present pressure on oil production was pretty constant and we produced basically at maximum minus whatever variation happened in unknown but uncomfortably large error term. Thats fine as year after year decade after decade the variations don't really matter as the pressure or demand side is constant. As long as the pressure existed if real production went a bit low one year it was probably higher the next.
In the late 1990's of course the pressure increased and oil production was unable to respond NGL's again are critical as they helped offset our inability to really increase oil production but the situation steadily worsened on the debt side.
Eventually oil prices themselves started increasing as far as I can tell closely linked to NGL production growth slowing or the widening gap with oil. Plenty of error in the numbers to speculate what may or may not have happened.
Now finally we can invoke the shark fin the system was stressed for a very long time technical advances allowed this stress to be offset by relatively high oil production and growing NGL production also help the supply side respond to the demand stress from constant fiat expansion. However this eventually comes at a price of course as if you do this to a system it can suffer catastrophic failure. The needed driver to create the stress seems to exist in my opinion over a long enough period to have distorted the system.
Now that by no means says that we will crash and I try to post repeatedly that I think that oil production is at a crossroads if we did what I think we did then we crash if not then we don't.
No I'm not going to repeat my post as to wha I think we are at a crossroads right now but heck 140 oil then already back to 75-80 suggest somethings going on we can leave it at that.
Now historically what I find really really interesting is this extension of the stress back through the 1980's it was done simply because I had absolutely no valid reason not to push the coupling all the way back in time with it strengthening rapidly after the onset of the fiat dollar.
But then I needed some sort of tin foil hat scheme or grand conspiracy to support higher unreported production.
It just so happened we had Reagan and his battle against the Evil Empire going on right where I had to have had some really questionable things going on with the reported numbers. And of course on a smaller scale it extends back into the Vietnam war era.
So if I do turn out to be correct then the effectively complete corruption of our government in its efforts to fight Communism outside the constraints of our legal system is what seems to have started us down this road of destruction on both the oil and financial side. Once communism fell the wacko system created to fight communism continued to expand like a cancer driven harder as oil/NGL production faltered. We simply kept right on pushing the same messed up system to fight a war on drugs and war on terrorism never stopping.
And if this is correct it could very well have resulted in us depleting our oil supplies to the point production crash. Or maybe it did not. Maybe rapid expansion of debt and extreme economic pressure resulted in a nice gentle move to peak and a nice gentle decline. And I wrote it that way to try and show how unlikely it should be.
All our commodity production not just oil should be strained to the max only technical advances from the green revolution to oil has allowed us to effectively dodge the bullet and keep on going. I find it hard to believe that we can be so grossly negligent on the monetary side yet effectively never ever have problems on the low level commodity input side of our economy. Now of course I could well be wrong and everything ok and all we have is a bit of a debt bubble to blow off and everything will be ok. Plenty of low level commodities are left and yes they may be stressed some but further technical development or silver bullets will save the day.
What really funny is almost every single technical market analysis indicate that this is the big one we have hit the wall. Going all the way back to the top if the economic system has hit the wall then it makes sense the commodities have also esp oil. Otherwise organic growth from expansion of commodity production coupled with technical capabilities should have been able to prevent all the economy charts from redlining.
Sure its a circular argument but its a tightly coupled system so everything hits the wall at the same time.
And one more time if its going to hit the wall it obviously already has there is not a lot of reason to argue the point. And thats what I keep trying to say. The numbers I'm interested in probably don't exist in the public heck some of my speculation might only be proven long after I'm dead. A historian 100 years from now may go through the secret records of the fallen American empire and reconstruct my arguments and prove I'm right. Or we may never know.
Or I simply could have been wrong and perhaps if we do crash then a strong coupling between oil production and debt from the 1990's onwards was real and it was not that coupled before then. If so I simply don't understand why it seems a bit of a stretch that a coupling lasting only 10-14 years was capable of such distortion of the worlds oil supply.
I'm pretty confident that the numbers that tell the real story simply are not available to the public if they still exist at all. If we don't crash then of course it does not matter however if oil production does crash there is a small chance that some truths may be discovered and made public if so perhaps I'll find the answers to my historical concepts.
And this is not about oil its about how a reasonably intelligent wealth democratic nation can destroy itself.
The answer as far as I can tell is its senseless hatred of communism and people that wanted to do things a different way. Plain old prejudice and bigotry did us in.
We can talk about the evils of communism and Stalin was not a nice guy but China shows that if we where willing to live and let live that perhaps the senseless ware could have ended.
And if we had not gotten so warped from our war with Russia then perhaps the relationship with China would not have been so warped. The saying from the Vietnam war of destroying the village in order to save it seems to fit perfectly.
And last but not least if I'm right about oil we screwed things up not just for ourselves but for the entire planet.
I really do not understand this discussion. Without any context, you put up a chart of world oil production and consumption and tell us to think about it. Figuring that this was a game of gotcha or 20 questions, of course I took the bait.
I hope you realize that my response was context-free and that your counter response to me is now effectively doubly-context-free since you did not respond to my specific points. In case you have forgotten how it works, that is how you play the game of 20 questions. You started it, so you really ought to finish it.
Its not context free.
The problem is Americans feel they where completely isolated from the effects of the cold war some how the American Empire managed to defeat communism risk free. It was not risk free and we did and will pay the price for this senseless war. We created a system that allowed us to not only defer payment but also live rather well at the same time.
Oil was extracted after WWII in this social economic context. I'm suggesting that we borrowed not only money from the future to accomplish the task but also oil. The reason we succeeded for so long is because we accomplished not on monetary inflation with little opposition but also aggressive extraction of resources to prevent a simple and rapid fall into hyperinflation. I can't see how financial inflation could have worked unless resource usage also expanded in response to offset some of the inflationary pressure and convert the money to long term debt.
Excellent point, and in a post short enough that I had time to read it!
You might want to include the functional deflationary effect of transistorisation of electronics which has commoditized much of the grunt work of accounting and other mathematical analysis.
No way. It is context free because you decided to show a graphic without any context behind it.
Here is an example of your approach:
"Take a look at the chart. And think about it."
That is exactly what you said in an earlier comment. No other context than that directive to "think about it".
Egad, do you see how ridiculous your games can be?
I have to admit that I find many of memmels posts fascinating partly because he seems to be one the few willing to call BS on the official figures. I think there is a certain naivety to many who cant imagine both government & private entities manipulating and even outright falsifying the data when it suits. Indeed considering what is at stake here it would seem very probable. Having said that I understand the reluctance of this site to engage in such unsubstantiated speculation in order to maintain its credibility & reputation.
Gee man how do you expect anyone to make a buck, first you gotta confuse them then you confound them then you charge them excessively, and if that doesn't work, you pick their pockets while they are frothing at the mouth and cursing your eyes. Complexity compounds cash!! Hooray for capitalism democracy and the good old American way.
Very interesting Steve. I agree with you, and Denninger, on the extent of corruption, even though I didn't talk about it in this specific piece.
The beginning of Steve's post is also spot on. I'm not sure of the extent to which you and ilargi agree, but his insistence that this is not an oil recession - if I'm remembering correctly - is bogus on its face.
Even very simple math shows that around 1.5 trillion was sucked out of the economy between '03 and '08. That was back when a trillion was still a trillion and not the new billion. That's also not counting any of the follow-on costs, which are likely several times, if not magnitudes, greater.
It's not only a peak oil recession, but it is a peak oil recession. (Of course, if we consider none of this exists, period, without cheap energy, then it's absolutely a peak oil recession, with a lot of financial depravity piled on top.)
Cheers
Steve of Virginia,
I spend a good deal of time thinking about your comments.Sometimes you come up with better descriptive language than anybody else.Do you post on any other sites where I can see more of your stuff?
Hi Mac,
I have a blog that is a work in progress:
http://economic-undertow.blogspot.com/
Comments are welcome.
When I grow up I hope to gave a 'real' blog like Mish's or Automatic Earth ... or Barry Ritholtz or Calculated Risk.
Okay ... now for the issue of whether this is an energy of finance deflation - ccpo's observation:
If peak oil is in the past - late 1990's - deflation is unavoidable. The mechanism is found by looking into the spaces between conventional economic analysis.
The trouble started when industry became too expensive on account of the combination of high wages and increased energy prices.
Note: industry - what is left of it - complains that costs related to mitigating pollution have made industry too expensive to support in the US, and the Chinese experiment in poisoning their own country would seem to suggest this is a reasonable claim. Energy costs are much greater an expense to business than pollution mitigation ... which experience has proven to be small or non- existant.
Often mitigating pollution provides a return, which hollows that particular argument.
In my opinion, finance has contributed to our dilemma, but it is the tail and energy is the dog.
Just to be on the record:
I value Memmel's posts GREATLY.
By the way, in relation to that photo of Euan and Rembrandt "contemplating our future". That stare indicates that you have found the culprits for our problems. Can't you please look away while we print just a little more money and burn just one (ahem....85 million daily...cough) more barrel(s)? That's a severe stare if there ever was one.
Nate, you need to consider demographic changes in China when considering the increase in money/credit supply. Large numbers of Chinese are moving from the countryside into the city, and city dwellers have a much larger need for money than rural folks.
Also, your comment about 100% reserve banking is very interesting. One can argue that we're moving in that direction with the huge explosion of "excess" reserves held at the Fed. IMHO, the Fed is really just converting toxic assets into hard currency so that the banks can cover depositors, who are increasingly unemployed or retiring, and will need to draw down on their deposits in the coming years.
Just on que, the same year I graduated from college.
That's life, or my life anyway.
Are you claiming that the roughly $6k gain in that time frame would buy the same amount of goods in '80 and '08?
A gallon of milk might have cost $1.60 in '80 vs. the $2.29 I paid today. If my math is right, that's a 43% increase in the price of milk vs. your 14% rise in wages.
A car might have cost $5,413 in '80 vs. the $27,958 today. That's a 400+% increase in the price of a car vs. your 14% rise in wages.
The numbers are worse, of course, if you start with where the financial system was pretty radically changed in the early '70's.
You might want to watch the video posted here by Leanan some time ago, The coming Collapse of the Middle Class. Elizabeth Warren.
http://www.youtube.com/watch?v=akVL7QY0S8A
Cheers
My guess is that, prior to the recent gasoline hike, money would have bought more goods in the 70s.
You can't look at just staple goods, as "inflation" is not the same across all items. Look at what it would cost to make an old tube TV in 2007 (if they were made)... much less. Even the cost of any basic TV would have been less by percent of income during the 2000s, compared to the 70s. This holds true across most electronics. Look how many we throw out. They're so cheap they're disposable.
And then there is the fact that we are paying for better things. What would an I-Pod cost in 1974? A personal computer? A wi-fi connection? Rhetorical questions, but I hope my point is taken. All the money is the world couldn't buy the Rockefellers air conditioning. Today, it's standard.
Or take the car. You quote the current car price as $28,000. But you can now get a decent, running car NEW for a little over $10,000. It probably has close to, if not more, options that a '74 car. And above all, it gets the job done.
My point is, inflation is not as simple as looking at the price of milk and grain. Staples may have gone up, but not everything else. Over all, many people lived better in the 80s, 90s, and 2000s, than they did in the 70s (excluding "unskilled labor"... but that's another issue). As is the next decade.
The prices were averages for both years. I chose items at random in order to satisfy your argument. You actually chose those that support your argument, and they were not averages. Apples and bananas. Guess which is more statistically valid.
If you want to examine a broad basket, feel free.
Or you could just watch the video.
Most importantly, I wasn't addressing inflation, but real wages.
Cheers
I think you're missing my point. There are different kinds of averages. Do you take the median or the mean for example? This sort of thing can obscure statistics. Quantitatively, the average salary of ten people who make 20,000K and ten who make 100,000K is 60K... but to state that the average salary is 60K is missing a lot of what is really going on. A somewhat similar point to what I was getting at... that by looking at only part of the whole, you are missing the big picture. And anyway, I don't think you picked those "at random" anymore than I did... the diffeence is that you were trying to apply that statistic to the whole. I was simply pointing out your faulty logic. My argument was only that your argument was unsound, so I think what I selected is fair.
So now you tell me what's more statistically valid, looking at the whole (not that you did that) or the loosely defined "average"...
I don't see how you can discuss "real wages" without consideirng inflation. And my point was directed at how one defines real wages anyway.
Just watch the video. Avoiding that is all you are doing. You aren't arguing anything of use.
BTW, average is average and mean is mean.
Cheers
Andrew brings up a key point: prices of staples have gone up while prices for electronics, cars and some other items have gone down.
The production of food and energy are technologically mature. The man hours required to produce a bushel of corn or a pound of chicken have been reduced to less than the cost of fuel, fertilizer and farm equipment.
If one has less discretionary income, the price of cars, electronics and other discretionary items had better come down.
There are many reasons for relative price movements, one of which is changes in the effective money supply. Cars, electronics and plastic tat from China have gone down even during a great credit expansion (ie inflation) due to the mobility of capital and international wage arbitrage (the dynamics of aging empires). For prices to fall in nominal terms under such circumstances means that they were going through the floor in real terms.
During deflation we could see the opposite - after an initial period of price collapse across the board, we could see prices of essentials rise in nominal terms against a backdrop of a collapsing money supply. This would mean prices were taking a moon-shot in real terms. The most essential things would be the most strongly affected, as we would then be into the phase where supply collapse would be the dominant factor (as demand destruction leads directly to supply collapse).
I am probably not alone here as the only one that doesn't totally understand what you're saying. Think I get the gist of it, but it's a little bit technical for someone without an economics background. I think that you're saying that, in a shrinking economy, the trend of luxuries becoming cheaper while necessities remain (comparatively) stable, might reverse? But I don't really understand the driving mechanism behind it (nor do I understand the driving mechanism of the relative price disparities on the "upside" either... I was just noting that they were there).
Another point: perhaps it's premature to say that we have "perfected" food production. At best, we might have perfected it in the current 20th century, FF rich conditions. But perhaps another way to look at what might come next (prganic, local, etc...) is not as a step back from the Green Revolution, but an adaptation to a new set of circumstances that the Green Revolution cannot (and wasn't designed to) address.
This is why I am not 100% sold on the connection of growing energy supply to economy. I think the economy can be reconfigured to grow with less energy... current American energy useage has more to do with historical happenstance and abundant supply than what is neccessary. Consider how Europe looks based on when it was "built"...
Cars, electronics and plastic tat from China have gone down even during a great credit expansion (ie inflation) due to the mobility of capital and international wage arbitrage
They're also going down due to manufacturing productivity improvements and economies of scale. US manufacturing reduces costs by 3-6% per year, year in and year out, by improving the way work is done. The UAW's ranks would have shrunk dramatically in the last 35 years regardless of outsourcing.
It is a Minsky moment indeed.
Anybody.Wasn't our GDP to debt ratio a lot higher in the depression and during WW2 ?
If by "our" you mean the USA, then yes compared to today. Other countries (the UK, and many other "big" nations at the time) had much higher proportions of population which subsequently died in war and debt/gdp during the 1930s and 40s. The US and other nations sacrificed huge proportions of human life (half a million citizens were killed in the US and a similar number in the UK) and economy never before risked on foreign enterprises. Most western economies wisely realized (as a result of WWI) well before the end of WWII that extracting raw commodities from a nation as retribution was a losing game and that mutually assured destruction/benefit was the way to go.
No. At the height of the great depression, when much of the debt hadn't yet defaulted but the GDP plunged, US total private and public debt reached about 250% GDP. Total US public and private debt is currently about 375% of GDP and still rising. We are in a historically unprecedented situation, which is why the old models are of limited predictive value this time.
I understand your point here and it is valid, but believe me back then they were very worried about the consequences of such a high debt. Back then, there had to be some very important people thinking what we were doing. Just like they're doing now in our time. Now we can look back on it and see how they pulled it off. So now what we do know is that the Gov will pump billions more into the economy if they have to. What the consequences of doing this is what we're all talking about. Your point of, and I quote you is, "We are in a historical unprecedented situation." I would say back then they said the same thing. In my humble opinion, the difference between them and us is ENERGY. All this other stuff is just a smoke screen compared to our complete dependency on other country's willingness to sell us OIL. I know OPEC loves our money and the security we can provide them, but it is still a decision that they make, not us. So these guys are not only deciding the fate of their own future but our future as well. Right now, it is in their best interest to sell to us. But if we learn anything from history that can change real fast. God help us if that happens! So like I said many times before we have lost the offensive.
In the next year the Government will bail out more banks or change the rules; fund States from short falls; extend the first time home buyers' tax credit; extend unemployment benefits and who knows what else. I bet making our debt level at about 500% of GDP. So at that point we all will just be spectators like we are now. We are all on this train together and I wish you all Gods Speed
Fantastic summary of the monster clusterf**k we're facing. Great charts (with sources too!) --thanks!
I agree. Stoneleigh makes a major error in her thinking here:
The bond market is far more powerful than governments at this point.
No, they are not. Governments have guns. Bond Markets don't.
Bond markets can make your life miserable, a pissed off government can make you dead.
Stoneleigh thinks like an economist, which means she doesn't understand the world - she only understands the representations of the world.
When push comes to shove, heads roll, and that's that.
I am not an economist, I am a big picture person with a formal background in science and law. I am perfectly well aware of real politik, but physical forces comes further down the line. For the time being the bond market is far more powerful than people typically imagine, because it has the power of the collective behind it.
Thanks Euan. Well, a lot of this went over my financially challenged head, but what didn't was scary indeed. And that graph of UK house prices - yikes!
What I noticed in that chart was something I suspected for a long time. There was no housing bubble in Germany.
There is a strong rental market here in Germany and people who buy/build houses tend to stay in them for life.
Oh by the way, I hope Stoneleigh is wrong about whats to come. It sounds awful.
For that reason, Germany's relative power within Europe should increase, even though their export markets are likely to collapse with demand for a period of time. The housing bubble nations will be significantly disadvantaged, particularly the UK and Ireland which are at the wrong end of a long energy pipeline from Russia. The pressure in that pipeline is already essentially zero when it's cold on the continent.
Neither of them will have the means to earn the income to pay for energy (or other) imports anyway. The implosion of the Irish bubble (and with it national income) will leave the Irish unable to heat all the new large homes they've built in recent years. The UK's income results largely from North Sea oil and gas (rapidly depleting) and the City of London (where huge fees are generated from money chasing its own tail). Without those sources of income the UK will be an over-populated basketcase, and a powder keg as well. My concern is that nascent fascism, especially when Nick Griffin of the BNP makes mainstream TV appearances. This is precisely why I no longer live there.
Similarly, there are places in the US (including my area) where a much higher than average proportion of the housing stock is owned free and clear, mostly by retirees. As long as the Social Security holds out, these homeowners don't have to sell, and that thus puts a pretty substantial floor under the local housing market.
My impression is that the places that are the worst off are the ones dominated by young wage earners, all of them with big mortgages.
Also, as the number of foreclosures and distress sales increases, does this not imply that the housing stock will increasingly consist only of houses owned free and clear and vacant bank-owned housing? At a certain point, it would seem that the downturn becomes self-limiting. Furthermore, it is looking like a very substantial fraction of those increasing numbers of vacant foreclosed homes will not eventually be sold at all, but simply trashed, vandalized, and eventually arsoned or bulldozed. This will also serve to somewhat limit the decline in housing values.
1. People have to live somewhere.
2. To the extent there is a total oversupply of housing --as there is in declining rural areas, the housing which gets abandoned/destroyed is always the worst of the existing housing stock--never newly built housing. The reason you see newly completed housing with no one living in them is that the builders and bankers refuse to reduce the prices to market clearing rates.
People need to live somewhere, but there is no guarantee that they are going to own it. The percentage of housing that was owner occupied hit an all-time high just about exactly when prices peaked. Back in the late 19th and early 20th century, home ownership rates were well below 50%. People need to live somewhere, but if they can't own, then they'll rent - unless they can't afford that either, in which case they'll squat.
Renters generally make do with less space than home owners. The house that holds one owner family could, with a few minor modifications, hold two or more renter families. Then there are the phenomena of kids not leaving home, kids moving back home, the brother-in-law on the couch, etc.
I don't know exactly what percentage of our housing stock will ultimately prove to be surplus and will have to be abandoned, but it is a substantial percentage.
The Great Depression saw a lot of mansions abandoned or converted into multi-family units. I expect we'll see that again.
Take a look at the latest Frontline for an example of that happening:
'Close to Home'
http://www.pbs.org/wgbh/pages/frontline/closetohome/view/?utm_campaign=v...
It's rather deep into the program where we learn how many people are living in one house but the whole program is worth it to see how many of us will be living soon.
I saw that. The interesting thing was, it didn't appear to be an absolutely terrible thing. Watching TV together, extra pairs of hands to help out with things, people to watch after things when the homeowner is out of town. It didn't look like nearly the horrible experience - for either the homeowner or the lodgers - as some people seem to imagine. Far from ideal, yes. Compared to sleeping under an overpass, though, it didn't look all that terrible.
I think some of us will be living in totally new forms of housing.
http://www.n55.dk/MANUALS/WALKINGHOUSE/walkinghouse.html
If you want a bit of a shock as to how we might be living, check out this tour of the fastest growing form of human habitation.
Much of the new build is rubbish that will only stand for a few years (like the concrete skyscrapers in Dubai that might last 10 years due to appalling construction standards). Having been built mostly in foolish places that will serve only as slums, due to their lack of proximity to anything useful, many of these places will simply go to ruin very quickly, after being stripped of useful materials.
Much of the new build is rubbish that will only stand for a few years (like the concrete skyscrapers in Dubai that might last 10 years due to appalling construction standards).
Could you provide some documentation of this? I've seen this claim by Alan Drake, and it never made any sense to me.
I can't provide any generalized proof, but I will confirm from my own observations that current construction is often pretty shoddy.
Oh, I've seen a lot of shoddy construction.
OTOH, I haven't seen any evidence that
1) urban construction is any better,
2) construction quality is, on average and in general, getting worse over time, or
3) quality is bad enough that "Much of the new build is rubbish that will only stand for a few years".
That last looks least defensible to me.
The only thing I might say in the way of anecdotal evidence in support of #3 (and it isn't my statement, I'm not defending it, just commenting upon it): I've seen quite a few houses built in the 1970s, and quite a few built in the 1950s or before, and it does seem that the ones built in the 1970s are not holding up nearly as well. Most of the ones built more recently are too new to really notice anything yet, unless there is some sort of immediate disaster like that Chinese gypsum board fiasco.
I'd say you're suggesting that there's a bit of truth to #2 (construction quality is, on average and in general, getting worse over time), not #3 (quality is bad enough that "Much of the new build is rubbish that will only stand for a few years").
After all, you said "the ones built in the 1970s are not holding up nearly as well". So, these are 30-40 year old buildings - they obviously are still standing. When you say "Most of the ones built more recently are too new to really notice anything yet" you're saying that 20 year old buildings are doing just fine - they're not drying up and blowing away.
As a counterpoint, I would note that single-family homes, are, on average, much more energy efficient than multi-unit buildings (if that seems contrary to your intuition, here are the references: http://energyfaq.blogspot.com/2009/01/is-urban-housing-more-efficient.html ). That suggests that newer construction is better in some regards.
When I hear someone say something unrealistic like "Much of the new build is rubbish that will only stand for a few years" I begin to get the sense that the writer's intuitions and foundational assumptions are very much excessively pessimistic.
I have serious issues with the quality of housing built in the USA, namely that sturcutral support is mostly wood and it has asphalt shingle roofing. Parts of Europe are way ahead with aerated autoclaved concrete (AAC) and tile roofing. My recently built house in coastal Alabama is AAC with an aluminum roof. IT is designed to be energy efficient, need little maintenance and last 500-1000 years. It is also heavy reinforced with concrete cores ahd rebar, wieghing 100 tons.
http://www.safecrete.com/
I have serious issues with the quality of housing built in the USA, namely that sturcutral support is mostly wood and it has asphalt shingle roofing.
US housing has been framed with wood for 150 years (the phrase "balloon framing" was created in the 1800's). Asphalt shingle roofing isn't my ideal, but it lasts a pretty long time, and is cheap to maintain.
I like your ideas, but they have little to do with the unrealistic idea that suburban housing is going to blow away in the wind.
I have serious issues with the quality of housing built in the USA, namely that sturcutral support is mostly wood and it has asphalt shingle roofing.
I also noticed that many US houses are somewhat flimsy and badly insulated compared to houses built in Switzerland, but I wouldn't consider wood not to be a good housing construction material.
This untreated wooden house was built 1287 in central Switzerland:
That's 722 years old.
A house like this would be consumed by termites in a humid subtropical climate like southeatern US. Also, it is a fire waiting to happen.
Where I live we have hurricanes and insurance on a house like this would not be affordable.
Granted there are no termites in the Alps, but there have been several winter storms during the last 700 years and this house has obviously been heated for several centuries with fire. (And winters in the alps are actually significantly colder than winters in the southeastern US.)
If you take wood as a construction material, doesn't mean you need to build with flimsy 2x4s. You can also build with serious, solid beams.
The walls of wooden houses in central Europe are actually often made out of 8" to 10" thick solid wooden walls. It insulates well (heat and noise), no creaking, high protection against earth-quakes (higher strength to weight ratio than steel), no cracks, has a high thermal capacity, hardly burns down (a wooden beam doesn't loose its strength in a fire as quickly as a steel beam does) and won't be blown away by any storm. (Fire is actually often more a question of your furnishing than of the building itself.)
Anyway, at the end it is not necessarily a question of the building material, but whether you want to live in your house comfortably for a long time or whether you just want to buy/build it for speculative purposes and don't mind paying exorbitant heating bills and maintenance costs.
Property taxes. A home here in the financial ruin that is Detroit still have substantial taxes. I almost bought a home here for about 10k. Taxes on it might have been as high as 3k/yr.
That's $250/mo just for taxes and more than half what my mother gets from her SS. Add in insurance, utilities, food...
Do the math. Owning your home is no guarantee unless you've money in the bank or income that goes beyond a meager SS payment.
Cheers
On the other hand, retirees could probably take in one or two lodgers, and collect enough rent to cover the taxes. Unless they were fortunate enough to downsize when they had the opportunity, most of them are now empty-nesters rattling around in half-empty houses. They might even find it beneficial to have an extra, maybe younger, pair of hands around to help out with some things, and it might make things less lonely.
I don't think that Social Security was ever intended to make it financially feasible for retirees to live in too-big owner-occupied homes by themselves.
At a certain point it will be self-limiting for exactly the reasons you describe, but we are a very long way from that point, and I would argue that real estate will fall by 90% on average before we get there. That doesn't mean it will be cheap though. For almost everyone a $50,000 home would be far more out of reach then than a $500,000 home would be now, due to the lack of access to credit. If virtually everyone who wants to purchase a home must do so in cash, how many buyers will there be and what would you expect homes to sell for (given a paucity of buyers and lack of price support)?
Not true - at least not in the long run.
The reason for that is that germany is democraphical finished - germany is doing democraphical-suicide (profile-fertility-rate of around 1.4 since 1970 for west-germany, cohort-fertility for 1965 cohort around 1.45, for racial germans 1.2 and german academic woman less than 1.0)! The absolute population is allready declining despite of vast numbers of non-european immigrants up to 2005.
Older people buy a car every 10 years compared to every 3-7 years by a young guy. They may have a lot money but they are not productive anything at all or make inventions. So the sociaty is getting a "freak-sociaty" with ever ongoing decline. You can discuss if an fertility-rate of 1.8 is better for an intersection-time to release presure from the environment but a profile-fertility of 1.4 is suicide.
This may be a big advantage for the USA and Ireland with fertillity rates around 2.0 - and to some degree for France and the UK also - at least if you suggest that all people are equal and the subsaharian african immigrant in France (with around 4.5 offsprings per woman in France) will design the State-of-the-art Maschine-tool around 2050, when all the german and japan egineers which do this today have vanished/retiered. But this i suggest request some extented efforts in education and integration, than which is actually done.
Older people buy a car every 10 years compared to every 3-7 years by a young guy. They may have a lot money but they are not productive anything at all or make inventions.
I think the German engineering profession would disagree with you. Do you have sources for that?
I admit that this is not a proved conclusion - just an observation of everydays life. I also would admit that after the immediate retirement people aged 55-70 often buy more new cars than younger people. But also they have sometimes only one car left (if they are married) instead of two and after they reach an age of 70 - 75 they normally don't drive that much anymore - often by far less than younger drivers and that's proved (insurance-data) - and hold their cars very long.
The german engineering profession knows that and is allready accepting the fact that the german market will shrink more and more in the long run. They focus on markeds like china, india and also to some degree the US.
But also if you assume they buy the same number of cars and other stuff like young persons till they are 90, than they only can life by transfer-payment of the productive part of the society (the allready not retired, exept if they hold large amounds of foreign-stocks which is not the case in germany) - which is a big burden to the wellfare state. This is allready clear in germany and soon will become a bigger problem in the US as we now - but in the US the problem is by far not that big because they never see fertility-rates of 1.4, which are the normal state in germany since 1970. That's also a main reason for the problems in Japan since 1990 - of course it is not the only reason but a central reason and that's widely accepted in economics. The number of people in the working age and their relative strengh comparred to dependants is a central number for the economic power of a (developed industrial) society - their is much literature on this topic. And this number is allready shrinkung in germany and will shrink faster after 2010 and especially 2020, in the US after 2010 the growth will also slow down but the absolute number of people aged 20-65 will not shrink. The relative strengh of people aged 20-65 compared to all other will go down in all western states , but in the US by far less sharp than for example in Germany or Japan (with their low fercility-rates thince 1970). Democraphy is destination!
Ah, you're talking about post-retirement.
Well, the solution is obvious: later retirement. People are healthier, and living longer, so they should work longer as well. More productive, less bored...
As the pressures mount on people of working age, retirement ages will rise.
I agree this will help to some degree, and allready the (government specified) retirement-age in germany is now at 67 up from 65.
But this is not a solution in the long run, because it is political and also economical not possible to rise the retirement age like it must be raised because of the age-structure in germany or japan (for germany around 75 in 2045). There is much literature on this and nearly all modern demography-scientists figure out the problems of a fast shrinking society with fertility-rates below 1.6-1.8.
http://www1.bpb.de/wissen/1KNBKW,0,0,Bev%F6lkerungsentwicklung_und_Alter...
http://www.sozialpolitik-aktuell.de/tl_files/sozialpolitik-aktuell/_Poli...
http://www2.uni-jena.de/erzwiss/dup_3/Senioren_Idosebb/Bevoelkerung.html
The other point is that you could not avoid oconomic decline in the long run if your fertility-rate is to low, because one day people die, at least till the kypernetic days... Because the oconomic power of a nation is a function of the capital stock, the so human capital stock and the tecnological improvement you will either way get a problem in the long rung, because the second and third does not well in an aging an declining society. Thats a fact, it's commen knowledge in the oconomics. And please don't say the per capita income in an shrinking society is growing faster, because thats also a myth and not the case in reality.
it is political and also economical not possible to rise the retirement age like it must be raised
It's certainly politically difficult - I think that will change as it becomes more and more difficult to pay for pensions.
Why wouldn't it be economically possible? Older people are living longer because of better health. That means much lower levels of disability, higher energy levels, etc. People can and should work much longer.
I'm surprised to see that Germany's population is already shrinking. I thought that was the case for only Japan and Italy.
Obviously, you can't let your population decline forever...
What do you mean by "because the second and third does not well in an aging an declining society. "?
A couple of government charts on the UK situation.
Growth is minus 5% for the last 4 quarters.
http://www.statistics.gov.uk/cci/nugget.asp?id=192
Government debt has ballooned to 59% of GDP, totaling £825 billion, around £15000 for every man, woman and child. Less than half the population actually work, so that leaves >£30,000 national debt for every worker.
http://www.statistics.gov.uk/cci/nugget.asp?id=206
Not to mention that UK has external liabilities of 450% of GDP!!! Government debt is peanuts in the debt universe as a whole,
, so that's around 10 trillion dollars or so.
UK GDP is around 1.3 Trillion pounds I reckon.
http://ukhousebubble.blogspot.com/2009/03/uk-external-debt-64-trillion.html
One mistake people often make is focusing on Government debt alone and not the whole amount of debt, this is like trying to focus on tar sands and forgetting about light sweet crude oil
Just like the peak oil situation can only be understood by factoring in EROEI, crude, biofuels, solar, wind etc. Debt must include Financial, Government, Private debt, external debt etc.
ummm...
ok I'm not sure what you mean here by 'external debt' but if you mean that debt which we owe to other countries then is it not fair to net off what they owe us?. The key word in your quote is 'gross'.
Don't get me wrong though. The UK is in so much debt that it is laughable. There is not the faintest chance of us paying it down. And then the ejiots calling for more government spending!
For anyone who might be interested, here's a link to the TAE primers explaining how our current predicament developed, and delving deeper into specific aspects, for instance the interaction between energy and finance. And here's the TOD post that started it all in 2007.
I very much enjoyed meeting you at ASPO, and I enjoyed talking to Euan again (can't say I "enjoyed" our talks though).
As you know, I guess my only real quibble is that from the point of view of oil importers, we are already in the early stages of a long term accelerating rate of decline in net oil exports, and IMO constrained energy supplies are acting as an accelerant, pushing us faster along the path to the ultimate conclusion. In round numbers, Sam's best case is that the (2005) top five net oil exporters shipped close to 5% of their post-2008 cumulative net oil exports in just the eight months since February, 2009--1/20th gone in eight months.
Incidentally, for those of you who haven't met Stoneleigh, she is a delightful, funny woman--who just happens to have a grim message.
WT - what is your point re net exports? Less oil would be inflationary in nominal terms but without surplus energy the existing claims can't be serviced. The house of cards Stoneleigh refers to then falls faster and dwarfs the nominal impact on energy prices.
I agree that there is not nearly enough exported oil to come anywhere close to generating the economic activity necessary to repay even a fraction of the total debts that have been incurred, nor is there enough exported oil to come anywhere close to generating the future earnings that the stock market is expecting.
Here is the crux of Stoneleigh's comment on energy:
My point is that we are already in the early stages of a supply collapse, regarding net oil exports. Current volumes of net oil exports are still high, but that is extremely misleading, e.g., combined net oil exports from Indonesia, the UK and Egypt were only down by 9% in 1999, versus their 1996 rate (when they showed a combined production peak), but by the end of 1999 they had shipped 53% of their post-1996 cumulative net oil exports (CNOE). In other words, their initial three year net export decline rate was only about 3%/year, but their initial three year post-peak CNOE depletion rate was about 25%/year, calculated exponentially.
Calculated exponentially, Sam's best case is that the (2005) top five net oil exporters are now depleting their post-2005 CNOE at the rate of about 9%/year (from 2005-2013), versus an observed three year (2005-2008) net export decline rate of 1.4%/year (EIA).
And as oil prices rose at 20%/year from 1998 to 2008, OECD consumption was flat to down, but non-OECD consumption has shown a large increase. This pattern appears to be continuing this year. Whether it will continue in future years remains to be seen, but the Thirties case history suggests that it is certainly possible.
In the Thirties, oil consumption fell early in the decade, circa 1930/1931, rising thereafter, and oil prices rose at 11%/year from the summer of 1931 to the summer of 1937.
You don't seriously think they'll be finished as exporters next year, though. Fiat money combustion will win this horse race. I wonder about the collapse in supply from lack of demand, too - why'd the industry survive 1986? Still enough P2/P3 to get by on? And drilling went bonkers in the wake of the early 80s demand retraction. What was the decline rate back then?
I see various silver linings in the KSA situation, too - 75% of their consumption is burnt up for electrical generation, some of that raw crude oil, too. They could offset their consumption gains at the very least by some dedicated utilization of non-associated NG, or, as Alan suggested the other day, by cutting a deal with Qatar or one of their other gas-rich neighbors. The fact that al-Naimi doesn't he bother to discuss this suggests to me that they view their domestic needs as a non-issue that they could deal with at anytime they felt necessary, as did the OECD in the 80s with massive fuel switching away from resid use for electricity.
KLR as far as I can tell they already have done the things your suggesting and hid declining oil production as increases in internal consumption.
In general it seems most of the oil exporting nations have optimized internal consumption of oil to transportation as much as they can. This was used to hide overall production declines.
Thus this card has been played they are holding nothing.
This of course implies export land is kicking in big time as they have no choice but to decrease exports as falling production can no longer be hidden and offset via a move to NG.
To some extent this also help explain why NGL's have been abundant as exporting countries expanded NG usage of both associated and non associated gas NGL production increased.
These NGL's also helped all over to cushion falling real oil production.
You don't have to believe me but then explain where the NGL's came from for export and what happened to the NG ?
Overally I'm very confident we are past the point where substitution of NG can offset production declines.
The fact that NGL's seem to have stopped increasing or are already in decline indicates to me its crunch time.
I think the rate of change in exports is accelerating fast enough right now that modeling it using historical data may be inaccurate. If I'm close to right about the actual decline in oil production then highly inaccurate.
Given the price of oil and the massive overcapcity in shipping and refining its clear regardless of the cause the amout of oil being exported right now has dropped dramatically.
Now of course you can except the claims that its from OPEC cutbacks and demand contraction or ...
Sooner than later given that in general storage inventories are tightening and oil prices are rising we will find out what the real situation is.
Although our economy probably has not recovered on the demand side demand seems to have at least stabilized esp at the global level.
Not a lot of sense in arguing as the truth should be obvious in a matter of months. How long all depends on what the real variables are but OPEC is approaching the point that if they cutback and have capacity and want to keep a bound on prices they will have to produce. Export land alone means even if they did cut back they will still be forced to increase production to keep exports stable.
The fact that OPEC is not reporting rising production and flat exports make me believe that what ever the real answer is the reported numbers are fake. Otherwise they would be reporting steadily rising production to offset internal consumption increases as they keep exports level. Exportland never sleeps.
Apparently you don't understand the ELM. Using the ELM to model is very accurate. It has a built-in acceleration as a proportion to remaining available exports. The other bits of acceleration are accommodated by watching historical production declines. You cannot just go and redefine the data and the conventional ELM interpretation. It already accounts for everything you say. I don't know how many times WT has shown the numbers and charts. Does it still not sink in? Or do you refuse to read these posts carefully?
Besides, your statement about being right in the sense of some vague statements you have made seems awfully presumptuous. Do you have some chart that you have made to demonstrate "the actual decline in oil production" that you refer to? Can you provide a link? You always hint that you are "right" about something by referring to a non-specific post that you made. If you track that post down, it will also refer to another phantom post. This keeps going on and on. And it never leads to a concrete number, table, or chart that you have drawn up. I have tried to track the stuff down that you mention because I am interested in doing the actually modeling and giving credit to one whom credit is due. Yet I have wasted so much time tracking these vague statements down that I have frankly given up.
Note to self: That reminds me to remove all references to Memmel's statements in my documentation.
Actually you slammed me on it fairly hard since I called explained it as similar to the lambs-dip in spectroscopy.
The way he has it plotted it shows as a spike in pure price its a dip.
Here is the post.
http://www.theoildrum.com/node/4770#comment-436521
In this one I guessed the center at 1995 in later posts I've considered it might be slightly later.
If you look at his graph the sharp peak is from the price collapse but its a bit of a outlier.
Depending on how you weight that single point anything from 1995 to 2000 could work.
Note however there are other factors not included in this graph such as expanded debt so ..
I checked the original post and it did not mention inflation adjustments or if it did I missed it.
You can pick the min in prices off this chart.
http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_P...
However there is a bit of a shock right there. From Russia
http://www.stratfor.com/analysis/20081003_global_market_brief_implicatio...
So it depends really on your definition just about any one of the years between 2005 to 1999 work. On the post peak side 2000 seems to mark the boundary arguments for 2000 including financial data would be dubious.
If you look at this chart you see the flatline for credit expansion during this period.
In this post I have resolved it a bit later 1998-2000.
http://peakoil.com/current-events/weekly-us-petroleum-and-ng-supply-repo...
That was posted in Sept 24 2009 a few weeks ago.
I have many posts between these two that discuss the interaction of economic data and oil prices over this span.
After 2003 the data simply becomes unreliable and murky at best. Not surprising since credit expansion had been well under way at that point.
I have many posts going back over this period for a number of years pointing out the divergence that occurred during these years.
http://europe.theoildrum.com/node/5731#comment-542731
The google hits generally seem to be on only the most recent ones.
In any case for the record the latest "model" that you will reject is we entered the plateau period somewhere around 1995 or a bit later. Oil production for all intents and purposes flatlined from 1995 to sometime in 2007 for heading down the backside of the production cliff again probably as and accelerating decline curve.
The data after 2003 seems throughly corrupt so no real telling what the exact changes in production where past that point.
In any case during the whole period from 1995-2007 you could readily claim production was flat or slightly rising or a undulating plateau all are probably valid given the reliability of the data.
The economic data is far more reliable and you can see the credit expansion and rising prices so looking back using economic data it clear we hit the wall back then.
Assuming that oil production and our economy is tightly coupled then that was peak oil regardless of the production claims.
The data given here is US centric which is ok for our purposes but global data may help or may add more error.
Regardless the basic thesis is that global credit expansion began because of peak oil or more correctly the flattening of oil supplies at the top of the shark fin and failed when oil supplies began to fall off sharply and the price of oil skyrocketed. Given the timing it seems that the peak in oil production started before the credit expansion so it can be viewed as the cause or driver.
Or you can say that oil production maximized credit was expanded oil production did not increase or increased little and credit was expanded over and over again in and attempt to keep growth going in the face of stagnant oil production.
Of course near the end the credit expansion was driving itself in its own bubble so ..
One more graph I like this one.
http://netenergy.theoildrum.com/node/5304
Given the relationship between economic data and oil extraction is vague with the only real connection being the price of oil which is not enough tough to say.
I did find a book that gives a graph of investment in oil exploration and production which adds another tie back to the economic world.
http://books.google.com/books?id=1Li8HLXw5tYC&pg=PA171&lpg=PA171&dq=Hist...
Page 172.
Investment in my opinion was obviously climbing by 1996 assuming it started climbing because current production was no longer adequate and its in agreement with other data.
Mixing economic data with oil production figures is a intrinsically blurry process however no matter how you do it the data always seems to overlap and points repeatedly at the 1995-2000 time period as when the major transition took place.
None of the traditional peak oil models treat this period as special despite the economic data practically screaming that it is.
So I looked here and eventually decided it probably means we are on a shark fin production curve.
Depending on where you wish to plase the start of the plateau period since you have a ramp up period that should be included lets say 1993-2007 1993 because OPEC showed a fairly clear plateau in production at that point.
Thats 14 years of stable high production rates. Now the economic data paint and even longer forcing period looking at credit expansion it oil production started being forced as early as 1980 or the first peak in oil production.
Using this as the starting point you get 1980-2007 or 27 years of forced production. Opec production cutbacks in the 1980's till into the 1980's lowered production but raised prices and the credit bubble started expanding in 1980 so for the overall picture the top of the shark fin is actually 27 years but given production varied this is a production capacity number. If you assume peak was reached near the midpoint of this forcing period you get 1994 and six months.
Valid capacity numbers are probably even more hopeless to find so ..
Regardless 27 years of forced oil production simply is not going to end well.
You can't compare it to a "lamb's dip" in spectroscopy. You can't go grab any arbitrary chart and claim that it justifies your own theory, whatever that is. What you have done with this response is to prove my point -- that you have no paper trail of reasoned logic, just a hodge-podge of random assertions and associations.
I don't know exactly what prompts this kind of activity, but it has a common name on the internet. Most people like to call it the Chewbacca Defense. In general, the aim of the argument is to deliberately confuse the readers, and my favorite description is of an argument so "patently nonsensical that the listener's brain shuts down completely".
So in this case you probably have no idea of the difference between a "lambs-dip" (sic) and a Lamb Shift in spectroscopy. You basically cherry pick for some oddball curve shape and then claim that it holds some relevance. Please, no one look up what a lamb dip is (I did and it is irrelevant, trust me). This is just plain ridiculous. If it all wasn't such a brilliantly concocted scheme that has been running on TOD for years now, I would have ignored it completely. Memmel's ongoing stream-of-consciousness is only interesting in its sheer audacity and endurance.
The quote from the Cochran character:
I'd say keep at it, WHT, but why? :-) I too, agree with your observations of memmel's stream of consciousness. I'm glad someone takes the time to call him on it. And, I think he's getting worse. A course I took in college on communication defined it something like this (and I'm recalling from years ago) - communication occurs when the receiver understands what the sender is saying. Clearly this is not occuring with memmel's writing. Memmel seems to be satisfied with what he has written, not with what he has communicated. I used to read all of his post. I no longer do that. However, I do enjoy your critiques!
And herein lies the problem because sitting here in my nicely centrally heated house on the south coast of England I am expecting those nice Qataries to be sending me their gas, in exchange for my pounds sterling. They can't give it to everyone! So I had better hope my pounds maintain their value..
unless you mean next several years, I disagree we are in early stages of supply collapse -plenty of oil on markets now plus tanker storage plus spare capacity
b)Stoneleigh meant well into future re high energy prices - not soon
c)I think under BAU scenario prices would eventually get to $500+ a barrel in next decade - but when that supply demand situation materializes it won't be BAU scenario.
I agree that you have summarized the conventional wisdom.
There is big difference between 'supply collapse' and 'supply shortfall'. Any near term supply collapse in oil would either be due to a demand collapse or some geopolitical event that no one can predict. Oil projects already finished and running will still bee pumped even if prices drop to $20 or lower (which even I can't imagine). So it's hard for me to see a supply led 'collapse' in production before 2012. You think supply is going to collapse on its own in face of stable demand in next couple years? I think this is highly unlikely but anythings possible in this environment...
My point is that the current slow decline in net oil exports is very misleading, since Sam's best case is that the top five (2005-2013) depletion rate is about six times higher than the observed net export decline rate.
Regarding demand, I expect to continue to see falling OECD demand, especially falling US demand. The key question is what happens to non-OECD demand, but given the recent 10 year trend and the Great Depression model, I basically expect to see a pattern of non-OECD countries outbidding OECD countries for declining oil exports.
Closer to home, remaining CNOE are difficult (probably impossible, at least for Canada & Venezuela) to model for Canada, Mexico and Venezuela, but what we can say is that combined net oil exports from our three closest major sources of imported oil, and three of our four largest sources of imported oil, dropped by one fifth in only four years--from 5.0 mbpd in 2004 to 4.0 mbpd in 2008.
Nate as far as supply goes if it does collapse then it has nothing to do with recent projects brought online or new oil production at all. Mexico's collapse was obviously caused by geological loss in oil production capacity.
I don't want to argue but nothing really prevents them from being the poster child for the future or more likely the past. The one well documented example of a recent collapse in production was because of geology.
At best until we see oil supplies increase again to meet growing demand the future is unknown. Assuming continued stimulus averts collapse over the short term then organic growth in China alone may be enough to cause this to happen soon.
I certainly have my point of view but it should be clear that regardless of what the real answer is at the moment nothing can be known for sure. OPEC could well choose to allow prices to climb much higher before responding if they can who knows ?
At the moment I think everyone would agree the future is more uncertain then it has ever been in decades from oil to financial to even most peoples personal future.
About the only people that can be certain are those dying of terminal diseases and have less than six months to live.
The rest of us are sitting at the point of maximum uncertainty regarding the future. A swan of any color is now highly probable for everyone.
Now with that said a fast collapse in oil production which is not unlike the terminal patient is the only case that can probably either be confirmed or repudiated over the next several months. Assuming its false this only eliminates one unknown from and almost infinite list. If its true then the outcome is obvious.
Nate WT I think the important part is to understand the difference between items bought with cash and those bought with credit see my long post below.
Basically the collapsing credit economy acts to boost the purchasing power of the cash economy over the medium term since commodities are purchased with cash in the end ( I explain the role of credit). The cash economy is resilient to the collapse of the credit economy. In particular commodities. As far as export land goes this means that oil exporting nations will get higher relative cash flows even as the credit economy tanks.
Now taking this a bit further you have a fairly interesting scenario developing. Since the influx of cash into the exporting nations results in them becoming creditors as they cant absorb the cash.
However the ongoing and probably quickening collapse of the credit markets makes investment even harder.
So on the macro economic scale you have cash balances growing rapidly in the exporting nations along with debasment of the fiat currencies and dwindling real investment opportunities. At first of course the natural reaction is to buy treasuries or government debt as no other investment is possible. This flight to saftey could well simply be a result of export land and cash piling up in exporting countries with literally no place to go.
However as it becomes obvious that fiat money is headed toward zero and the governments will default this cash becomes liquid i.e its spent on real goods in and attempt to capture value. Of course no way can the demand from exporters for real good expand fast enough to soak up the growing pile of cash so ..
This is why I call it rich mans inflation poor mans deflation. Hard money creditors that are connected to commodities see their cash hoards expand even as they are being devalued by falling real purchasing power of cash as asset prices fall evaporating the money. Everything is a losing investment for them its really just a question of how they want to lose money. The inflation is this power money doing its best to find the smallest loss. Often bubbling the prices in a sort of paradox and turning long term losses into temporary short term gains as money pours into a shrinking number of investment channels. And it pours out just as fast popping these bubbles rapidly.
This is also whats probably caused a good bit of the stock market bubble lacking other investment choices money has focused on the stock market as its liquid and result in a mini-bubble. Of course this is very very unstable.
So in my opinion if the cash economy proves resilient then export land itself serves to dramatically increase the volatility of the markets as you have cash piling up with no place to go.
Related of course is in many cases this hard money is used to secure loans in the new dollar carry trade because of low interest rates i.e a already bad situation of cash having no sound investment choice is leveraged up via borrowing in and attempt to make gains off of bets that are actually losers. Not only do we have to much power money but its also levering up ! Of course we have a good idea which bankers are helping the Saudi's leverage their cash hoard for returns so these guys rake it in.
If it looks like we have entered the abyss then you got it.
Eventually of course the money is lost the investment fails because of the leverage a substantial amount of the cash hoard is simply destroyed.
At some point the exporters of oil simply can't accept fiat currencies in exchange for oil its simply not worth it.
They have no choice but to move to something else in and attempt to actually make money that can stick long enough for them to reinvest it in a sane way.
I seriously doubt we make the last transition.
That's a major supposition on your part; conversely we can have doubts about their stated claims of being unable to find customers for their excess sour crude. My point is that they are using a lot of oil for electricity, which is wasteful. I forget where I read the 75% figure, here's what the EIA says for their domestic consumption of products, in kb/d and percentages:
International Energy Statistics
As I stated they're also burning crude directly for power: Saudi Arabia Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal
These are low-hanging fruit they could pick when the need arises, whether through increased production or import of NG, solar thermal - they are the Saudi Arabia of solar power - or nuclear. They also claim that only 15% of the country has been adequately explored for gas.
Memmel,
Strangely enough, most of the exporting nations do not have strong fiscal balance sheets today for different reasons. I suppose it is possible that they will in the future, but some major changes within those nations would need to come about to make that happen. I've always feared that if and when that day comes, assuming we and other nations may be in much weaker positions than we are now, that the world's farmlands, mines, forests, and other natural resources would be selling at huge discounts. Even now, there is immense interest in farmland as investment in Africa, U.S., Russia, and South America.
Saudi, for example, is in an interesting position in that it cannot feed itself due to lack of water and environmental destruction. They are ready to import 100% of their grain (wheat and corn) within eight years. source
My overall point is that these cash-rich nations, if there are any, will want to exchange their fiat currency with real assets sooner, not later. As oil supplies become constrained, the waste will be cut out of the system. Agriculture will be given one of the priorities for its use. Could it happen that we, the nation who has outsourced many of our jobs would become owned by cash-rich nations, and essentially have the tables turned on us, that is, become their outsourced workers? By owned, I mean they would have purchased our farmlands, commercial real estate, homes, factories and so on. We would be paying rents to them, working to produce food for them, and other goods.
But, this is really just a thought experiment, because for the most part, at present, this economic crisis is a global economic crisis and that fact offers a good deal of protection from my scenario materializing any time soon.
I enjoyed meeting you too Jeff :)
I find your ELM very interesting. It doesn't surprise me at all that the seeds of supply destruction have already been sown. I think oil will bottom early in this depression.
Stoneleigh, it was a pleasure to meet you at ASPO and this article does a brilliant job of explaining many of your ideas we only had a brief time to touch upon. I particularly find the concept of how credit expansion fits in with multiple claims against dwindling petroleum supplies.
The particulars of HOW this deleveraging occurs will be of great significance. Do you have any more predictions as to how this might proceed?
This article's more detailed explanation of how rates and the bond markets are intertwined really helped me understand your arguments more clearly.
Much like the first posting in the comments, I think that particularly in the US we may be underestimating the power of mania and herd-thinking in supporting the market. I love your quote:
I agree the fundamentals point toward an implosion and I would expect one, yet I see our world leaders and so many in Wall Street propelling things further into unreality simply by wishing and thinking it so. I'm frankly baffled at this and much of our Western culture. But as discussed on TOD many times, engineers, scientists and rational thinkers do not run or lead the world, we analyze it and make predictions but irrational humans (magnified to the nth power by energy use and population explosion) are a big singularity in the system and the things we don't know are are the equivalent of "dark matter" in the universe.
Thanks Stoneleigh- you've been saying these things for a long time - as you know I largely agree with you - in direction if not in magnitude.
Yesterdays 3.5% Q3 GDP has many thinking recession is over. It amazes me that so many people can overlook the governments role in defusing/delaying the financial crisis of our overinflated assets. Without massive government intervention many of your predictions might already be occurring - of course it's human nature to defer the day of reckoning in any way physically (or digitally) possible.
This commentary out this morning on Q3 GDP
What the conventional analyst community is missing, in my opinion, is the grandness of scale of our current complex situation -from a historical perspective the overinflation of assets (and I don't just mean prices, but affordability and serviceablity into the future) with respect to biophysical inputs is akin to a mass delusion.
That's an important point you touch upon, the marginal productivity of debt.
http://bit.ly/4hLkCe
As this chart shows, the usefulness of one extra dollar has been declining for a long time. It's like the Red Queen in Alice in Wonderland, where the economy has to keep borrowing more and more money every single year just to keep afloat. A million dollars in 1980 was worth a lot more then it is today due to the fact that the marginal productivity of debt was much higher (you got more bang for the buck!),this is akin to a declining EROEI on oil fields over the years from 100:1 in the 20's to today's 10-20:1
But ofcourse you know this :-)
measuring return on massive investments over a very short term is exactly why we are in this financial mess in the first place. hopefully that $173B is being spent wisely, which means that it is precisely *not* being spent for immediate gratification.
I find it hard to believe that much of the stimulus is being spent wisely. We know, for example, that a large fraction of Q3 stimulus funds went to the absurd cash-for-clunkers and the $8000 new home-buyer credit. I think it unlikely that the former has long term benefit. The latter may briefly, slightly prop up housing prices that need to fall further. In fact, however, 85% of the new home-buyers said they would have bought without the credit.
I agree with the principle that we not evaluate long term investments in the short term. I just don't believe very much of the stimulus package is long term. One exception that comes to mind is the renewable energy tax credit.
And yesterday's temporary rally over the 3.5% GDP lie just got crushed by a 249.85 point fall in the DOW today. Lots of people actually stopped and read that GDP report and they are discovering that what's inside doesn't really make those numbers outside look believable.
I think that's a bit over simplified. One can imagine lags of all sorts on different time scales that will feed in over time.
In no more than 10,000 words can you explain briefly the key elements of the stimulus package - spent so far. Paying people to buy new cars whilst taxing people who buy new cars is perhaps the poster child of the new economy.
What the US really needs is really high gasoline taxes - phased in overtime.
Should have done that back when Alaska,North Sea and Cantarell were discovered.
I don't attach any credibility at all to that 3.5% figure. I suspect that it very likely will be revised downward substantially when the final numbers come out.
There probably was a bit of an uptick, just due to replenishment of depleted inventories in advance of the holiday season, and that cash for clunkers things probably contributed a one-off uptick as well. Sustainable recoveries are not built on such things.
What the media doesn't explain to the public is that USA GDP numbers are mostly consumption based. In other words, an analogy would be for the spending of a family to increase this quarter by 3.5%-if this increase has been caused by increased borrowing for consumption, obviously it isn't sustainable or even relevant. The USA economy overall suffers from a major lack of actual investment (not churning and burning of funds)-for all the talk of a phony China, they are spending a lot of money on actual things that will be needed in the future (railways,nuclear plants,wind,etc.etc.) not just propping up current consumption numbers.
I don't understand this existential fear of debt(hundreds of paper trillions).
If a company has too much debt then just they go bankrupt and the debt basically disappears. Somebody buys the assets at fire sale prices and rebuilds the company.
A debt collapse just reprices everything.
If a country goes out of control into debt, the currency gets repriced (inflation)
which is exactly what happened in Germany in 1923 with the Rentenmark.
The assets are still there.
There is a feedback effect in a debt collapse in that the failure of companies causes the market to lose its 'self-organizing' function(so it makes sense to let companies 'reorganize').
In the US we have bankruptcy protection and anti-trust regulation to
control the growth/death of companies.
If the USA went bankrupt, the dollar would collapse and either foreigners or the US government would buy cheapened assets.
The USA has huge debt obligations from social programs. Either
'rewrite' the obligations (legally tricky) or inflate the currency or tax the rich(bondholders). In the 1930's the top rate of income tax was 90%.
If the oil supply crashes, there is a repricing of everything that nothing can stop because it is obvious that money/capital has been misallocated by the market. Initially everyone loses money because of a decline in the self-organizing ability of markets which I would guess is about 50% of the value of capital(multiplier effect)
but then it's matter of shifting allocations.
Well part of the fear is the social instability that would accompany such a 'shifting allocation'.
But if your point is that a system more closely aligned to our real balance sheet lies in the future and that this would be a positive development then I agree.
I agree, maybe my biggest fears concern the social instabilities that will accompany the 'shifting allocation'.
A couple of data points from the Great Depression:
Reinhard Heydrich, tasked with organizing the 'final solution' in Nazi Germany, came to Goering's attention as the head of the secret police unit tracking down Germany's last remaining private holdings of gold and foreign exchange in 1939.
During his speech to the Reichstag on the 6th anniversary of the Nazi ascendency, Hitler claimed that "international finance Jewry inside and outside Europe" could again "instigate a world war".
My take-away points:
1. A desperate government will take by taxation and/or siezure any assets they can identify, and
2. There may well be a lot of rage directed towards bankers, which along with scapegoating will be exploited by demagogues to rationalize their agenda (resource wars or whatever).
Errol in Miami
I learned in accounting 101 that debt is a liability. The amount of debt a system, country, company or individual has is a meaningless number unless it is stated in relationship to assets. A rapid rise in debt is sustainable if assets are also increasing or if assets remain larger than debt and cash flow is adequate.
This article does not get into assets at all nor does is analyze cash flow to service the debt. I therefore content its deflation thesis has not been demonstrated. Citing extreme examples of mismanagement/misgoverning as in the case of Wall Street or California ignores vast sections of the economy that are doing quite well. IMO for every defaulter there are many times over those who pay up and are solvent.
For every debt there is a lender who holds the debt as an asset. So debts and assets cancel each other out in a system, unless the debtor defaults. And defaults on debt although much ballyhooed are really a small percentage of the total debt.
In any case if deflation is the outcome of the current situation which I do not believe it will be, it increases the real value of dollar denominated debt which benefits lenders and savers. It seems to me this would be a good outcome rather than something to fear. For too long savers have been heavily punished by inflation and taxes on savings interest while inflation rewarded debt and interest was often deductible for debtors.
Any deflation that may occur will be short lived and isolated to the most extreme cases such as California real estate. Other areas of the country will not see much of it.
Damn that was a good one.
Problem is I think your serious...
More likely your and alien impostor from and alternative earth that works under a different economic system.
Thats the only reasonable explanation for your comment.
Well welcome to earth I hope your friendly maybe you can teach us your magic economic system we could use it.
i concur with mr. x. even if unemployment is understated by about 100% (meaning: 20% unemployment nationally) four out of five able-bodied workers have jobs. four out of five are paying their bills and paying down their debt. if those bills and payments are translating into productive activity/output/investment, then the economy slowly makes its way out of the gutter. i'd argue that in most industries/sectors, money is flowing to productive ends (though we are certainly in a period of uncomfortable adaptation).
which industries/sectors are not directing resources to productive ends? imo finance is a major problem -- too much short-term gambling, not enough long-term investing, and too much money at stake -- and needs to be reformed substantially. and then you have the issue of state governments... which need to get serious about hiring smart people and running their operations with common sense. depressing wages in the private sector with regulation (as in finance) and depressed salaries due to short-run unemployment may have a salutary effect on hiring those smart people to do work in the public interest. rhode island is having major problems because the government has made lots of promises that seemed great at the time, but that it can't now keep.
U6 is already pushing 20%, without any "understatement". When you include the large number who have retired early (to become a drain on SS rather than a productive member of society), the numbers are worse still.
Part of the "makes its way out of the gutter" would include debt implosion on that 20-25%, which of course results in losses for the other 75-80% as well -- it's not at all clear that we're anywhere near the bottom of such a spiral down -- quite the opposite really.
I think we won't have an opportunity to get any sort of recovery going until all the debt (personal, state, gov't) washes out to a large degree. So far the gov't is still growing and all we're doing is centralizing the debt, albeit inefficiently. That's got to come crashing down as well.
I think "slow" means "decades", but with a lot of ups and down and thrashing along violently along the way. Oh, and then peak oil bites in that period too -- better add another decade to the doldrums and another step to the slide.
debt implosion? is that a technical term? what happens when people go bankrupt is that banks take a hit on their balance sheet -- money they expected to be repaid vanishes. this does not cause losses for those who did not default. yes, lending is constrained, but over time as you suggest, this "washes out" as less risky lending practices for new loans improve bank balance sheets.
i agree with regard to many people still needing to pay off debts and some of them going bankrupt. but i wouldn't call it a spiral - people are being forced to pay for things they bought five years ago -- some can and some can't. i also agree with stoneleigh that arm/balloon loans will impact a portion of those currently in homes, but who knows... perhaps banks will determine to rewrite more of those loans instead of kicking people out, or perhaps big g will mandate it.
for reference, here's a chart that shows the state-by-state percentage of bankruptcy filings in the us for the last 3 years. it's bad, but it's not as bad you might think.
i think it's also safe to assume that people prone to go bankrupt typically have less net worth on average. so the bite they take out of the bank balance sheets is relatively small.
Bert bankruptcies are a trailing indicator esp with our new laws. Until bankruptcies start decreasing and employment starts increasing then using trailing indicators to prove a point is simply not correct.
They only prove something when they are both obviously slowing and are really only important on the decline side after they have peaked. Even slowing rates of increase are possible false positives.
I'd argue that other indicators will turn positive well before these do. Thats the talk of green shoots when however until the bankruptcy rate actually shows significant decline we simply don't know how much is left.
Now historically the primary reason why people would file bankruptcy in the first place was to save their home.
Given our current situation one has to expect many people are not even bothering to officially file bankruptcy.
They may later on if they expect to actually need to get their financial house in order but I suspect many people
are simply walking away and hiding their new address and number from their creditors. Not even bothering with the expense of a formal bankruptcy. Given this credit card defaults are probably the best indicator of our real economic situation not bankruptcy filings.
http://blogs.wsj.com/marketbeat/2009/06/16/credit-card-update-bank-of-am...
I think its obvious that the bankruptcy rate is simply not keeping up with the credit card default rate.
All this suggests is no one wants to keep their houses.
what does it matter if bankruptcies are a trailing indicator or not? that makes no sense to me. all i'm saying is that the rate and number of bankruptcies are not astronomical.
1.4 million are going to go bankrupt this year. is that good? heck no. but is that a "debt implosion" -- on the order of 20-25% of the workforce like paleocon is suggesting? heck no. and is that going to force the us economy to collapse? heck no.
banks are failing. more banks will fail or be bought up. that's what happens when you make stupid loans.
and what i mean, paleocon, about assuming that it's low net-worth folks that tend to go bankrupt is: the super-wealthy are not (for the most part) going from riches to rags. the people going bankrupt by and large are people that couldn't rack up massive debts, because they didn't have any collateral or high enough earnings when loans were being handed out.
there is still more economic woe to come. lots. don't get me wrong. i mean, look at this doosie... but i don't think the economy collapses. if it does, you can send a messenger pigeon to rhode island with a note that says, "i told you so!"
have a good halloween weekend, all.
Along the way the banks themselves go insolvent, and with less credit the velocity of remaining money slows, and with a shrinking GDP the national debt ratio goes way up and tax receipts go down.
I guess my take is "working out" will be like Japan's malaise, measured in decades. Banks carrying homes sans payments and without foreclosing defers the pain too, but it'll still come.
Wouldn't a contribution from bankruptcy be based on net debt, not net worth? I would think those going under would tend to hurt a bank more than most. The 50% who have a paid-for house aren't going to get foreclosed on...it's those who owe a fortune more than it's worth who will walk away, or be foreclosed upon when unemployed.
It causes losses in the value of non-defaulters' assets because defaults increase the supply of those assets at fire sale prices when banks try to recoup what they can off the collateral to the loan. If non-defaulters' assets were purchased with debt then they may walk away from underwater investments, thereby further increasing the number of defaults. They can also have their loans called in - meaning they are forced to sell assets to cover them - increasing supplies and driving down prices even further. This is a spiral.
Meanwhile, highly leveraged banks can go under even if only a small number of loans default. And systemic risk can take down the whole banking sector because banks' obligations to each other are so intertwined. Even if they don't go under they're usually scared to lend because: (1) they might need the cash to buff up their balance sheets or cover their own debts, (2) they don't know who to trust to lend to. They may also call in loans that would otherwise seem good to cover their losses or because deteriorating conditions make them seem less sound.
When banks aren't lending but are still receiving payments on existing loans, the supply of money in the economy declines, which causes deflation. Falling asset prices can also perpetuate deflation - see Dave Cohen's recent articles and consider Japan's decade long asset-deflation induced recession. This does not create a confident lending/borrowing environment, and so the downward spiral continues; in fact, it can continue for a long time. It can also wreak incredible damage to the whole economy and innocent bystanders can be hurt by it. The process is not so neat and tidy as you try to make it sound and "implosion" is not necessarily so far off the mark, technical term or not.
When the banking system collapses is it considered a implosion or explosion ?
My opinion is it can be considered a vacuum since nothing really exists in a fractional banking system thus its a implosion.
I think the problem with deflation is that the value of debt rises relative to incomes making it impossible to service the debt resulting in a cascade of defaults.
In the housing market, this means negative equity, and where home "owners" cannot meet debt payments then they are out on the street. Empty houses everywhere and a growing number of homeless, who can't afford to buy milk.
Just like in the Great Depression, only a little worse. That was pretty short-lived and isolated, wasn't it?
sorry but that is nonsense. It may work for a company balance sheet but only if you use realistic mark-to-market prices to construct the asset side. Realistic means exactly that: what someone else is able and willing to give you in exchange at the moment in time. Not theoretical, but at what price could you actually complete the transaction at right now.
It would be delusional in the extreme to believe that all the asset values of all the assets of a country - houses, stocks, land, pigs etc - would be achievable if all the assets were to be immediately liquidated.
The value of a nation's assets, independent of property laws and monetary value, are in what they do or provide, not what they are 'worth'. A house provides shelter irrespective of whether there is a mortgage on it or not or how much the estate agent values it at.
There is another layer of this, which is that overvalued assets, such as loans, are themselves leveraged again to buy other "assets", and some of these assets are derivatives...so when the base crumbles, you must necessarily end up with a cascade. That's how a "few percent" of loan losses turns into entire portfolios imploding, companies disappearing, individuals looking for high ledges to leap from, and markets locking up. Even with massive bailouts we're teetering on many of those tipping points, and probably before long we'll topple into them again.
All of this turns into more gov't debt -- a centralization from washing out decentralized individual, corporate, and state debt on the national public dole -- and that in turn will drive the bond defaults (or hyper inflation, or both).
IMHO, debt-free and employed is the only way to be. Good luck getting there and staying there! Hoard your cash and pay off your debts, and enjoy being part of the problem for a change!
I agree, but also if (like me) one has a small amount of debt but no assets one can also sleep easy because there ain't nothing they can do about it when I can no longer afford to pay the loans off. I'm not smirking here, just making a point.
My accountant has just submitted my annual return to the Treasury - my small company owes Her Majesty's Esteemed Plonkers (aka the government) £3,028 in tax. I also have about £2,500 VAT outstanding. I am in no position to pay either of them as business has been painfully slow and my bank is not answering my calls for short term funding. I have a perfect credit history, have been depositing more than £60k into my Barclays business account every year so they know I have a genuine business but when I asked for £10k over five years I was turned down on the spot. The offered me the money over just one year at 23% interest and £250 admin fee!! The monthly repayment would be over £1,000 which my cash flow can't support.
So, long and short of it is that when the Treasury Goon Squad show up at my door demanding my taxes I will calmly tell them that I ain't got it and have no way of getting it and that I have no assets for them to take. Am I bothered? Not one tiny little bit. If the system is broken - and it clearly is - then why should I lose sleep over it!
Because, being the state, if they can't take the money, they will take you instead - to prison.
I read somewhere that 40% of our prison population is there for financial 'crimes'.
Then he'll have a warm place to stay.
George Cooper's The Origin of Financial Crises is an excellent analysis of this phenomenon. Positive feedback loops on the way up and the way down.
There was no mention in your outlook of the likelihood of war breaking out. If this plays out as you anticipate and governments are unable to re-inflate the economy it seems like someone will launch WW3 in desperation.
War is a given under such a scenario, especially resource war. I wrote a primer on this called Energy, Finance and Hegemonic Power.
A brilliant, and sobering post, Stoneleigh.
I'm an optimist, which means I only ever get unpleasant surprises...
I take the view that the direct instantaneous connections of the internet open up new Peer to Peer Finance ways of organising the economy.
In particular, we may reconfigure national economies by 'unitising' the use value of land/location, as I said almost a year ago to the day at my FEASTA lecture. As one of your diagrams shows, the Irish were streets ahead of anyone else in their property bubble, and I advocate a move from a deficit-based & land backed currency, to a new generation of land-based currency. This is IMHO achievable through a debt/equity swap (both Taleb and Buiter, among others advocate a switch to equity) - it just wouldn't be equity as we know it.....
I think that the necessary global reserve currency can, and should, be based upon energy pools and have posted at TOD to that effect. This is my most recent article on that subject.
Stoneleigh: Your analysis is very strong. It differs from some notable analysts such as Faber, Schiff and Willie in that these guys feel that the US dollar collapse or continued decline is far more imminent than it appears you do. They feel that the US dollar carry trade is free money for the players from the public and there is little motivation to raise rates even if the currency declines. Politically, the vast majority of the public views the US dollar as a constant value, so even a very large devaluation would be politically advantageous if it forestalled a deflationary collapse. They are convincing, you are convincing so when I put it all together it appears like a consensus opinion of a total collapse of the USA economy along with a huge devaluation/collapse of the US dollar. Real estate values would totally collapse with the exception of areas of strong foreign interest or areas in demand by those with access to taxpayer funds (DC,Goldman,etc.).
yeah brian.
http://cluborlov.blogspot.com/2009/10/faint-odour-of-melons.html
i think the dollar is going to be trusted for a briefer time period than stoneleigh; & the crisis will magnify tremendously then.
See Mish's post today.
http://globaleconomicanalysis.blogspot.com/2009/10/spotlight-on-eastern-...
Other currencies of weaker nations will collapse first. There is a very strong ordering in collapse :)
So far only Iceland and Zimbabwe have had their currency collapse. They won't be the last.
Until the weak currencies start collapsing stronger ones will stay around.
In fact as Mish points out initially the collapse of the weaker currencies will strengthen those that remain.
The lifeboat effect. And of course our boat is slam full of holes.
Not that the dollar won't eventually collapse but it certainly won't until after other currencies have collapsed.
So you just have to wait until these start collapsing before you can talk about the dollar.
There is a good chance that a collapse in Eastern Europe will collapse the Euro and this would massively strengthen the dollar.
Personally I think the US has bet everything on this that collapses elsewhere will keep the dollar strong and we can print to basically infinity.
In fact the Feds recent moves to let long term interest rates rise slightly may well be designed to hasten the collapse of other currency resulting in a renewed flight to safety and and artificial drop in rates.
This rapid move out of secondary currencies and into major ones is supposed to lift the system at the expense of the loser.
Of course the low interest rates have also result in a growing dollar carry trade with the dollar loans converted to these same faltering currencies to make risky investments in these countries because of the higher yield as the currencies falter.
So the end result is probably default on dollar/Euro loans poking massive holes in the lifeboat currencies.
How all that plays out is anyones guess but until it does the dollar won't collapse.
Now of course that does not mean the time between when these currencies start to collapse and when the dollar collapse might be brief but the order is fixed.
I don't dispute that the US dollar will eventually go the way of all fiat currencies, but IMO that time is not now. Now is the time to be liquid, and dollars should perform best over the next year or so. The dollar should benefit from a huge flight to safety, and the deflation of dollar-denominated debt, of which there is more than any other kind, should cause the dollar to appreciate more than any other currency.
However, the value of currency relative to available goods and services domestically will be more important for most people than the relative values of currencies internationally ( see The Special Relativity of Currencies).
this clever use of imagery i especially enjoy...
...but mostly because it's followed almost immediately by...
(i'm sorry, that was snarky... but it did amuse me. i think the part that's missing from this analysis is that every nation around the world is determined to make sure that no big economic player crumbles, because we're all interlocked. as a global economy, we're adapting after a shock. it's going to be a long haul.)
Euan, Stoneleigh,
thanks for this post. Very informative.
Here in the UK, how does the minimum wage affect the outcome of deflation and its resulting mayhem. During the 'good' years since the minimum wage was introduced many have benefited but in a deflationary environment that you speak of the minimum wage is going to be a killer. There is no way that any government could realistically scrap it or decrease it - it would be political suicide and there is even video footage of David Cameron at one of his 'Cameron Direct' roadshows telling a women point-blank that he would never reduce or remove the minimum wage. However in a deflationary environment maintaining it would only exacerbate the unemployment situation.
What are your thoughts on this?
Fixed wages in a deflationary environment would amplify unemployment (I think). In the first instance, I think rising unemployment will be the real problem. Next year they will start laying off increasing numbers of public sector workers and once the public mind set adapts to the gravity of the situation then workers may be more receptive to the idea of the minimum wage being cut - of course they may just all go on strike instead.
I agree. Wages wouldn't be cut immediately, with the result that unemployment will be significantly aggravated. The psychology is similar for home prices. Sellers do not cut at first, so the first symptom of a property price collapse is an increase in inventory. Sellers eventually have to cut, but always do so too little and too late, so that they follow the market down. Wages could follow the same pattern, at least initially, so that workers continue to price themselves out of the market for a long time, due to their understandable need to meet their own fixed costs (this is a recipe for War in the Labour Markets). Most will probably default on the obligations they will be unable to meet as they will not be able to find employment. Eventually the logjam will break, for both home prices and wages, and a drastic repricing lower will take place. General strikes are a given in the meantime.
Upping the minimum wage and re-empowering unions as we go into the first inning makes for a long, hard ballgame. For better or ill, under-the-table jobs (cash only) will necessarily increase for legal citizens in a manner similar to those of illegal immigrants. Once unemployment runs out and welfare doles become slim, ANY job will seem valuable.
I already see the invisible cash economy growing. Just last weekend I had a couple of guys offer to haul off some junk for "free" -- just for scrap value, and they offered to do any labor I needed as well. They mentioned augmenting their unemployment checks as their incentive, to better support their families.
Paleocon,
To put things in better perspective-
Even with the economy in the shape it is now scrap metal is a very valuable resource-it's bringing about a hundred and fifty dollars a ton paid in cash no questions asked for steel and iron -all other common metals are four or five times that , minumum.Most are ten times and more.
Just to remind everybody that it's not only oil that is scarce, and that oil and coal , etc, prices are working thier way thru the industrial economy as usual-meaning another round of price increases in finished metal producta of course.
I expect fertilizer prices will probably jumo up again soon too.
Not everyting is deflating -some things that are critically important are going up.
Which leads to another thought-how about the fire sale of ethanol plants-is anybody keeping up with who bought them?My guess is people with a strong belief in sharply escalating oil prices to a large extent.Sometimes it's rather interesting to contrast the public prounoncements of such companies with thier actual actions.
oldfarmermac,
Did you know about this one?
Altra Nebraska, LLC's $220 million ethanol plant real estate/equipment will be sold piecemeal at auction Wednesday, October 28, 2009
As with most things, I expect the value of scrap metal to fall initially and later to increase substantially, at least in real terms, and possibly in nominal terms as well (ie skyrocket in real terms against a backdrop of a collapsing money supply).
I am hoping for a shorter work week instead. Congress passed a law mandating a 30-hour work week during the Depression, but FDR vetoed it, calling it "socialism." The idea is to spread what work there is around. The effect would be the same as cutting wages (and be as deflationary).
However, I think the result would be much better. Better to have everyone working a little than a few massively overworked while the rest are unemployed. Also, having that time off would give people time to prepare for the new reality. They could learn new skills like cooking, gardening, sewing, carpentry, etc. The things you do when you have more time than money.
We are seeing some movement to 4-day weeks - some still 40 hrs (4 X 10), and some down to 36 (4 X 9) or 32 (4 X 8). If people actually stay home that extra day, then that would have the effect of reducing commuter energy consumption by 20%. On the other hand, if that enables people who would otherwise stay home most weekend to drive hundreds of miles every 3-day weekend, then there go the energy savings.
I don't see a shorter work week as saving energy. It might; I have a feeling people won't be able to afford to spend their three-day weekends shopping or going on weekend getaways.
But I see it mainly as a way to deal with the shrinking/localizing economy.
This would be by far the best option for the reasons you state. I doubt if we will see it happen though. It's not the cheapest option for employers, who will be holding all the cards in a world where employees will have lost almost all bargaining power. Keeping people overworked and terrified of unemployment keeps them quiet and powerless (like Mr Scrooge's assistant Bob). It also helps with a divide and rule strategy (the working poor versus the burgeoning underclass). This is likely to suit many of the people who will be holding the purse strings in a neo-Dickensian dystopia.
The wages of developed country workers would have to fall to the level of BRICs to solve the problem.
Indeed, and the BRIC wages will also be falling was export markets die. Wages in the developed world will plummet, leaving people will fixed costs or debt repayments in a pickle (to put it mildly).
Developing countries have more economic potential in the form of unexploited technology, therefore, they can still manage to grow. (Some of them are good at ignoring intellectual property rights too, so they son't have to invest as much in R&D.)
The 1930's Depression is so misunderstood. The work week fell and those with jobs saw their money go further, thanks to productivity!
Developing nations are in a similar situation now. I am not saying that this transition will be painless. It will certainly cause dislocations and hardship.
Those who still had jobs saw their money go further thanks to deflation. This time as well, the minority who still have significant purchasing power will see it go a very long way indeed. For them deflation will make things cheap, but for the majority most things will be unaffordable.
this of course is the great debate "inflation" vs "deflation"
Jim Puplava on Financial Sense just held a series of presentations on both sides
you should post the inflationist arguments. I think I am in that camp right now
I cannot make a credible inflationist argument. For more on my position see From the Top of the Great Pyramid and Inflation Deflated.
To quote a few relevant paragraphs from the two articles.
and
Stoneleigh: But there must be a level of USA fiscal deficit spending which would bring you to the inflationist argument-I realize these levels are not there yet, but if the massive debt default can singlehandedly buoy the US dollar, then in theory government spending could be ramped up enormously (and I expect it will) even as tax revenues plummet. If this does not devalue the currency, then there would be no limiter on the government at all-the level of monetization could increase indefinitely. So my question is: what is the level IYO? A 4 trillion annual fiscal deficit? 10 trillion? IMO you might be right in the near term, but I just find the whole situation and the math behind it surprising. The trend appears to be for a decreasing % of USA federal expenses funded by taxation, almost indefinitely, a magic money creation machine for the guv to use. Maybe pretty well everybody in the USA with a job will be working for the federal government in a few years-that appears to be the trend.
The things that the US government are doing and are going to do that would certainly be inflationary in other contexts are not going to be inflationary in this context, because the context is so overwhelmingly deflationary. Stoneleigh is absolutely right in her analysis of this.
The FedGov will still be doing these things, nevertheless. The reason why is not to cause inflation, but to change the winners and losers in the game. The interventions that the FedGov is undertaking will not cause inflation, but they will change the game, and will change who the winners and losers are.
This is something really fundamental, and a lot of people just are not getting it. I am convinced that this is what is really going on.
Wnc,
I generally think you are at least in the money every single comment-but I might have missed some.
Who are the losers and winners going to be in your estimation-specifically?
There are a LOT of different kinds of businesses and industries and there will probably be classes of winners and losers that are not immediately obvious to most of us.
I would say that in general, those who have paid the politicians have gotten their money's worth. A lot of political money has come from financial firms like Goldman Sachs, and we all know that they are making out like bandits (literally!). The trial lawyers have done very well for themselves too, keeping any possibility of tort reform off the table and thus assuring that they reserve their place at the feeding trough. GM and Chrysler are still in business; does anyone think they still would be without government "help"? The political money that both those corporations, and their suppliers and dealers, and the autoworkers, invested has sure paid off for them far better than have their common stocks for everyone else. I could go on. There are places where one can find who gave money to which politicians, and how much. I'm not on that list, and neither are most ordinary people, which I believe explains very well why we ordinary people are getting the short end of the stick.
By the way, some might object that Lehman Bros and Bear Sterns were allowed to fail, and they paid to play too, so doesn't that negate my hypothesis? They might have paid to play, but consider that the surviving firms paid even more. Getting rid of one's competitors is worth a very great deal, and is yet another way that government can be used to obtain a return on one's political investment. The big payoffs only come to those at the top of the donor list. If you are the politicians, you want to occasionaly impress upon your donors the point that if they don't give enough, it may not be enough to protect their interests. Making sure that the ones you make an example of are completely done away with and not just hurt is essential, so they won't be around to be enemies later.
Life in a crony capitalist banana republic. Third world gangster government kleptocracy, now showing at a national capital near you.
Indeed. Re-jigging the winners and losers through graft and corruption is a major part of the game. The well connected take risks with other people's money and don't have to eat their losses. Those are force-fed to the taxpayer.
Stoneliegh,
High speed internet made it's appearance late in my community and I haven't had time yet to check out a lot of interesting commentators.
Up until this piece hit TOD,I just had you lumped in with the deflationists and knew virtually nothing about you beyond that.
You have a new fan!
Thanks :)
I'm not an economist, but a systems thinker/big picture person. I have a formal background in science and law and I used to be an academic (a research fellow at Oxford). I've been working in energy for most of my career, and currently specialize in ag energy (focusing primarily on dairy operations).
My aim to to make complexity comprehensible. For an accurate view of the world, one must integrate energy, finance, real politik, population, ecological carrying capacity, disease mechanisms, environmental externalities, herding bahaviour, ponzi dynamics, game theory, codification of social control mechanisms, predatory wealth concentration structures, cultural drivers, marginal returns to socioeconomic complexity etc etc. It's my life's work to build a big enough big picture and be able to explain it to others.
And a heck of a life's work it is, kudos. A few of us seem to have come at this from different directions and find ourselves meeting up here and at TAE. Keep it up! Sorry the physical distances are so large that I can't drop by and say howdy in person.
The distance is indeed a shame. I'd be happy to have a drink and a chat if that were possible. I always like meeting people whose work I've read and enjoyed.
I guess my question was rhetorical because IMO there is absolutely no way the US dollar has some magical status that would allow the US federal government to run fiscal deficits of infinite value. However, Obama's administration will certainly push it to the limit and we shall see how far the rubber band can stretch.
From Stoneleigh's arguments here & in the links she provides, I find that there is much with which to agree. On the other hand, I have to disagree on a couple of points - and I'll also throw in some semi-random comments relevant to the arguments of other contributors. My perspective is affected, to a great degree, by the fact that I live in Australia, which is strongly and increasingly linked to Asia & possibly the OECD country least affected by the GFC.
1. From the mid-90s onwards, central bankers and governments in OECD countries boasted about how they had beaten inflation. Consumer prices, which had been increasing at high rates (about 10%/annum in many countries) since the 1970s, had been tamed & were increasing at 3% or less. What ensued was, however, inflation in asset prices in most OECD countries - first in information technology (the dot.com boom) and subsequently in real estate. In both cases, the stock market participated as an integral part of the flow of financial capital through the economy.
Inflation in asset prices, and particularly on the stock market, was to be expected, since the establishment of (practical) consumer & wage price stability led to a surge in economic confidence. If people generally are confident in economic growth, and the economy is sufficiently deregulated to allow the finance market to act in superficial accordance with the theory of neo-classical economics, investors will act to "get in on the ground floor" and capture the profits which they are now confident of harvesting into the future. The aggregate result of this is that these expected profits get capitalised into current asset prices. Exactly which assets increase in price is a function essentially of fashion.
Given the herd behaviour of investment markets, the upward trend in asset prices brings on a speculative boom, which sooner or later has to bust. Central banks which have held interest rates down because of the low rate of consumer inflation contribute to the boom, by making it easy to use Other People's Money with which to speculate. Governments which, in the name of economic orthodoxy, deregulate financial systems, contribute even more.
The tech wreck which followed the dot.com boom (as surely as night follows day) scared Alan Greenspan into bringing interest rates down to record lows & holding them there. And, as surely as the next day follows the night, an even bigger speculative boom was set off. It should be remembered here that, for the length of his term, Alan Greenspan was lionised as some sort of economic miracle worker by virtually every significant player in the US financial markets. He retired in January 2006, before TSHTF.
The point of this dissertation is to argue that inflation in consumer prices & inflation in asset prices do not necessarily happen in tandem, but they are linked in that an expansion in the money supply & in the velocity of its circulation will come out somewhere. In the current situation, we are seeing a deflation in asset prices in most OECD countries (Australia seems to be an exception at the moment). Stoneleigh's arguments demonstrate to my satisfaction that the supply of money/credit is in a protracted process of contraction. What is not certain, however, is whether that will lead to falling consumer prices. Peak Oil (and the impending decline of other commodities) will lead to rising prices for commodities, which will feed all the way through the economic food chain. The contracting economy, however, will result in a continued fall in asset prices.
2. Not all asset prices will be affected equally. Peak Oil will lead to vastly different outcomes, dependent on what one is looking at. Investments in renewable energy sources, for example, will have a good chance of being profitable. Further, the increasing price of petrol (inexplicably referred to as "gas" in the US) will introduce a strong & increasing geographical price gradient into real estate. Because most people won't be able to afford long commuting distances, they will move closer to their employment and/or take employment closer to their homes.
To see the effect of this, look at the nature of cities in the late 19th & early 20th Centuries. Everything was built a lot more closely to everything else and travel distances were therefore considerably shorter. The trade-off, of course, is that everyone has less space. The effect of this re-emerging in Australia will be to increase the population density of the inner city immensely, with people being prepared to live in rabbit hutches if that's the only option. I'm not sure if that's how it will work in the US, since the ingrained racism of that society has transformed inner cities into ghettoes which even high oil prices may not be enough to transform. In that case, new nodes may emerge in some cities about which social & economic life will concentrate.
In any event, what is certain is that most of the outer suburbs of large cities (Melbourne, Sydney, Brisbane; New York, Los Angeles, Chicago) will become deserted wastelands over the next 10 or 20 years. The combination of economic decline and Peak Oil will result in suburbs where you can't even give your house away (though you might be able to get something for the copper pipes).
3. Figure 13 does not prove what Stoneleigh thinks it does. This is because, in the era of floating exchange rates, central banks no longer have to keep changes in official interest rates as a surprise (if the exchange rate is fixed, central banks are effectively gambling against the financial markets, and telegraphing changes in interest rates means speculators make easy & massive profits at the expense of the central bank). Central banks therefore guide expectations of interest rates, which means that the markets respond to moves before the move is made. The rest of the correlation in the rates in Figure 13 can be attributed to the fact that the banks and the Fed were reacting to the same economic conditions, and the 90 day bill rate is a forecast of average overnight cash rates for the 90 days ahead (with a risk premium added).
Central banks set short-term interest rates. Long-term rates (i.e. on bonds) are set by the market. There is a link between long-term rates & short-term ones, however. If the markets think that the central bank is setting the cash rate too low, and thus inviting inflation, bond prices will drop so as to increase the effective interest rate on them, to compensate for the expected inflation. Conversely, if the markets think that the central bank has the necessary resolution & competence to fight inflation effectively, the cash rate can go quite high without affecting bond prices at all. It will be an expression of confidence that the high short-term interest rates will be effective and temporary, and will be followed by an extended period of low cash rates.
4. There is little, if any, chance of a financial crisis causing a rise in the value of the $US through a "flight to quality". Rather, the coming years in the United States look to me to have a high chance of being catastrophic. This is because the rest of the world is starting to form the collective resolution to reject the $US as a reserve currency. Recent economic data indicate that central banks are diversifying their foreign currency reserves away from the greenback, while the $US exchange rate is declining against all significant currencies bar one - the Chinese yuan, which is fixed.
Almost every analysis of the $US comes to the conclusion that it is over-valued and that the world economy, including that of the United States, would benefit from a more realistic valuation. The problem is, however, that the rest of the world holds so many dollars that the non-US firms & governments which hold them would lose massively from the transition to that realistic valuation. The upshot of this is that the foreign holders of the US currency are very nervous. When you add to this the absolute explosion of US Government debt, which is starting to look unpayable to some observers, the scene is set for disaster.
The disaster would take the form of a sell-off in the US Government bond market and a collapse in the $US because of the withdrawal of support from foreign buyers. Because of the huge reserves of the $US overseas, there would be a deluge of bonds & dollars on the markets and absolutely no buyers outside of the US itself. A side-effect would be the breaking of the greenback-yuan link, since the Chinese Government would not be prepared to follow the $US dollar down the gurgler.
The sell-off in the bond market would produce returns of 10%, 20% or maybe even more for those who buy them. This would, in turn, send Uncle Sam broke, since nobody would buy new bonds (to finance current deficits, or even to roll over old bonds) unless equivalent interest rates were offered.
This would, indeed, be "hitting the emergency stop button". Either the US Government tries to balance the books, or it doesn't. Short of a social revolution, to balance the books would mean massive tax increases, combined with ceasing all expenditure other than debt service and the military (do the maths & then think about the consequences). If it doesn't try to balance the books, it embarks on the path of hyper-inflation, a la Weimar Germany or contemporary Zimbabwe. Once again, think about the consequences.
The rest of the world would suffer considerably from the collapse of the United States, but not as much as it would have even 10 years ago. What is really scary is that the US might acquire a government which was in denial about its loss of global economic power, and lash out in the only department where is still has undeniable supremacy - military force. This is not a situation where one can contemplate with equanimity a government which pours scorn on "the reality based community".
Is this scenario inevitable? Well, the decline of the US is inevitable, but its catastrophic decline isn't. I just don't know whether there will be the trigger that starts it all.
The sell-off in the bond market would produce returns of 10%, 20% or maybe even more for those who buy them. This would, in turn, send Uncle Sam broke, since nobody would buy new bonds (to finance current deficits, or even to roll over old bonds) unless equivalent interest rates were offered.
Could you expand on this? I can see why long-term rates would jump, but why short-term?
To expand:
People lend money to Uncle Sam for 10 years at about 5%, because they reckon that there's no chance that Uncle Sam will reneg on his debts. That's about 2% to cover inflation & the remaining 3% is to compensate for the delayed gratification - for not being able to spend it now. The interest rates for everyone else are higher, because they might reneg (or mightn't be around to pay back the loan, which is functionally the same thing). The margin over the US bond rate is a function of how risky the market believes the borrower to be.
If people expect inflation to be more than 2%, they'll demand a higher interest rate to cover it, even when they're lending to Uncle Sam. Note that this is about expectations, not current events, and most especially not the historical record. Everyone else will also have the asking rate on their loan go up by a similar amount (as a first approximation - inflation might increase the perceived risk of some borrowers), since they're paying a premium for risk.
Governments & central banks respond to inflation (provided they actually want to bring it down - the criminal actions of the Russian Government in the 1990s are a counter-example) by increasing short-term interest rates so as to restrain economic activity generally and decrease the proportion of buyers in the market in relation to sellers.
What I'm referring to is a different situation entirely. It would be produced by the market developing the consensus that maybe Uncle Sam couldn't really pay his debts, so he deserves to pay a risk premium on top of the 5%. Markets are slow to react to information that is contrary to the received wisdom (for almost the entire time that oil was rising from $US20/barrel to $US147/barrel, the crude futures markets were in backwardation), so when the market reaches that conclusion, it won't be to say "Well, there's a tiny bit of risk here, so I'll ask for another half a %". Rather, the effect would be as if every holder of US bonds woke up one morning & decided "This is seriously shaky here - the greenback is the new peso. I want at least 10%, and if inflation is going to go up, I'll want more on top to cover that, too". Note that there doesn't need to be a formal down-grading by the ratings agencies. All it requires is for the market to decide that the rating deserves to be downgraded.
If everyone decides that (practically) overnight, the sellers drive the bond price down (to compensate for the fact that the "face" yield is lower than the necessary interest rate) quickly and a panic develops. In the panic, bond prices go down even further, leading to bond rates going up even more. This is not just a case of tough luck for existing bond holders, though. It means that Uncle Sam can't borrow any new money unless he pays the going rate. After all, if people can get an effective 10% return by buying an existing bond, they have no reason to lend at 5% for new bonds. Note that this applies to rolling over bonds that come due as well, so even "balancing the books" would not protect the Government from paying higher interest rates as its existing bonds, from its previous deficit spending, mature. Further, note that I'm just plucking the 10% figure out of the air so as to have something with which to illustrate. Heaven knows how far the bond prices would go down in a panic - I certainly don't. I'm not ruling any figure out as being too low.
A massive and sudden increase in interest rates would put the emergency stop button on the US economy in three ways. Firstly, the US Government would come under massive pressure to cut its spending immediately. Secondly, the decreased credit-worthiness of Uncle Sam would result in the markets deciding that the economy as a whole had become riskier, so every borrower should pay an extra premium as well. And thirdly, the first & second effects would have positive feedback on each other.
The link with the $US is caused by the fact that a large proportion of US Government bonds are held by foreign governments. With the US Government becoming recognised as a riskier proposition, they'd be wanting to unload their US bonds before the price went through the floor. And because they understand all too well that the emergency stop button will be in operation, they won't be wanting to sway their bonds for other investments in the US. Instead, they'll want to bring their money back home, or maybe send it to Japan or Europe, to take advantage of an appreciating currency. Therefore, the $US would be sold down as well - and savagely, when you consider the huge store of dollars that is held outside the US. And, of course, nobody outside the US would want to accept $US as payment for a debt.
The question then is how this affects short term rates. Well, if the $US dramatically devalues against all other currencies (and in this scenario, the link with the Chinese yuan would be ditched by Beijing), prices would skyrocket. I would then expect that economic orthodoxy would force the Fed to increase the cash rate, with the effect of aggravating the situation still further.
prices would skyrocket.
Well, that applies to import prices. OTOH, imports are only very roughly 10% of US consumption, and we could expect import volumes to be under enormous pressure. More importantly, both domestic and import sellers would lose pricing power - both business buyers and consumers would be very unlikely to pay higher prices (they'd go to a competitor, or not buy at all). In such a scenario how could anyone think that inflation would be the primary risk?
Does this consider not only printing massive amounts of money, but also forcing consumers to spend said money by giving debit cards which must be spent within a given time? If you give them rapidly depreciating cards which must be spent on some frivolous objects or services, I see no need for deflation. The way I see it, there is a proper amount that can be printed which can give an inflation rate of 2%. But of course there will be deviations.
They tried that in Japan and it didn't work.
Great article.
Some comments:
For a very long time decades few have worried all that much about essentials in the developed world only the poorest of the poor found staying alive difficult. Beyond this class for the most part even the poor generally had to deal with paying debts because of credit abuse vs paying bills. Credit availability at almost all class levels can be readily seen by comparing credit scores and income. The concentration of poor credit scores in the lower income brackets shows that credit was extended to everyone regardless of ability to pay. This is inflationary of course and results in endemic problems as the steady pumping of credit raises prices which causes people to attempt to use credit to live which leads to a steady default rate and of course justification for charging high interest rates to offset default.
Its a vicious circle and of course rises through all income classes.
We are of course now entering a fundamentally different part of the cycle where debtors recognize that they have no hope of ever paying their debts and attempts to retain access to credit fail.
At this point the debtors simply default.
Next of course regardless of income class as wages fall or stagnate the amount of money free each month between paying debts and buying necessities narrows i.e all income classes are impoverished relative to their debt levels.
This is important since the large debt loads of the wealthier classes offsets higher income and as the spread of disposable income narrows everyone is effectively a pauper and faced with paying debt or keeping the heat on.
Now a bit of a paradox develops.
If you assume peak oil is in the past and that oil supplies are falling the with supply falling if demand remains we see increasing prices.
The paradox is once people decide to default on their debt obligations and pay for necessities then their monthly cash flow increases substantially. They no longer service their debt and now have more disposable income then they used to.
Going into 2008 the expectation was that the tightness was a temporary situation so the response was completely different people cut expenditures of both unesscary items and excessive use of necessities such as gasoline and expensive food. They stayed home ate ramen noodles and serviced their debt obligations.
This of course initiated a traditional recession. However as we enter a real depression and people give up on servicing their debt they do the opposite. They certainly save a bit more since they no longer have credit so the savings rates increase but also at first they spend at first maxing out their credit then later using the freed disposable income as they default.
They may become prudent in expenditures esp after credit is exhausted but what they don't do is make excessive cuts in consumption to service debt.
From this point on they focus on buying necessities first so although they are hopefully more prudent they don't hesitate to fill the gas tank if they have the cash or buy food.
In general for many with mortgages they are eventually forced to rent and most often rent a cheaper home then they used to live in. Rents are already substantially lower than mortgages for equivalent dwellings and buy downsizing they gain a even greater advantage. Many move in with relatives and friend and live rent free or split the rent in exchange for denser housing arrangements.
So you actually get a bit of a economic boost or false dawn if you will early in the period of credit defaults as cash flows increase.
This is our current green shoot economy. However given that oil prices have already risen then we know that oil supply is not meeting current demand however since current demand is steadily increasing its ability to pay for oil via debt default demand is no longer dropping and is actually fairly price insensitive. Real ability to pay for oil has increased substantially because of the large amount of income that used to go to service debt.
Increases expenditures slows the rate of economic contraction for everything that can be purchased without credit and the people blowing out their credit before default boosts the economy.
Everyone now is ready and willing to pay for gasoline at almost any price it remains to be seen what price the new former debtors finally balk.
Of course rising credit defaults force creditors to contract their credit lines which now simply causes increases in defaults former debtors now have fairly deep pockets for cash purchases esp food and gasoline so people trying to cling to life and pay their debts find that the necessities are not getting cheaper despite the overall debt deflation as the ranks of former debtors swell and demand remains constant if not rising even as prices increase for necessities.
Of course all this does is force more and more people into default too free up cash for basics and credit free consumption.
And its important that steadily reducing your shelter standards ensures you can do this for some time.
Of course this leads to falling rents as our overall oversupply of housing balloons since people most often choose denser living conditions. The falling rents allow people to downsize at ever cheaper prices and increase the gap between mortgages and rents.
Housing is not a very liquid market and sellers often have high expectations so the housing market permanently lags the purchasing power of a rapidly shrinking pool of credit worthy buyers. And of course credit itself is shrinking so this pool shrinks even faster.
I suspect if oil prices continue to rise that you will find the pool of people willing and able to purchases homes and cars on credit has shrunk to effectively zero.
Programs such as cash for clunkers and the housing credits instituted while many still believed in being good creditors pulled forward a lot of demand probably most of it. Many to later default as their situation worsens.
This substantially depleted the pool of people willing to expand their debts.
The result of course will be a silent spring where houses don't sell at any price as no one hash cash or credit to buy expensive items. Same for cars for that matter. The programs that attempted to spur demand will make this even worse than it would have been.
Extending the programs does no good as the pool of greater fools is now close to empty. The housing credit was extended to support move up buyers but with no first time buyers left its fruitless the chain is broken and falling housing prices steadily erodes the ability of even current mortgage holders to move. And of course rising gasoline prices also work to limit the mortgage they can handle. They can no longer move up.
What you might see perhaps is the reverse that the credit accelerates the move down process at the bottom first time buyers that can still get out of their mortgages sell their starter homes to former move up buyers who sell to people who used to be above them in the game of keeping up with the Joneses.
Many of course will not buy down but exit the mortgage market and rent lucky to have gotten out.
If you get the feeling we are going to see housing implode then your right and attempts to halt it only speed up the rate that people move down. Given that in general the more expensive homes often have more equity many can afford to cut their prices to lure downsizing buyers. And as I said at all levels people are heading for the exits and renting.
Of course rents are still falling because excessive housing units are still expanding as people give up and default and go denser.
And last but not least rising oil prices will literally and fuel to the fire.
If I'm right we are on the verge of a collapse of the mortgage and housing markets of epic proportions.
Banks that have been trickling foreclosures onto the market either because of new rules, incompetence or design are going to be forced to unload their inventory to capture some value as the shadow inventory swells with defaults and prices are obviously going towards collapse. Once this dam breaks and banks are forced to either sell now or write properties off to zero then things get even worse. Mark to model fails as its obvious to everyone that the game is up.
Its just going to collapse in a massive implosion and fast. And the paradox is of course that demand for gasoline and food remain healthy through the whole thing. Since most of the debt collapse is focused on previously sold homes it does not surprisingly have a huge impact on the economy outside of course the banks. Housing construction is already dead so further shrinking here no longer has a huge impact. Resale of new houses only adds income via fees and supports the bankers so although certainly we will see continued job losses in this area you also have the fact that you need to retain people in attempt to process and sell the foreclosures which keeps job losses lower than you would expect. Of course many in this business are also ones that probably tried to keep their credit up and have remaining credit lines so they will use these up.
I think we will see a lot of used house sales people desperately trying to sell foreclosures even as they enter personal bankruptcy themselves and move to renting.
I disagree. I think people are going to shut their wallets tight for fear of not being able to earn any more money, whether or not they continue to service their debts. The threat of unemployment is a powerful one. With earning an income getting much harder and access to credit being cut off, people will be unwilling, and often unable, to make consumer purchases.
I agree about the implosion, but not the demand argument. Demand is not what one wants, but what one is ready, willing and able to pay for. With sharply curtailed purchasing power, demand will fall off a cliff, even for essentials, although essentials will see relative price support as a much larger percentage of a much smaller money supply will be chasing them.
I disagree.
I don't think your really considering how much debt has distorted the economy. Look at California for the extreme case.
Many people spending all of their income on their house payments alone living off credit cards for the rest.
When these people walk away their cash flow positions improve dramatically. Thats and extreme but its also obvious.
Next jobs lost because of a foreclosure are small. I.e the economic impact of this defaulted debt is very small.
It does hit the banks balance sheet of course but thats being ignored at the moment.
Only if losses where being written down would I agree as long as they are hidden you get expansion from increased purchasing power for everything that does not require credit.
You don't make the mortgage payment you max out the credit cards and stop paying those your cash flow improves that simple math nothing complex.
And of course your saying the mighty American consumer who incurred debt up to his eyeballs is going to become afraid and snap the wallet shut ?
He should but I think you will find he won't.
Sure he will save a bit more and move back from insanity but its a relative move back. From insane spending to simply overspending. Not even close to full conversion to a frugal saver.
I'd argue your mixing in your own response with those of others and not being objective. For the most part Americans actually don't even know how to save not that they won't make a symbolic attempt but its symbolism not reality.
Short term for example I expect consumer spending over Christmas to be OK nothing to write home about but not the worst year on record either.
We can check that prediction a bit later in January.
I of course have snapped the wallet tight as I'm sure most of the readers here have however we are a minority not the majority and obviously I'm predicting the majority will spend until they can't. Defaulting on debt is to allow continued consumption not and attempt to change to be a saver the difference is huge and important.
Later the wallets will snap tight but not right now. Heck the housing numbers alone should convince you your argument is already wrong. Anyone consumer converted to being a saver could readily do the math and figure out the tax credit was not worth it and was a losing proposition. And just as obvious many did not set down and think it through.
If we where suddenly a nation of savers then the cash for clunkers program and housing credit would have had minimal impact smart savers would have correctly seen through the programs and kept the wallet shut and bought when their job future was clearer.
That did not happen therefore your argument that we are a nation of savers now is simply wrong.
Eventually you will be right but not yet its going to take some harder blows before people give up and change.
Again time will tell but everyone expecting savings in low demand will in my opinion prove to be wrong.
Most americans will instead default on their current obligations and spend until they can no longer spend.
For many the conversion to being a saver will only happen when they open the fridge on Monday and its empty and the electricity may be turned off any moment and the phone was cut long ago and they have a come to Jesus moment that they really don't need cable and should start saving money and they are going to have to beg some money from friends just to eat for the week. We simply are not even close to that point its default and spend for now.
And then you state your opinions. Please refrain from projecting your inadequacies on other people.
I think this says all you need to know about what the current American consumer thinks about debt obligations.
http://www.calculatedriskblog.com/2009/10/fannie-mae-delinquencies-incre...
Thats a graph of liars crooks and thieves. These people will do anything to keep the party going.
"When these people walk away their cash flow positions improve dramatically. Thats and extreme but its also obvious."
It should also be obvious...
For the one who walks away it "might" or "temporally" improve. The lender(banks, 401k's, other institutional retirement programs) is inversely damaged. We have collectively kicked the can down the road...that is all
"Next jobs lost because of a foreclosure are small." I.e the economic impact of this defaulted debt is very small."
On who? Banks? Tax bases? Housing ATM "economic activity", Our after the dot-com crash jobs were mostly construction and debt related. Debt was "the fuel", we are out of "fuel" I can't imagine you seriously making such a comment.
"It does hit the banks balance sheet of course but thats being ignored at the moment."
CDO's,loans, whatever, etc. are not all held by banks. Retirement systems have been hit. Boomers are rightly concerned or scared. States have underfunded pension systems. Foreclosures and the impact on the tax base, via housing price declines, is huge.
"....ignored at the moment"
Lets cash in on that one by borrowing even more money, opps we are trying that....good luck!
Cash for clunkers = more borrowed money, private and public. More debt partying, more hangover in the morning. Moving consumption forward with nothing that will sustain demand. Again kicking the can down the road.
"You don't make the mortgage payment you max out the credit cards and stop paying those your cash flow improves that simple math nothing complex."
WOW! Ignoring everything else including reality helps too! And you get kicked out of your house, and you have your credit canceled, and you get your car reposed, and they turn off your cell phone, and your kids can wash up in the McDonnalds bathroom. I sure your wardrobe won't look crumpled while sleeping in your car, if you have one.
How can you assert this...."Sure he will save a bit more and move back from insanity but its a relative move back. From insane spending to simply overspending...."
"...overspending..." with what? credit? Have you missed the biggest point in this whole thing? We are in a credit contraction, don't you get that? You can point to individual exceptions and I suppose you will, but this is a collective problem that effects everyone, this economic expansion was built on debt. I might not default, I might save, but those who do default and can't save will effect this economy and not in a small, insignificant little way as you suggest.
"...Not even close to full conversion to a frugal saver." When was this the major issue? Those who can save I think will. Those who can't won't - its quite simple.
"For many the conversion to being a saver will only happen when they open the fridge on Monday and its empty and the electricity may be turned off any moment and the phone was cut long ago and they have a come to Jesus moment that they really don't need cable and should start saving money and they are going to have to beg some money from friends just to eat for the week. We simply are not even close to that point its default and spend for now."
Our economy has been built on credit expansion. That will continue until it can't, which I agree with Stonesleigh is underway. Credit destruction is here and now.
People are tapped out, tapped out people don't save because they can't- they need every dime to pay bills. Can't pay your bills, or buy things - someone looses their job, Its a spiral that self reinforces.
You have snapped your wallet shut, so have I, making the situation worse and adding to the self reinforcement of the downward spiral. Why do you think we are so unique? I think those who can save, or should it be "not spend", will. Those who can't - can't.
Which group do you think makes up the majority of our economy? Savers - A:no, you have stated as much.
In debt spenders? A:yes, you have stated as much as well, and I agree.
Whether or not we are savers is not really the big issue, in terms of economic activity. Debt is.
We are in the hangover phase, have a bloody Mary for breakfast if you wish...
DelusionL,
I have one example to support memmel's line of reasoning: I know someone who has stopped paying on her mortgage and credit cards. She does indeed find herself with more disposeable income, and is partying on. Since there is so little consequence (so far), she sees no reason to stop spending money. After all, she's been told the 'recession' is over!
I know this is hardly a robust sample, but bear in mind that even with 16% U6 unemployment, 84% of people who want to work are. If they can wiggle out from under their debt service burden, they have money to spend!
People who foreclose appear to be of several different stripes.
Many are foreclosing on not-their-main-residence, so they fall into the memmel category of people whose cash flow improves dramatically.
Some move in with relatives, find that comfortable, and also may fall into that category.
In one article, up to 40% ended up in their cars, or homeless on the street. These people are likely to curtail their spending in a big way. Most likely they are the ones who lost their home after losing their job.
Many have to put together money for a rental unit security payment, for foreclosure tax on the amount forgiven, to pay off the credit cards they ran up while trying to stay in the home, and try to rebuild their credit so they can buy another home (qualify for FHA loan after 3 years, I believe). I expect these will be able to do some savings, as the incentive is high.
I have one example to support memmel's line of reasoning:
There is a webcast/radio show dedicated to 'stop paying your credit cards' Cash Flow with James Martinez. An hour of bank hate or weird ramblings about chip bodies/mystery bodies.
A different approach.
Where did almost all the money go ?
The banks. Why because the government realized it was facing a large protracted default crisis give substantial amounts of money was lended to borrowers who where not credit worthy. These are not people that saved 20% and bought a house the old fashioned way these are people who either had already defaulted on obligations or had good credit scores but did not have the income to service the debt. The latter where pulled in via speculation.
Next understand that the increased cash flow from default in a temporary phenomena eventually of course this is not enough but that down the road. Given the goal is to kick the can down the road to allow banks to recapitolize thats ok.
Eventually of course since these people never learn they will seek credit again maybe in a couple of years for many in just a year. Now of course their credit scores are horrible so they pay ruinous rates. However since they are trying to rebuild their credit they actually pay their debts. This goes until they overextend and default again.
The only thing that has to happen to keep the part going is that the US Government has to backstop the losses on the home loans its doing this in spades. Once these losses are socialized everyone is a winner.
The frugal saver is simply not part of the equation. Sure some will drop out and start saving but as long as the majority spend beyond their mean either by spending cash flow and not saving enough or via credit prices are inflated and the standard of living of the frugal saver is much lower. You get punished for being a saver and paying prices set by a larger population of spenders.
To be clear all I'm saying is that short term I expect that if oil prices continue to rise we won't see a sharp contraction in consumption instead as each person becomes unable to service their debt they will default and spending will remain constant or even increase as cash flow increases.
As long as the debt can be socialized it does not matter. And this is exactly what we have done.
Longer term of course its and issue but when we get to that point it seems that the plan thats shaping up over the long term is to replace the USD as the world currency with something else this will allow the government to ensure its external creditors are first payed to some extent then it can inflate away its internal obligations.
So for the US in general only the external debt holders matter if they are made reasonably whole then its internal obligations will be met via inflation of the USD.
That is again down the road and probably many years.
Short term what ever gets the money flowing again works. If this means high default rates to increase cash flow fine longer term which could be just a few years they know these people will be back looking for credit and they can and will soak them for it.
I'm simply saying that the thesis that people who took on debt burdens well beyond their means many with a history of default or as speculators are not going to suddenly turn into penny pinching spendthrifts. They certainly will need to save a little bit since they have no access to credit but just enough to get beyond living pay check to pay check.
Most never saved much beyond a few thousand dollars so as their savings grows to be say 2-3k their spending will begin anew.
And of course this increase in saving goes a long way to helping the banks recapitolize. Its not lent out but combined with rolling short term loans at 0% to purchase longer dated treasuries and create risk free returns.
To repeat the only trick that needs to be performed is losses have to be hidden and or socialized as long as they are not recognized the system can buy itself time to prepare for a new round of debt expansion at higher rates to remorseful debtors until they again begin to default en mass.
Now if the banks actually thought Americans where going to suddenly start saving and the system was not being gamed and they had to recognize their losses things would be a lot different right now.
Yet another reason to believe this is not only not expected but not happening is the MSM has focused purely on plastering consumers with the concept that the pot of gold is just over the rainbow get out and spend.
I
"The only thing that has to happen to keep the part going is that the US Government has to backstop the losses on the home loans its doing this in spades. Once these losses are socialized everyone is a winner."
"As long as the debt can be socialized it does not matter. And this is exactly what we have done."
I don't understand how you can possibly believe this. If I was allowed like the banks to "pretend" to not have losses, not be bankrupt, take huge bonuses, I WOULD GO TO JAIL. It is called fraud, just because the government rewrote the rules to allow this doesn't make it magically go away, some ones going to eat it. Passing it to taxpayers is not "making everyone a winner".
These banking games will come back and bite us in the ass, hard.
"To repeat the only trick that needs to be performed is losses have to be hidden and or socialized as long as they are not recognized the system can buy itself time to prepare for a new round of debt expansion at higher rates to remorseful debtors until they again begin to default en mass."
You are being silly?
We are going to reap the consequences of our fiscal insanity and our petroleum based life style insanity.
DelusionaL...
We have done that so far, but we have reached (or almost reached) our capacity in that regard. The next phase of the credit crunch is imminent, meaning that the consequences of debt will start to weigh heavy again. We only managed what we have done so far thanks to the rally, but that is ending. We certainly cannot postpone the consequences for several more years as you suggest.
In the US we've built a housing stock that assumes 70%+ owner occupancy. In the future we are actually going to be lucky to sustain 50% owner occupancy; even 40% might be optimistic. This is simply returning us back to the pattern that existed at the beginning of the oil age - which is exactly where one would expect us to end. That is what you find in economies with lower standards of living than what we have been enjoying up to now.
A US with an owner occupancy rate of only 40-50% simply does not need as many single-family houses as we have right now. We have grossly overbuilt, and are going to see a huge surplus of vacant, unsold houses. A substantial number can and will be converted to duplexes or more, and a substantial remainder will simply remain vacant until so trashed and vandalized and arsoned that they will have to be bulldozed.
This is one of those basic underlying trends that is going to happen regardless of the machinations of the financial system. Don't allow short-term financial fluctuations obscure the reality of this underlying megatrend.
BTW, I do believe the UK is toast, along with most of the PIGS - Portugal, Italy, Greece, Spain, and eastern Europe
... time to buy some good farm land in Canada...
hey there, enjoy your blog posts all the time....
BUT i do work in the stock photo industry. it pays my bills so one day i can become a self respecting/sustaining farmer. can you at least pay for the picture you inserted on this entry???
thanks!
I'm curious -- how do old photos end up in a collection that one would need to pay for? I can understand that many people or businesses buy photos or clip art for convenience or because of the quality of a collection, but surely there are vast sets of photos with no discernible rights, or ones for which copy rights have expired?
On the other hand, how could anybody know if any photo was licensed or not, unless they're the one that took the shot and retained the rights?
I was wondering about that myself. (Though perhaps he was referring to the card photo.)
It's become hard to know even if you're the photographer. With Internet stock photo agencies, you really don't know who bought the use of your photos. You know someone did, but not necessarily who. So you may come across your photo being used, and you may doubt the person paid for the privilege, but often, you have no way to know for sure.
i was referring to the card photo which is now removed...
i'm not going to debate the efficacy of the business model and where its headed to - "rights model" and orphan image registration and such... but at least use images that doesn't have a "preview" watermark which indicates that the image being used is at least not paid for. you wouldn't get in a car and joy ride just because it's sitting in a parking lot with the key in the ignition unless it's yours...
there are services the stock photo agencies employ (http://picscout.com/) to nab unauthorized rights-managed-images.
if you don't understand what's the meaning of various image rights models: gettyimages.tekgroup.com/images/59/Copyright101.pdf
happy drummin'
I have repeatedly tried to explain copyright law to other staffers here, and why we here at TOD should respect it. (In another life, I'm an artist and photographer myself.) However, they generally don't get it. They see the problems we are facing as so overwhelming that trademark and copyright law seem irrelevant in comparison.
If it were up to me, I would use some of the TOD's funding to buy some stock photos. I have also encouraged them to take their own photos when possible. It's just not a priority though, I'm afraid.
Grim day for the markets, VIX spiked up 25% or so (fear gauge) and the NYSE was overloaded, so had to move to backup servers. I reckon that Wave 3 down of this depression has begun, should last till the end of 2010/ early 2011. A lot is going to happen in the intermittent period, with many nations sliding off from the first world into the rest of the world. Mid November we should see the DOW begin it's great descent and some recognition that this is indeed the beginning of the Greatest Depression in human history.
Wonderfully lucid analysis from Stoneleigh as usual.
And as usual, EEEEK! Scary stuff. I find it very credible.
I recall, probably incorrectly, that Joe Kennedy knew it was time to get out of the stock market when shoe-shine boys were giving him stock tips. Thats kinda the feel I get about "inflation/hyperinflation", it seems that it's now the crash trajectory assumed by everyone who thinks things with BAU aren't rosy. So the advice is to just buy gold and wait to become relatively richer.
I think part of that may be that inflation is more intuitively easy to understand, and it also implies (at least to many people) a gradualism and a level of assumed "control" by governments which is reassuring. The idea that "the decision-makers are in control" is a powerful meme for social primates like us, which is why most of us think there must be invisible ones who will still be in control of us after we die. Thus, we may have an unexamined bias to expect inflation.
The thought of inflation is like losing power in several engines on your plane but having a pilot who assures you in a Chuck Yeager drawl that you'll be losing some altitude but everything's under control; while deflation is more like the pilots losing control of the plane.
What has my government been doing in the recent past? Sure looks to me like trying to prevent a deflationary collapse. Delay one, maybe.
It seems it all hinges on "optimism and confidence". Cornucopian smily-face delusionality, in this context, may help liquidity for as long as it lasts and so perhaps seem "rational" to encourage. But it's hard to be optimistic about optimism, when looking at how often past bubbles have collapsed. (always?) Once the rush for the door starts, it will acquire its own momentum.
As a nominally-ascetic enviro-ninja on sabbatical, I'm woefully unqualified to have an opinion on financial stuff. But I'll offer my own shoeshine-boy thoughts: personally, I expect things to get more chaotic as we go forward until terms like deflation and inflation are insufficient. So saying, I tend to look at many things probabilistically (and liked Stoneleigh's doing so). I have no idea of the timing, but generally expect a much larger version of last year's flight to the dollar as soon as some unknown perturbation causes confidence to be lost, followed by a clusterf*ck of large proportions whose trajectory will depend on what sort of panic decisions are made by the various governments. Inasmuch as this could range from hyperinflation to nationalizations to making all sorts of things illegal to raining fusion bombs on one another, and that key decisions will be made idiosyncratically and alter the context for all subsequent decisions, the probability distribution is an interesting tree.
I have a strong feeling that we ignore Stoneleigh at our peril. Many thanks for this article, and a tip of the hat to Stoneleigh in general for being a super person.
...and a tip of the hat to Stoneleigh in general for being a super person.
Hear, hear.
I have Stoneleigh's "40 predictions" taped to my wall, and always seek out and read her articles and commentary. She is unfailingly polite and a joy to read.
Greenish, that's a great turn of phrase, "It's hard to be optimistic about optimism." You've hit the nail on the head with that one.
hi Greenish,
I tend to think that Stoneliegh is smarter than I am but you can read too much into past history when there are so many more new variables in present day circumstances.
At some point I think the powers that be-namely the congress and prez-will simply sieze direct control of the treasury, the fed, and the banking industry, including the printing presses both electronic and physical.
When?
Whenever the sxxx is well and truly in the fan-which most lokely imo come about as a result of a Four Horsemen combo of Stonelieghs deflation, Nate and Wt's energy crisis,your environmental crisis, and all the monkeys rioting-the riots could escalate right on up to the Bomb of course.
Result?Inflation-and if you don't like it the federal marshalls and the federal judges will explain it to you-that new money-pink or yellow or whatever color-is legal tender and it IS good and you WILL accept it and the debts will be paid off-if the riots and the energy crisis and the environmental crash and the wild cards can be finessed.
I'm going out and harvest some venison-the damn oversize rats are destroyng our young fruit trees.
We are locally in deer overshoot.And chronic wasting disease is headed this way.
As Alan might say best wishes for local food and energy production. Tomorrow I cut firewood.
Edit-I haven't been following Stoneliegh and did not realize until this post that she acknowledges the possibilities of an eventual inflation-or hyperinflation.
So she goes up a notch imo.
Thanks Greenish. I enjoy your work in various forums very much as well. You always have a unique and creative take on complex issues :)
look at the volume for the s&p today. almost a straight line increasing as the day goes on. smells of someones control. i'd like any reasonable explanation.
http://finance.yahoo.com/echarts?s=^GSPC#symbol=^GSPC;range=1d
I, for one, am completely convinced.
But, if it is not out of line, I do wonder what all this means for the average joe.
In particular, will even money market "cash" be unsafe? Should those of us with such, and with a mortgage, draw down the mm to pay off the house (something I am considering). Or will we all lose our houses anyway because municipalities will be forced to tax us right out the back door?
I got out of nearly all stocks and into mm before the last crash. Now I'm wondering if even this "safe haven" is not so very secure.
(Again, sorry to turn the discussion from universal monetary mayhem to personal financial advice. Thanks ahead of time for any hint or suggestions.)
read stoneleigh's comment above; particularly lifeboat.
+ see brian's comment above as a bit different take.
My primer on what to do can be found at How to Build a Lifeboat. Getting out of debt is priority #1, as real interest rates will be cripplingly high (even if nominal rates are low, and higher still if nominal rates shoot up). The prospects for employment, and therefore income, are getting rapidly worse. Investments can be lost in a market crash, and savings to a systemic banking crisis (which I think is inevitable), so servicing debt could become almost impossible. Bankruptcy is currently available as an option because relatively few people have been availing themselves of it. If that trickle becomes a flood, that particular escape hatch is likely to close. There have been other (less civilized) recipes for dealing with debtors in the past, and those are likely to make a comeback (imagine debtor's prison, indentured servitude or being strong-armed into the military for starters).
Instead of getting rid of debt wouldn't a better solution be to opt for fixed rate debt and put your cash into a hard asset?
No. Generally hard assets are for later, although if you can afford to get out of debt, hold liquidity and still invest in hard assets, then there's no reason why you shouldn't. Most people won't get that far down the list though. It very much depends how much you have in the way of assets.
Stoneleigh: I know you feel that real estate will get crushed-do you see any cities getting spared? As you know, Toronto is hot right now,Vancouver, Hong Kong also.
I think we will see a lot of variation. Places with greater possibilities, for instance the potential for water transportation in a world of crumbling roads, should do better. Vancouver has one of the largest property bubbles in North America though, and Toronto is terribly over-valued too. Hong Kong has been pumped up by the Chinese bubble that is bursting.
I don't have any great confidence in predicting specifically where might do relatively well, but I'm inclined to think smaller centres that were less affected by bubble pricing. That way the people would be less likely to have been collectively ruined and may be able to stay together as a community. That would equal established social capital, which is worth a lot. If the rest of my family spoke French I'd consider moving east to Quebec, where there's social cohesion and plenty of hydro power.
Thanks, all, for the insights and links.
Many have now learned not to think of their house as just another investment, since when this investment goes sour, you're not just out of some cash, you're out on the street.
I'm debt free except for a couple dozen thousand on my mortgage that I plan to pay off over the next year. My wife's credit card debt is another matter.
Fixed-rate debt isn't, when you have inflation or deflation shifting the base. In a deflationary world, or even one where you are simply unemployed, that debt grows voraciously.
If only my house were debt-free, I'd be a liberated man. Getting closer, but still too far to go. Please, God, just one more bubble?
Great analysis but I'm still not convinced, as others have pointed out above we are maybe giving debt too much importance. The US may default but so what? this analysis is US (or at least OECD) centric, as Memmel would probably say, the big elephant in the room is the emergence of the Chinese consumer. There is now a clear decoupling between the OECD and the non-OECD, the world engine of growth is not in the Western world but in Asia.
Well let's just see what happens when the US defaults on its debt:
Scenario A - Obama holds a press conference and looks into the cameras and tells the world that they can go whistle 'cause he ain't giving them back their money.
1) $100 bills replace toilet paper as the preferred method of wiping one's bum.
2) No one in the US can afford anything imported. Read: no one in the US can afford anything, specially not oil.
3) The second amendment is given center stage.
4) Obama's poodle is toast. So is Obama. So is the USA.
Scenario B - Obama tells Ben not to pussy-foot around anymore and lends him Marine One to help in the turning dollar bills into confetti. Ben takes Barack at his word and really gets going on the printing. No obvious default, but a heck more money is fed into the system.
1) $1,000,000,000 bills replace toilet paper as the preferred method of wiping one's bum.
2) No one in the US can afford anything imported. Read: no one in the US can afford anything, specially not oil.
3) No one in the US can afford anything produced in the country because there is no currency to speak of. Bartering is the name of the game.
4) The second amendment is given center stage - less outright killing, but NRA types are hired by hippy permaculturists to defend the crops and firewood which become the new currency.
5) Obama's poodle is toast. So is Obama. So is the USA.
Either way you look at it defaulting on a nation's debt is not a pretty sight. If a nation's economic power and prosperity - and military might - depends upon a strong (stable) currency, as it does, then defaulting on the debt will never make matters better in the short/medium term.
Edit: all the above is relevant to the UK as well, except the bit about Obama's poodle.
You forgot to mention that in either scenario, certain well-connected people get tipped off in advance (or more likely, dictate which scenario it is going to be and when the trigger is pulled to set it off) so that they can make the astute moves necessary to assure that they end up being "winners" in the game.
The only really important question is: under which scenario do they end up being bigger winners? That will pretty much tell you which scenario is the one that actually happens.
It would seem to me that Scenario B would give them more scope to game the system, and would thus be the preferred one, but what do I know? I'm only an ordinary person pre-assigned to the losing column.
LOL
I question Chinese numbers but anyone thats lived in China would question official numbers. However internal consumption in China is probably increasing its just a matter of how much.
All China has to do to win is not collapse if they can simply keep China moving even laterally that more than enough for them to be relatively strong when everyone is weak. And at the global scale relatives differences matter a lot.
Given their hoard of dollars and the fact that the Chinese government can and does allow bad loans to be hidden on the books I see no reason why China can't continue to do what its done for decades which is initiative boondoggle government projects and get what real growth they can as a sort of side effect.
Its good to think of China as like Japan but because of the different demographics reckless government investment pays off despite itself. Incredibly stupid investments actually work internally in China because of the economic expansion.
Now of course overtime they might be forced to become more and more realistic and focused and actually try and optimize the system thats fine but the entire time they are probably growing their economy and at worst hitting a sort of steady state.
Regardless the relative strength of China increases steadily as its competition weakens and thats what really matters.
As with the story of the bear China need only outrun us to win.
I think reality and perceptions vary a great deal from country to country. If I, like you, were sitting in Canada I'd feel more positive, and rightly so. Still got a stash of oil (tar at least) gas and U, and energy hungry Asian economies wanting to trade iphones for energy.
I think Figure 5 is quite telling, how in Europe Germany has avoided the housing bubble. The structure of their economy and their outlook will be very different to the PIGIES (portugal, italy, greece, ireland, england and spain). Scotland of course has a stash of oil and gas too:-)
Because they are "poor", Chinese workers are much more energy efficient than those in the OECD, potentially keeping energy prices above our comfort level - the pendulum swings.
I disagree with this. China is incredibly energy inefficient. Your making the mistake of mixing in the poor interior with the industrial affluent coast. Never use averages in China. Its two distinct countries about 300 million or so fairly wealthy 1-2nd world people and about 700 billion below that line.
The affluent class which is at least equal to the US and associated industry is horribly inefficient in its energy usage. Differences in oil consumption are primarily from the fact most of the wealthy live in large cities bringing them more in line with Europe simply because of the nature of the cities. Chinese have to be a bit creative to waste oil driving around. However expansion of the highway system is helping them. But driving to work from suburbia is not easy in China it still has very centralized cities. For the US New York is probably the only city thats close to comparative but not really. They are trying to introduce suburban expansion and increase their inefficiencies as fast as possible but that takes time. Its non-trivial to convert large efficient cities into sprawling inefficient ones no matter how hard you try.
Underneath this efficiencies increase steadily until you have the poor of china living renewable lifestyles with perhaps some coal or canned gas for cooking and a small amount of heat.
There is no average the country itself has every variant of energy usage patterns possible. Some of the city dwellers are even efficient preferring to save and walk rather than take taxis. You name it as far as energy usage its done in china and on a large scale. What matters is of course the direction the population is moving and thats obviously towards higher energy usage requirements.
On the top end China might be finally working towards becoming more efficient but thats hard to know.
I tried to choose my words carefully. What I was thinking is this:
http://www.biomara.org/fuel-from-seaweed
Original credit goes to Dave Gunn, the Scottish Association for Marine Science
This is gathering seaweed in the world's largest seaweed farm, Sangou bay in China. If the guys doing this work expected to have a ski holiday in New Zealand and a summer holiday trekking in Nepal then I very much doubt the seaweed farm would be economic. Low energy cost labour has a huge impact on what they are doing. The problem is their vision is to go skiing.
Understood.
Probably the best way to say it is China is exploiting all possible approaches to grow from what your describing to plenty of examples of waste.
And your exactly right the vision is the problem and they leverage everything to get there. Assuming thats edible seaweed most of its probably headed for some rich persons table.
I wish there was a simple way to explain China but the fact that every province sticks to its local language and ignores Mandarin unless forced to use it should give you a clue that your dealing with a very complex situation thats literally hard to put into words. At best I don't think there is a country on earth that has as much diversity of both good and bad. China also has a real chance of fracturing and falling apart Beijing hold on the rest of the country is not nearly as strong as most people think. Depending on the situation I think you would be surprised how fast China could slip into civil war. The possibility is there right under a fairly thin veneer. China itself is intrinsically a set of city states that sometimes get a long and sometimes not. Think Europe on steroids. I don't understand India nearly as well but it seems to be similar.
Throw the divergent economic situation on top of both countries fragmented social systems mix well and simmer.
How is the chart on the second page to be read? It has '000 tonnes at the top and a figure 10,800 for China. Is that 10,800,000 wet tonnes for China?
Euan - how about we English trade you Gordon Brown and Dear old Darling for your Scottish oil and gas. Go on! You know it is a good deal, after all Brown put an end to Boom 'n' Bust.
;)
He put an end to the boom and bust cycle....
Actually, looking at the public debt as % of the GDP (http://en.wikipedia.org/wiki/List_of_countries_by_public_debt):
Canada 60.7%
Germany 76.4%
US 61.5%
UK 43.4%
and external debt as % of the GDP (http://en.wikipedia.org/wiki/List_of_countries_by_external_debt):
Canada 59.69%
Germany 159.92%
US 95%
UK 375%
Germany does not seem in a very good position especially with an exports-driven economy. Canada has managed to reduce its debt thanks to high oil prices.
From the same source:
public debt as % of the GDP
China 15.7%
and external debt as % of the GDP
China 5.11%
....one can achieve a lot with a competitively fixed exchange rate.
external debt stats neglect the elephant in the room - that the whole world uses fractional reserve banking system - you can buy a house for 300k and put up 30k - the 270k loan gets wished into existence with a house as the asset - you need to add up all government debt, all private/household debt, all corporate debt, all financial debt, all state and local municipal debt, etc - no country associated with the world growth economy during last 30 years will be immune to this, though some are in better shape than others.
ps -look at private credit growth in China -a giant bubble in making - much different situation than their external debt one
Exactly. The Chinese bubble is already bursting. It won't be long before we see the consequences of over-capacity where export markets have collapsed. That will bring all the bad debt to the surface....
Fractional reserve would be less of a problem if the reserve fraction were not allowed to be so very small, and if the banks were required to match deposit terms with loan terms - in other words, no more lending out for thirty years money that depositors might demand tomorrow. Allowing all that is just asking for trouble.
This is not true.
First, the numbers for the government dept are outdated, the german site has newer numbers for 2008, in 2009 and 2010 it will get worse in relation especially for the UK and the USA in comparison with germany (but germany will also extend its government dept):
http://de.wikipedia.org/wiki/Staatsverschuldung
The second numbers are the brutto numbers which do not offset the german depts to foreign countrys by the depts which foreign countrys have to germany. Because germany is a very cross-linked economy (because its the workbank for high-price high-tech technical goods of the world and in the opposite heavilly addicted to foreign imports of semi-finished goods, consumer godds and resources like oil or NG) this number is high, but also the depts of foreign nations to germany. In the summation, germany is a netto creditor to the world by around 800 billion € / 1200 billion $.
http://www.bundesbank.de/statistik/statistik_aussenwirtschaft_avs.php
The US is in opposite the biggest deptor. Also Japan is a big netto creditor, thats the reason why the Japan or German government dept mostly to their own people is quite a different thing as the US government dept to China because the US people safed nearly nothing since 2000 (US safing-rate was somtimes even less than zero, the safing-rate for Japan and Germany where around 10 % of net income beetween 2000 - 2008). The US simply sells there money to others, getting real goods and oil therefor. As we all know this will not last forever.
More relevant than the external debt is the current account balance:
http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance
Or current account balance per capita:
No.
OECD workers are more productive than any low productivity countries.
http://en.wikipedia.org/wiki/File:Gdp-energy-efficiency.jpg
Assuming that GDP falls in direct proportion to energy production,
then the OECD energy could drop 75% before the OECD GDP per capita ($30000/c)would reach the levels of Chindia 2005($7500/c).
Thats a nice chart showing same thing as this one:
Figure 2 GDP - energy trajectories for key countries and federations. Europe = 25 countries making up W and E Europe, some small countries excluded. Data sources as before.
http://www.theoildrum.com/node/5495/
The Chinese economy as a whole is for sure much less energy efficient than mature economies. This by and large is due to massive energy expenditure on infrastructure projects - this is real GDP. I believe more than ever now that a huge chunk of OECD GDP is phantom and at some point will simply evaporate, and this will alter the energy GDP relationship dramatically.
The point I was trying to get across here is that poor workers, leading simple lives use little energy, and without having data to back it up, I'd imagine that they are very energy efficient when you look at what they produce in relation to what they consume. Energy efficiency enables more GDP to be produced per unit energy consumed enabling those who are efficient to pay more for that energy. Hence, I believe the OECD is going to find itself at a huge disadvantage. If for no other reason we have "grown" on the back of cheap abundant energy. The new economies will grow into a system with scarce expensive energy.
China is producing consumer goods for the world.
China consumes energy that the Americans and European should consume, but they don't and this doesn't show on your chart.
Eeeeek!!!
Peak credit will have the same effects as peak oil.
I repeat Peak credit will have the same effects as peak oil.
The entire global economy is dependent on the extension of credit. Just in time systems, global trade and commerce all depend on a functioning credit system. As the system gives way, our way of life will alter entirely. Think global shortages, farmers not getting enough credit to grow crops, no investments in new and existing oil projects due to falling demand and no investment in solar, wind, geo etc as purchasing power dramatically declines. Credit is required for virtually every facet of life in the West, turning it off is akin to hitting the emergency stop button on the economic train.
The notion that China can exist outside of the US sphere of influence is a no go, in his book on The collapse of Complex societies, Joseph Tainter clearly states that if we are to face collapse today it would be global in nature.
About 35-40% of China's economy is dependent on exports and no matter how they fudge their statistics, their economy is hurting real bad.
-Real unemployment might be close to 40-50 million as in China someone who 'quits' voluntarily after a slight nudge and a better severance package is NOT counted as unemployed.
- 6 Million graduates annually need a job, this will NOT be possible as Japan, Europe, US etc all succumb to the credit crunch.
- China considers shipments of cars from the factory to the dealerships as sales. So while car 'sales' have increased sharply, the use of fuel has gone up only ever so slightly.
- In the first six months of the year electricity use declined YOY, this is not consistent with the rosy 8%+ economic growth projections.
- In Shanghai average income is 500 dollars a month, yet most construction is taking place at the high end of the market which costs 100,000 per unit or something around there.
Hugh Hendry takes a short look at the gigantic empty buildings in China http://www.youtube.com/watch?v=ektMQGbW3wk
And the Mall of China which is the largest mall in the world is virtually empty, it has 12 shops. YES 12 shops!!!! http://bit.ly/3IwH9O
China has blown a huge credit bubble of it's own in the past 10 months, loaning out trillions of yuan! Something close to 1.4 trillion dollars.
This has had the effect of propping up asset prices across the board and fuelling speculation in commodities.
Andy Xie writes, http://www.bloomberg.com/apps/news?pid=20601080&sid=aWmgMyTQJHgU
China is an economic bubble waiting to burst. Extreme malinvestment across the board and the sharp declines in wages and incomes across the world are going to hit it hard, Asia will be locked with the US and Europe in a deflationary death spiral.
There is no decoupling. When the US (and other developed world) consumers fall flat on their faces, export markets will collapse. China has built a huge overhang of productive capacity, most of which will be revealed as capital converted to waste, as Greer would put it. I do believe that China will be the next hegemonic power, but first they have to live through a crippling depression (the set back at the dawn of the Chinese Century, the way the Great Depression was the set back at the dawn of the American Century). The huge surplus of single males in China bodes ill for stability under such circumstances.
The Chinese would argue that their capacity is far more flexible than any other nations. When factories shut down last year a large amount of workers moved back to their family's house away from the cities.
The world is not as bad as you think. Travel anywhere in the world outside North America and Europe these days and you would never think there was any crisis or looming catastrophe.
Can the Chinese survive without US and Euroean growth - no. However, for short periods of time, such as the first nine months of 2009, China proved that it could pump enough cash into their economy to create spending which can temporarily offset short (1 year) growth gaps in the US and Europe.
"Travel anywhere in the world outside North America and Europe these days and you would never think there was any crisis or looming catastrophe."
What an odd thing to say. Do you mean that people are more optimistic in much of the rest of the world? That might make some sense. Or perhaps you mean that things are so bad, no one can imagine them getting much worse...
Otherwise, I am left wondering if you see no looming crisis in:
India, where the water table is falling precipitously
Mexico, quickly becoming the next failed state
Bangladesh, awaiting the next tsunami or sea level rise
Somalia
Haiti
Congo
.
.
.
There are doubtless SOME places in the world where the future does not look absolutely bleak, but I find these to be vanishingly few. At the least, perhaps you would want to retract the "anywhere" in your above statement? Or clarify what aspect of the crisis does not look catastrophic there?
I do wonder though, if the Chinese might have secret plans for the rapid conversion of many of their export goods factories over to military production. The US was able to do this phenomenally rapidly during WWII, and arguably is the main reason why the war was over in 1945 and did not drag on for a year or two longer. Chinese students sent to the US to study must have researched this and reported back. The Chinese government is run mainly by technocrats, and I can't believe that they haven't considered this and developed contingency plans.
I'm sure they do.
With regard to your "so what?" question about a future US default, or about any questions about what direction things go in the future in the US, I am becoming increasingly convinced that the only question that one really needs to ask is Cui Bono? ("Who benefits?"). As I have stated in several posts elsewhere here, it is becoming increasingly obvious that the main point of the massive government interventions have been undertaken not so much because of their effectiveness in changing how the macro-economic trends play out, but rather to simply game the system so a different set of winners and losers result than what would otherwise be the case - namely, assuring that the well-politically-connected are the winners. This being the case, and given that past behavior is usually one of the best predictors of future behavior, I think it likely that whatever the government will do or not do in the future will be first and foremost to the benefit of these same favored few. In considering whether or not the US government will do things like sovereign default, or defend or not defend the dollar, or allow interest rates to rise, or monetize the debt, or whatever, the only question one needs to ask is: "who benefits"? If the same favored few are likely to end up being winners rather than losers, then it is a safe bet that the US government will move forward with that action. If the proposed action will result in the favored few being losers rather than winners, then it won't happen. The flip side of that is that one can pretty confidently predict that whatever the US government does is not going to benefit we non-connected ordinary people. While it is hard to know exactly how the future will play out, a general attitude of pessimism would appear to be well justified for ordinary people.
I know this all sounds shockingly cynical, but I'm afraid that it is actually only being brutally realistic. That is, in fact, what things have come to.
It seems to me that growing resources (extracted from the ground) allowed debt to grow greatly--in fact, completely out of line with underlying resources. This happened in the US and in many places around the world.
We are now reaching resource constraints, so this growth cannot continue--certainly not in total, although one might argue that a few developing countries might continue to grow. The net impact is that the debt pyramid we have been building around the world looks like it will collapse, or meet some type of discontinuity, so much of it unravels.
I don't know how it will turn out, but I hesitate to base my forecast of the pattern going forward on what has happened in the past. This is so different. There are so many countries involved. It seems like some of the "glue" that makes our current system world-wide debt system work could come unattached. Things could be quite different. We might have individual economies trying to operate much more separately of each other, for example. Local goods might be cheap (if they are available), but those requiring international trade might be largely unavailable.
This is important and true but I think that on all scales people are missing the fact that one persons loss can be another persons gain.
For example I read a story about a family that had defaulted on its expensive McMansion and they all went on vacation to Hawaii.
Thats a individual example but obviously Hawaii benefited and the bank lost. You have these situations at all levels of the economy. Certainly part of Goldman's increases in profit is a direct result of loss of competition from Lehman and Bear Stearns and other changes. Liquidated hedge funds eventually cause money to flow back into other funds.
As the glue comes unstuck as you will profits can and will be made at the expense of others so even as we derail you get tons of cases where losses create winners.
In general however the winners themselves eventually become losers. A simple example is all the investors that snapped up cheap foreclosures that cash flowed. Well rents are falling and eventually these rentals won't come close to cash flowing and will become foreclosures to be snapped up by a now smaller and wiser pool of investors. But the bottoms not in and the cycle repeats.
Basically across the board as competitors collapse the survivors get a bit of a boost until they also collapse.
This along with artificial stimulus works to slow the rate of collapse until forces either oil or economic mount and the system goes down another leg.
Often small differences can cause a large divergence over time between to competitors that started almost equal as the system gets stressed.
Any time you have a discontinuity in an economy, you have winners and losers. (Any time short of an asteroid strike, that is, in which case you only have losers!)
The whole point of the massive government inverventions in the economy have been to assure that certain well-connected parties ended up being winners - people that otherwise almost certainly would have ended up being losers. That means that a different set of people - the non-connected - end up being losers instead of winners (or even more losers than they would otherwise have been).
I do not buy this deflation talk for the following reasons.
1. Except for the 1930s in the US, severe deflation has NEVER EVER occurred anywhere. This is really strange and inexplicable. If deflation is inevitable in a crisis, how come it never happens?
2. Printing money is easy, producing goods and resources is hard.
3. The dry up of credit does not just affect customers, it also affects producers and companies - even more so. As credit and demand disappears companies will go bankrupt creating lack of supply in nearly everything. I believe this is the next phase.
4. There are insane number of dollars out there, will they just disappear? Highly unlikely.
5. If deflation occurs across the board savings of the BRIC and OPEC will increase in value. I do not see a chance that the US will let that happen. They will sooner start dropping dollars from B-52s. Literally.
6. Oil and gold prices are not collapsing, the dollar is losing value. This is not deflation.
7. Inflation is under reported, see shadowstats.com
We'll see soon enough what happens, but so far there is no severe deflation. Asset bubbles are deflating and credit is deflating, but thats all. 2010 will decide this debate for sure.
Excuse me but severe deflation has occurred numerous times in US history and it will occur this time. Yes it has not occurred since the 1930's but was a regular feature back in the 1800's. Printing money is not easy, there are consequences of doing so, the elite would lose a lot more under hyperinflation then they would deflation. Severe asset price deflation occurred during the Russian crisis in the 90's where the Oligarchs bought their large corporations for pennies on the dollar when people sold shares for food and many Spanish companies benefited from the collapse in Asset prices in Argentina. The CPI fails to include so much in it's cost basket, if your home price falls by 30,000 dollars and your food bill goes up by 1,000 dollars per annum - that's deflation (The NET contraction of money and credit) so Stoneleigh is saying that the price of necessities will stay constant or go up as remaining purchasing power will chase essentials and not luxuries resulting in a price collapse across the board. This is NET deflationary, while you may think that prices are going up, this is NOT inflation per se.
Also Irving Fisher clearly explained the mechanisms behind debt deflation in the 1930's and we are headed for a far bigger encore, via Kevin Depew of Minyanville.
Step One: Debt liquidation leading to distress selling.
Step Two: A contraction of deposit currency as bank loans are paid off, and a slowing down of the velocity of circulation.
Step Three: A fall in the level of prices, or a swelling of the dollar (assuming this fall in prices is not interfered with).
Step Four: A still greater fall in the net worth of businesses, leading to bankruptcies.
Step Five: A decline in profits, which leads to...
Step Six: A reduction in output, trade, and employment, which lead to...
Step Seven: Pessimism and loss of confidence.
Step Eight: Hoarding of money, slowing down still more the velocity of circulation, which conspires to cause...
Step Nine: Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in real, or commodity, rates of interest.
All central bank intervention so far has been to try and artificially support high prices in order to prevent mark to market losses and write downs across the board, this gimmick can only last so long as when the curtain is lifted the Emperor will be shown to be naked.
Printing money is impossible when money is tied to a hard commodity like gold, as it was prior to the 1930's in US. It is very easy otherwise. Note that deflation stopped dead in its tracks when Roosevelt made holding gold illegal; this was the effective end of the gold standard (1971 was just the final nail in the coffin). Also, Russia experienced severe hyperinflation during its crisis, NOT deflation. As did Argentina. The fact remains that deflation has never occured in a pure fiat money regime. Ever.
I agree about asset prices. I think Tainter's analysis of the Roman collapse is very relevant here. Land prices plummeted; the empire had to coerce people to cultivate abandoned land. At the same time, they were devaluing their currency by decreasing the fraction of silver in coins. The result was hyperinflation.
It is important to distinguish hyperinflation from normal inflation. They are different beasts. The latter is a regular feature of fiat regimes; the former is their inevitable demise.
If I could recommend an educational collapse, hyperinflation and future growth tour (go in person or simply look at the data) for North American/European/Australian TODers to get a sense of the world today: Moscow, Russia; Shanghai, China, Ho Chi Mihn, Vietnam; Singapore, Singapore; Chennai, India, the UAE (not just Dubai, but also Abu Dhabi), Buenos Aires, Argentina and Sao Paulo, Brazil.
If you can go in person you will get a much better sense the present and future. If you can arrange to meet resource (oil, gas, minerals, ags) companies in each city you will learn vastly more.
If and when you allow yourself to realize that "ever" means an entire 38 years, as it does with regards to the US pure fiat money regime, it doesn't look all that impressive, does it? Or particularly long for that matter.
What far too many people far too easily overlook (to which this whole thread bears witness) is that there are quite a few things that have never before happened in such a regime. During those same 38 years.
As I stated in my reply, the gold standard effectively ended in the US in 1933. When people were no longer allowed to hold gold directly, and only foreign central banks were allowed to exchange dollars for gold, the dollar became in effect a fiat currency.
In using "ever", I'm referring to the many examples of fiat currencies throughout history, not only in the US. Fiat currency was not invented in 1971.
What about Japan?
Mike Shedlock: Deflation In A Fiat Regime?
Stoneleigh: Mish is a smart guy, but I have no idea why he keeps talking about Japan. Japan is nothing at all like the USA in any way-they ran a big trade surplus all through the down years-they were funding all their spending internally-they didn't need one penny of foreign money. Naturally their currency was rock solid. The USA is the total opposite in this regard. When the USA can start paying for the expense of its federal government with a combination of taxation and internal borrowing from its citizens, then it will be Japan.
Any idea how Japan's pensions are doing?
I agree that Japan is a bit of a conundrum. Main point is they never stopped working. They actually produce and export and pay their way.
I don't know about pensions, but something is certainly going down in Japan:
Robbers sticking up stores for food / Holdups of convenience stores on the rise, but increase linked to hunger
http://www.yomiuri.co.jp/dy/national/20091027TDY02306.htm
Japan experienced a massive credit bubble with a huge bad-debt burden in its banking system. Their currency initially appreciated, and then depreciated with the carry trade that fueled a global bubble of the same kind, only vastly larger.
We won't be paralleling the way the Japanese experience played out as we are debtors, not the creditors they were, and they had an intact global market to export to. They could string out their difficulties through exports and by building 4-lane highways from nowhere to nowhere. Japan has still not faced the underlying problems in its banking system and still has much further to fall. Nevertheless the Japan model is useful in explaining deflation in a fiat regime, stressing the critical role of credit.
Our experience will be more Argentine - rapid collapse where the rug is abruptly pulled out from under people's feet. We won't have an intact global system to cushion the fall though.
This is exactly the point. You show why Japan's deflation is not a good parallel to the current situation. So what have you proven? The fact remains that there has been no deflationary spiral in a fiat-currency system. To say that such a spiral is inevitable at the present point globally would require a little more in way of arguing. It sounds like an educated guess based very much on lessons from the 1930s, without accounting for the different circumstances.
The same goes for the Argentine case. Which may well be repeated in some countries, but in the USA? Argentine did not control the global reserve currency, or the IMF, or whatever systems that are the core of the global political economy.
Stoneleigh, we need to consistent. Mish's definition is not the one you're using. It is not total money and credit, but total money and credit in relation to available goods and services. Like all meaningful metrics, it is a ratio.
x = {available money + credit} / {available goods and services}
and its time derivative dx/dt that is the subject of this debate. In your arguments, you often take the denominator to be constant; I would argue that this the real flaw. Applying the fundamental laws of supply and demand (which is common to all schools of economics), x is more or less CPI, at least in regards to the part of the economy which most important for the vast majority of people.
Nobody I think would argue against deflation in real estate; most credit extended to workers in our economy was in the form of real estate loans; the massive extension of credit throughout the 90's and 00's led to massive inflation in housing, and we are now experiencing massive deflation. Similar arguments can be made about the flow of retirement funds and other savings into equities.
In this respect, I agree with you and Mish about asset deflation in Japan and the US, but I think it misses the bigger picture. CPI is the relevant metric, because it averages x over all sectors of the economy; one cannot ignore couplings between different sectors, which is what Mish does when he dismisses CPI and looks only at real estate and equities. In singling out real estate and equities, you have built up a straw man, since the value of the denominator (total housing stock or total shares traded) rarely if ever decreases.
With regards to money that flows through the consumer economy, one can argue that there really cannot be any money destruction. People's deposits--the liability side of the banking system's balance sheet, and the part of the money system that is used to pay for things--are almost entirely backstopped by the government, in one way or another. This led to zombie banks in Japan, and is being replayed here in the US. The Fed's massive purchases of mortgage backed securities is preventing money destruction from happening, as it must, since the liabilities of the banks are insured by the FDIC anyway. The consequent massive growth of "excess" reserves at banks indicate this; those reserves represent people's money, a huge pile of dollars that isn't going anywhere, until those people need to draw on their deposits to pay for necessities. The outcome of this, when that dam breaks, is a flood of money into the real economy, and subsequent hyperinflation. It seems you agree that this is the endgame; we only differ on the timing.
The moral aspect of this debate seems to be "what do you do with your money?". I hold the position what society needs more than anything is to chill out, conserve what it has, and think about how to transition to a sustainable living arrangement. When you hold your wealth in dollars or Treasuries, you are in one way or another lending it to banking system (or government), whose raison d'etre is to circulate money through the existing economy, i.e. the opposite of my stated position above. (The same applies to equities with respect to the corporations that issue them). Granted, lending is abysmal right now, but every dollar you give the banking system makes its resurgence more and more likely. I don't trust the banking system with society's future, so I refuse, on moral grounds, to participate in their money game. I've chosen silver as my savings vehicle, because it represents embedded energy that I'm withdrawing from the economic system and storing in a vault; it is a very useful material for building all sorts of devices which I think society will need in its reconstruction, and one that I can readily get my hands on and store. Granted, it's not perfect, and buying silver leads to more silver mining, but it seems the best I can do for the short term.
I think Nate's comment below highlights this moral dilemma. Our efforts spent debating monetary issues is probably better spent in trying to build sustainable communities and looking forward to a brighter future. As I noted above, monetary issues are not wholly unrelated to this dilemma, but real value lies ultimately in our everyday actions and our relations with one another. Money, be it gold or silver or paper, is the tread that ties our society together; we need to replace that with something else, and discovering what that is should our foremost priority.
The average American lives on their working wage or some other steady cheque, not a pile of dollars they have stashed away in a savings account. That "flood of money" you are referring to only benefits those who have access to taxpayer funds or government creation of fiat.
That is also my definition, as I have said many times. I realize that the denominator will also be changing. As I have pointed out in relation to many things, I expect supply of goods and services initially to be excessive relative to much reduced demand. I then expect supply to collapse as parts cease to be available, trade collapses, businesses go under etc.
Government promises will not be worth the paper they're written on. They're a smoke-and-mirrors confidence game intended to reassure people so that they won't make a rush for the exits. Unfortunately, bluffs like that get called in major bear markets. We are going to see bank runs, and the FDIC will be overwhelmed (in fact it arguably is already).
I understand your position. Silver is not too bad a bet, as long as you don't need to depend on it in the short term (or you would be selling into a price collapse). Silver doesn't hold its value as well as gold during hard times, as more of its value is a function of its economic utility as an industrial metal. Both will fall in nominal terms initially, but silver will fall further. It will hold value over the long term though, and it could bottom early in the coming depression. Beware of confiscation though. That wouldn't stop you owning it, but it would make it much more difficult for you to trade it for other necessities. I would strongly suggest you hold at least several months worth of cash under your own control as well.
As I said, you and Mish disagree, because Mish equates deflation with credit contraction, without accounting for available goods and services (at least in the post you quoted; I think he gets the picture as, clearly, do you). Your assertion that goods and services will contract faster than available money and credit, however, remains unsupported. The way I see it, most consumer goods are produced in countries that already have more dollars than they know what to do with (notice China's commodity binge the last few months), and all those unemployed people here in the states aren't providing any services; they're on the dole.
The paper the government promises are printed on is the US dollar. So yes, it won't be worth anything! The FDIC has a $500B line of credit with the Treasury; the large banks have mountains of excess reserves (which represent freshly minted money exchanged for toxic real estate securities); the $787B stimulus package is going to real people, like myself (a research scientist) and several friends (electricians, construction and highway workers). It's real, actual, green money, not smoke and mirrors (but equally worthless). Your reference to bank runs is a throw back to the days of hard currency, where deposit insurance was physically incompatible with fractional reserve banking.
Anyway, assuming you're right about the FDIC, where do you suggest we hold these mountains of cash you're telling everyone to accumulate? Under our mattresses?
As for the silver, I think of it as a long term savings vehicle, not an investment, for the reasons I stated above (I'm withdrawing my wealth form the economic system, which is savings; any form of paper currency is not savings, it is an investment, since you're implicitly lending it to the banks). I know silver is volatile, but it's much more useful than gold (I'm in solid state physics, so I tend to oogle over cool materials) and has a much longer history as a currency for common folk like myself. Also, gold was confiscated in 1933 because it was demonetized, and government could not allow for competing currencies; this is why I assert that the fiat regime began at that time, not in 1971 (fiat currency is non-redeemable paper). Curiously, silver was left alone, and in fact was in circulation in small change until 1964; copper was the longest holdout, in pennies until 1982.
I have an extremely stable job, zero debt, and do have a stash of cash and my own WTSHTF survival plan, so I guess I'm hedged in case you're right. I too sold all my equities early last year (even took penalites on an early ROTH IRA withdraw, I felt that strongly!), and pleaded with my brother to not spend all his inheritance on a down payment (alas, to no avail---the desire for home ownership is almost carnal in some people). But I think things are different this time around, at least for commodities. If I might offer some advice myself, buy some silver! At least just a little! The market convulsion last year lends some credence to your argument. But I think the market players are well acquainted with the phrase, "fool me once, shame on you, fool me twice..."
It's an uneasy time right now for the bond markets; the Fed has completed their POMOs and their Treasury holdings are back up to pre-crisis levels. This inflation/deflation debate will end soon I think, wherever the (casino) chips may fall...
P.S. Kudos for engaging this debate, and for educating people on financial issues; you seem to have a very good heart, and are doing a lot more for people than us nagging commentators; on a personal level, I think I'd much rather shoot the s*** with you than the gold bugs! I enjoy reading TAE, and have found lot of useful information on that site.
You would have to be creative. I merely point out that holding it in the bank is not a good idea as the FDIC will be powerless in the face of a systemic banking crisis. Savers could lose access to their money without warning, as the Argentines did.
I'm glad to hear you're well prepared either way. Shame about your brother. I have a good friend who did exactly the same thing despite me practically begging her not to.
'Things are different this time' is a major red flag to me. Things are never different this time, as the drivers for these moves are grounded in human nature, and that has not changed. The market will fool the herd every single time, and they never learn. Commodities, and especially energy, will be very valuable once we have passed through the coming temporary supply glut. Access to energy will be critical and could be very difficult to secure. For that reason, paying today's high prices for some control over your own energy supply is probably a good bet, so long as you don't have to go into debt to do it.
As for silver, I wouldn't buy it at today's price. IMO it has a long way to fall, and if I wanted to buy some, I'd wait until I could to so for less than $5 an ounce. It will be valuable later on, but cash is much more important at the moment IMO.
Thanks - I'm glad you find TAE useful :)
[my bold]
This cannot be said enough. Thanks for saying it again, Stoneleigh.
And, thanks for TAE and your excellent posts and thoughtful commentary. I appreciate your efforts, as well.
I always thought that when I sold my house in the London suburbs in the summer of 2004 that I had done so too soon. But the chart in the article says this was the peak for UK house prices pretty much.
I'm no economist but even then I could see something was very wrong. When a work college told me he had secured a yearly savings account at 9% interest I had to ask myself why were the banks so desperate for money to make such a deal?
I also remember in 2003 my girlfriend came to visit (from the Netherlands) and was shocked with the British TV adverts. In one ad break 4 were banks or companies offering loans while the last was a company offering to sort out your debts.
I manage peoples money for a living (not that this qualifies me for anything -I just point that out that I eat, sleep and breathe these concepts) - I think there are brilliant insights in Stoneleighs analysis but also some deep flaws. It is possible this is semantics but I don't think so.
I agree that the debt bubble is a truism and have been trading its unwind for years. It seems that Stoneleigh doesn’t understand the difference between deflation and inflation however. Like many others she is being duped (drinking the koolaid) by Central banks who want the world to fear deflation so they can get away with the most inflation in global fiat central bank history. It is the latter that we need to fear as a result of the massive indebtedness, a fiat currency crisis, and one is inevitable in my analysis.
It is deflation of fixed income assets (credit assets) that we need to fear - this is the opposite of deflation. When fixed income goes down through defaults and/or money printing, interest rates on fixed income go up. This happens under inflation, stag-flation, or hyperinflationary depression. All of those are possible scenarios in my analysis. But deflation (goods and services pricing) is almost impossible given the record global money printing and declining real output. It is simply supply and demand. Too much money will be chasing a smaller pool of available goods and services. This indicates that the output gap will make inflation worse not better when lots of money is thrown at it. In other words we are seeing too much money relative to too little real GDP to show for it.
Debt is indeed the bubble as Stoneleigh (almost) rightly points out. But debt’s elimination will happen automatically through inflation, not through deflation. And she is also right that it will happen though default. Of course. It has to, and this will necessarily spark even more money printing to mop up the mess. A determined central bank can always create inflation though money printing. The world has been printing like this before.
It’s financial assets that are doomed to deflation, but this is inflation not deflation.
Sir, what exactly is your definition of inflation and deflation? You have muddled up and muddied up the terms to such an extent I can not get the gist of your post, are you heading south while walking north.
We'll see about the inflation given that banks are hoarding cash, the velocity of money is declining, M3 measures of money are all headed south, consumers are being frugal and holding back for fear of job losses and wage cuts, zero bargaining power due to so many people competing for jobs.Personal income taxes are down some 20% or so and corporate taxes are down 59% Yes there will be inflation in the long run as fiat currencies all tend to zero but this deflationary cycle will be extremely powerful and dangerous.
(By Deflation I mean the NET contraction of money and credit)
Tiptoe through the window
By the window, that is where I'll be
Come tiptoe through the tulips with me
Oh, tiptoe from the garden
By the garden of the willow tree
And tiptoe through the tulips with me
Inflation over here, deflation over there
... by what, again?
Actually, both are taking place at the same time. We are in an inflatio- deflationary pseudo collapse. We aren't really collapsing.
"Yes we are! I'm collapsing! I need a drink!"
Great article, almost as if written by Irving Fisher, himself!
(briefly) It's largely a matter of style and fashion. We are at the turning of fashion, always shocking. Long pants, short pants ...
no pants.
Almost all definitions of inflation are the same: an increase in money in relation to goods and services. It seems Stoneleigh and I have both disagreement AND a mixing of terms. I think we both absolutely agree that we will have deflation of financial assets: absolutely!!! But this is not “deflation”. This happens under hyperinflationary depression or stagflation or just plain old inflation with lots of fake statistics to show that we are growing but when you subtract the true inflation rate of a basket of goods, we will not be growing at all; we will be in one of the two former situations.
The whole idea of deflation is a hoax and the whole world is falling for it. The same thing happened in Weimar Germany after WWI. The consensus in the country feared deflation and started hoarding Marks as a result. They got their a$$es handed to them by those running the Fed and Treasury.
We both agree that there is a huge, unsustainable debt problem. Many of the deflationists don’t even get that. You really need to study world economic history more. Massive unsustainable debt more often leads to hyperinflation than deflation. It’s about 100:1 odds against deflation, most especially because far too many people just don’t get it. The world is being duped and is going to seriously regret hoarding fiat currencies and T-bonds. The masses get duped every time.
IMO you are both right. Treasury bonds are extremely overvalued but so is any USA real estate dependent on low interest rates. Hyperinflation isn't acheiveable without getting all this devalued money to the public, and there are no plans at all to do this. Inflation will be understated for a long time, which means even guv employees will be getting effective pay cuts for a long time, which means the cash will not be getting to the public for a very long time. The only theoretical way to get hyperinflation would be for a 3rd party being elected with a plan to spread the cash around-not going to happen-even Obama doesn't think the public should share in the bailouts.
I couldn't agree more with conservationist: Inflation is a monetary phenomena and it is possible to have asset deflation with general price inflation.
Only a few economists ever investigated the supply side during the productivity miracle years from the late 19th Century through the 1930's. The deflation was caused by massive productivity gains and it took a decade or more to develop non essential consumer goods markets (appliances, electronics, convenience items, air conditioning, and disposables) to get back to full employment. Also, the streetcar infrastucture was dismantled, forcing people to become dependent on cars.
I never hear anyone mention the discovery of the East Texas oil field in Oct. 1930 as a factor in the deflation.
http://www.easttexasoilmuseum.com/Pages/history.html
This was the largest field ever discovered in the Lower 48 and it flooded the US with the lowest priced oil in history.
In contrast with today we are facing the opposite situation with oil, copper, uranium, potash and numerous other natural resources.
Inflation is a monetary phenomenon, hence the supply of money and credit relative to available goods and services can be increasing or decreasing, but not both at the same time. Relative price movements happen for a variety of reasons, one of which is changes in the money supply. Price movements in different directions certainly can happen at the same time. You really need to stick to real terms though, otherwise the situation becomes confusing.
Deflation and inflation are taking place at the same time. There are two economies, the physical economy is experiencing deflation and the financial economy is at the border of hyperinflation, particularly stock and bond markets.
The central banks world- wide are obsessed with the financial economy, which produces nothing useful but does create liquidity in various forms. Since fractional lending gears with Quantity of Money effect, there is no limit to the amounts of liquidity the finance economy can create - and is creating right now. In this context, central bank interventions are minuscule, the real issues are the rolling over of swaps and other derivatives. These are also forms of liquidity; the total of these denominated in dollars is over $500 trillion and represents the largest amount of available liquidity in the finance economy. This number is from the Bank of International Settlements.
One outcome is the rise in stocks against the decline of the dollar; more funds aren't sold into the markets, but are lent into existence within the markets themselves. The monetary expansion is reflected in the 'cost' of dollars in less inflated currencies. What is also being measured by the declining dollar isn't the decline of overall investment risk but the increase in derivatives risk, since dollar inflation measures the increase in overall unsecured debt. In other words, the debt is secured by the dollar itself, rather than any productive asset; this is why stock prices have diverged from underlying value; stocks measure the quantity of money- plus- velocity rather than the earnings that will probably never take place.
Meanwhile, the physical economy is constrained by oil prices which at current levels absolutely prohibit inflation. Inflation could take place if the crude price was less than $20. Firms could afford very high wages at same time afford the low priced fuel which could be used to amplify labor productivity.
The $20 price or its relative equivalent will never be seen again. Peak oil is real and took place in dollar terms in 1998.
China's cheap labor/cheap coal advantage is a wasting asset; increased petroleum prices are racing to catch up with the Chinese advantage and to destroy its economy as it is currently doing to the US, Japanese and European economies. Since Chinese wages are too low to allow workers to afford Chinese products, its race with increasing relative petroleum prices will be, unfortunately, a very short one. The issue is capital allocation; either fuel or other capital/operational expenses can be paid, but not both. The consequence in the US has been offshoring expensive labor and creating asset bubbles as a hedge against rising energy prices. This experiment has failed. Likewise, and the current financial bubble attempt will also fail. The reason being the inability of the physical economy to support the bubble prices.
The only solution in the developed countries is conservation and de- industrialization. There are no other solutions, any other attempts will hasten the depletion of petroleum reserves and accelerate deflation which will result in conservation, anyway.
China is at risk of (short term) hyperinflation, its dollar peg allows the US to export its liquidity overflow to China via currency exchange, 'hot money' flows and the carry trade. China has sufficient savings to provide 'fuel' should the government convince citizens their savings will be worthless and should be spent at one time. Shaky PBOC and government pronouncements increase the likelihood this can happen.
http://economic-undertow.blogspot.com/2009/10/two-economies-two-conditio...
See Ambrose Evan- Pritchard here:
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6461568/...
Add to that the desire on the part of the Chinese government to maintain growth at all costs while pushing for more domestic consumpution by flooding their own country with yuan. The outcome is deflation here, hyperinflation there.
I don't see at this point how they can avoid it.
The deflation was caused by massive productivity gains
I've seen this idea before. It sounds reasonable, but I'd like to see more detail and backup. Have you seen a really detailed history or analysis of this anywhere?
I have not seen a comprehensive work on productivity so I have been working on it myself.
It is known that the US had the highest productivity gains the years from the late 1800s to the early 1900s, but the data is poor to non existent in the early years.
A highly technical place to start with more advanced analysis would be Ayres & Warr:
Accounting for Growth: The Role of Physical Work
http://www.iea.org/work/2004/eewp/Ayres-paper1.pdf
Exergy, Power and Work in the US Economy, 1900-1998
The notes and graphs at the end of the Ayres-Warr papers contain a lot of good information.
http://www.iea.org/work/2004/eewp/Ayres-paper3.pdf
For economists views in the immediate aftermath of the 1930’s depression see:
http://www.southerndomains.com/SouthernBanks/p5.htm#fn20
From the above website, see the section on Martin J. Sklar, whose book: The United States as a Developing Country: Studies in U.S. History in the Progressive Era and the 1920’ I am now reading.
Agricultural mechanization is discussed in many places, such as below, but this book covers everything of importance in the last 100 years:
A Century of Innovation: Twenty Engineering Achievements That Transformed Our Lives
http://www.amazon.com/Century-Innovation-Engineering-Achievements-Transf...
The descritpion of the impact of electrification of factories is nicely described in:
Electrifying America: Social Meanings of a New Technology, 1880-1940
http://www.amazon.com/Electrifying-America-Meanings-Technology-1880-1940...
For a good chart of hours worked to buy various goods from 1900 to 1998, plus lots of other data, see:
Myths of Rich and Poor: Why We’re Better Off Than We Think
http://www.amazon.com/Myths-Rich-Poor-Better-Think/dp/0465047831/ref=cm_...
For the effects of transportation infrastructures see:
The Rise and Fall of Infrastructures
http://www.iiasa.ac.at/Admin/PUB/Documents/XB-90-704.pdf
This goes all the way back to the Age of Canals, but continues through modern aircraft. It starts out rather mathematical, but you can skip the math and get some interesting facts, then go back to the math if you you like.
Computers and the Internet (fiber optic enabled) were the last major productivity drivers. Computers had their biggest impact years before they were on everyone's desk. In the 1960's computers revolutionized accounting, bookkeeping, billing, payroll and banking. Despite their importance to productivity I have seen little published information on the relationship. Compare this with steam engines where we have firing rates in weight of coal per work output, from the first engines on, except that we don't always know the correct BTU value of the coal. For computers we have processing speed, but have no way to relate that to changes in output, especially because the software applications became more complex while only marginally improving functionality.
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.
That has been my passion for the last 15 years.
Deflation may or may not be a hoax, but paper money IS a hoax.
The US was fortunate enough to have some of the best minds in history frame our constitution, and they understood the value of defining the dollar in gold.
Inflation is a tax on holders of money, and it is a double tax because of tax on interest. This is government confiscation of wealth, plain and simple. The bigger the deficits, the more the confiscation. Flight from cash equivalents is causing all of the bubbles because people have no faith in the currency. Eventually the realization will set in that the game is over and we will hyper inflate. It will be an act of government desperation, and I can see it in the making.
Any so called deflation will be shallow and temporary and will not show up in the price of consumable necessities.
Everyone should have some gold, silver and platinum. No one should own bonds, unless they are backed by natural resources.
I'm not an economist, but I believe Stoneleigh understands the definitions of monetary inflation and deflation perfectly. I also tend to think she is far more "right" than mainstream economists of any sort, and that our overall monetary base will erode precipitously.
I bet managing other people's money will be thankless job for you soon, if it's not already. I'm happy having been on the sidelines in cash for 18 months. Thanks largely to Stoneleigh.
I think Stoneleigh uses the amount of money (actual currency PLUS credit) in relation to goods and services -many others focus on price increases (decreases) when defining inflation (deflation).
How many times in our history have we had THIS magnitude of credit in relation to actual currency? Never. Perhaps some new ways of looking at things are warranted.
In any case, in 10 years time will it matter who was right or wrong re goods and service inflation/deflation over next 5 years if the financial system collapses? I think Stoneleighs piece is excellent in giving a big picture backdrop of where we stand - which is on edge of precipice - to debate whether asset reflation or across the board deflation is in many ways whistling past the graveyard -the winners of that debate will benefit from a redistribution of existing financial claims while the whole pie shrinks considerably. Instead we should be looking several steps ahead - discussing how we get an accurate accounting of our natural capital balance sheet in natural resource terms synced with our human demand and economic systems. To argue about how it is going to exactly unravel belies the greater issue of getting the next version right, or at least less wrong.
I'm going to write a Campfire on this tomorrow..
Nate
Nate - Thanks for that.
Inflation is the increase of the supply of money and credit relative to available goods and services. Deflation is the opposite. We are going to see deflation, as there will be very little purchasing power. Although prices will fall due to lack of price support (a fall in demand), purchasing power will fall faster, making almost everything less affordable than it is now, and the essentials less affordable than everything else as they will receive relative price support.
But, I have heard it said that a big part of our current financial bubble is the use of debt as money. So, is debt money? Or is using debt as money somehow fraudulent? Or what? Is there some way that there can be 'credit' without debt?
There is no question, to me anyway, that the use of debt as money is an idea that is in decline. Should it be in decline? Is current unpopularity of debt just a popular misunderstanding? I'm puzzled.
Your question, Geek, is the crux of the matter. Is debt money? Because we sure have a lot of it. Debt is money when growth supports the future possibility of repayment. But in a permanently contracting economy, with no ability to pay for current economic expansion via the promise of future economic expansion, debt stops being money, and starts being a liquidity trap, or fireplace starter, or . . . .
The way I see it, history of fiat currencies dictates that we will inflate our currency, because it is politically expedient in order to prevent the collapse of BAU. It is also necessary to inflate in order to pay our entitlements. The banks are all bankrupt, we will have 25% unemployment before all is said and done, and the US Gov. will have to pay FDIC, Social security, unemployment, Medicare for all, etc, or risk revolution. Inflate or die. If you doubt that, look at the history of fiat currencies over the past 400 years. How many of them are still around? What happened to all of them? Was their demise inflationary or deflationary?
Peak oil also dictates that we inflate. Less energy + more money = inflation. And if we have resource wars, that will cause inflation, too.
I believe that we will also have to default on derivatives and most securitized assets--$1.5 Quadrillion dollars worth of derivatives dwarfs the world's real money. The pretend assets trapped on balance sheets of the world's corporations, central banks, municipalities, pension funds, and financial organizations will have to be expunged, because there is no legal way to resolve the tangled mess. I believe that we will delay the default process in this country until most of this bad paper is held by the central banks (Treasury/Fed) and GSEs. When our central bank loses control of dollar/stock market manipulation, and we can no longer delay the process, and banks are collapsing en masse, the chain reaction of defaults will occur. What will be left will be several massive central banks, with GS leading the way. At that point, a new currency will be attempted.
Massive chaos will ensue, as the real money that is left after fake money is defaulted creates massive redistribution of money and asset repricing. Imagine the top levels of that pyramid posted in Stoneleigh's original post just disappearing. It won't be pretty. It will take out most of the FIRE-related economy. Maybe then, yes, eventually we will get deflation, because eventually our economy will undergo massive contraction. Perhaps that is when regional/local currencies will evolve, or maybe we'll just go to a barter system at that point, if the new currency fails. That's my take.
Money As Debt
This looks like a convincing argument, but facts do not support it. In this century many countries went through an economic crisis and there was no major deflation anywhere. Inflation however is very common.
Deflation in the past only occurred, when the monetary system was gold based - which prevented the printing of money.
In the current crisis the Fed will print as much money as necessary. States, big banks, big business will be bailed out. Maybe not in plain sight, but behind the curtains. Many other companies will go bankrupt due to lack of demand. Supply will fall faster than demand.
Hubbert's basic argument decades ago was that the increase of physical wealth cannot keep up with the rate of increase in the money supply. This still holds, with Peak Oil supply of goods will fall. The creation of money (credit) may slow down, but that is irrelevant. Even if money supply remains constant a falling supply of resources will mean higher prices.
What seems obvious to me is that either we will see rampant price inflation or massive deflation. The two camps both have very good points in their favour. There is certainly no consensus among leading economists as to what type of environment we will be in over the next 18 months.
What I believe is a given is that something will give, one way or the other and there will be real pain. Frankly there is not much to choose between the two. What is certain not to happen is a few coughs and splutters as the global economy picks itself back up again before carrying on in a fashion like the last 30 years; recording real growth of 3-4% annually, with rising wages and rising living standards. Those days are well gone.
I don't think that we'll see rampant inflation, but what we will see is that the massive monetization of debt, etc., will change the game wrt how deflation would otherwise play out. What it does is change the set of winners and losers. The game that is being played is to assure that the favored few who have bought the right political favors end up being the winners. The overall playing out of the economy at the macro level will be deflationary, and all that has been done and is being done by the government will not really change that substantially, However, it will play out in a way that is worse than it would otherwise be for non-connected ordinary people like you and I.
I think that the cash paid by the Fed to purchase Gov't bonds on the open market will not actually be used by the banks to make loans. Banks have already abandoned their social function of supplying credit in order to facilitate trade. The real economy will just have to figure out how to function without the banks. And it will, IMHO. Some people may starve to death but some people definitely will survive. Survivors will be those who are most marginal in the BAU economy, e.g. indigenous people of the Amazon, Inuit people of Canada, etc. But even many BAU people will survive if they happen to be in a place where there are good, innovative community organizers.
In other words, deflation will lead to collapse of the_world_as_we_know_it, but not to the end of the human race.
I would venture to guess that there are very few congressmen who do not personally know all of the bank CEOs in their district, and have not golfed or otherwise socialized with them on numerous occasions. Senators may have only had the time and inclination to cozy up to those bank CEOs in their state who are in the top 20-30% of the industry, but otherwise the pattern is the same. For the top dogs in both houses - committee chairs, party leaders, etc. - they probably have more than just a nodding accquaintance with the CEOs of the top 20% of banks nationally. What I have just said probably matches up pretty well with political donation lists as well.
This is all about keeping bank CEOs in position, so that the political donations continue. Maintaining an operating banking system that actually extends credit to main street and to ordinary citizens is of no concern to the politicians.
Well maybe, but it won't be easy. A lot of indigenous people have forgotten how to live the way their ancestors did, and have become terribly dependent on long and fragile supply lines. I'm thinking particularly of the aboriginal people of the north whom you mention. (I covered some of these issues in A Mackenzie Valley Pipedream? back in December 2006.) While they may be able to readjust to the old ways, it will still be a very painful process.
How to distribute all sorts of goods and services, which our first steps in specialisations created. Simple trading soon ran into limitations which created tensions, combined with our temper, more than often destroyed more than it gained. Some got "rich" while others didn't have the ability to gain the live easenings things we invented.
Something that could equal all kinds of goods, craftmanship and services was needed.
Something we already had found was given that function, the shining stuff with no real use.
This new idea along with some agreements could service a much bigger area and population. So it removed some limitations but the same ending up in one place remained. To tacle that problem an overlord was needed, someone with an eye for the bigger community. He could by controlling the money thing make sure that everybody got what he deserved. When everything goes well, he builds a reserve and uses that when things were out of balance. This created so much breathing room, that controlling the money supply became the means to run our society. As long as the overlord has an eye for the bigger community, prosperity is equally shared. The effort and/or skills was the base for the share every person deserved. Although money has a lot of pro's it's also one of the biggest history shaping things we ever invented. And forgetting the primary goal of this tool isn't wise.
This is my view on how our financial system started.
.....
It took a lot of time, errors and trial to get and keep this money thing going. My personal take on the egyptians bigger achievements, we can still see today, is that they figured out, how to solve the ending up in one place problem.
They must have had some sort of taxing system to make sure that the money always ended up in the same place. All people without a proper means to keep their present day things going, could always revert to preparing, moving and placing a big piece of rock. These actions can create an economy in itself and needs a lot of coöperation, math services and problem solving thinking. But it was a means for the greater good.
Every 1,2,3 generation(s) build their own, maybe several projects at the time. But it looks like it always ended when the overseeër passed away.
To restart they had to take out a lot of the gold, and the later dynasty's must have figured out that burrying it with the overseeër who had build the big pile was the best way, at that point in time to get things going again.
.....
after the egyptians came the romans, dunno where the greek fit in but they sure did some remarkable thinking. After the romans left, it got a bit dark in europe. Afterthat every present day country got their succes and bust stories. french spain holland germany and the british folks. Our money system didn't signifficantly change during that period I guess.
The new world.(usa)
Wow a virginal country with all sorts of treasures still untouched. The search for gold, spurred by indians who gave it litterraly away because they couldn't find a purpose for it, became the base for the fractional banking system still in use today. Having all the energy in the world but no money and no infrastructure to use it's full potential.
This is the crucial point where our problems today originated.
Money before was always a derivate of of some form of energy (Something that could equal all kinds of goods, craftmanship and services)
Slowly transformed into a piece of paper with value.
And more importantly.
Money became a derivate of of some form of fosil energy(99%)
This enabled present day america to build out their infrastucture at high speed, aided by the harnashing of coal to transform it's energy for movement, mass steel production and all other usefull uses we could think of.
Energy (still coal) was never a problem so created upfront money was always backed up by fossil energy. At the early 1900's this changed, our history shows what happens when our money isn't backed up by some form of fosil energy. (note:this is my personal opinion) America was forced of the goldstandard in the early 30's because also their money wasn't backed up by the (every year) more energy. Germany took advantage of this creative problem solving idea. They could rebuild their country (after ww1) in no time and prepared for the normal thing we do when we need something desperatly.
Oil became the new free roaming energy and together with coal, after ww2, we could attach our money to gold again because it was backed up by energy again. A new set of rules (bretton woods) created more stability. And we could rebuild all that was destroyed with credit. And we payed a visit to the moon. (money or a buckload of energy?)
In the 70's creative problem solving thinking changed that again
.....
Before the seventies growing energy supply was enough to grow to the energy sector itself + the real economy.(=better living standards for everyone).
In the 70's this didn't work anymore, to much energy was needed to get more energy. The "real" economy couldn't grow anymore.
So as a last resort we started to inflate the money supply by a small amount every year just to keep our world going.
In the late 90's this again wasn't enough, so financial voodoo was created to help inflating the money supply. Masked by bookkeeping fraud and pie in the sky wizards.
In august 2007 this all stopped
.....
Money is a tool and our monetary system can't function without the more part from our energy.
Credit = using our chlidren's future energy today.
Stoneleigh
First, thanks so much for your earlier posts on tod and your later posts at your blog. It was the mid 07 posts that got me thinking, eventually persuading me to go from long to short 11/07. I have not done so well since march, but luckily my sliding confidence reduced my positions and am still well in the black since 11/07. a month ago I doubled my short ETF positions, we'll see.
Have you seen the chart that substitutes Case Shiller housing price data for 'owner's equivalent rent' used in USG CPI? Mish occasionally updates this chart on his site.
http://globaleconomicanalysis.blogspot.com/2009/10/case-shiller-cpi-at-n...
Still showing deflation but not as much... however, I question the recent apparent increase in house prices. The low end may have stabilized on account of investor buying, at least for now (and until rents fall further), but prime defaults surpassed sub-prime defaults mid 08, and we are now seeing mostly prime defaulted homes on the block, and of course these homes are more expensive than sub... IMO higher prices are a mirage. And anyway, even Goldman says the 8k subsidy has boosted prices 5%...
Eventually the dollar will rise, pushing down commodities and equities, boosting deflation. I put out an investment letter to friends, next issue will catalogue risks:
Swine flu, east european defaults leading to western european banking crisis and euro crisis, China revolution on account of rising unemployment and falling living standards (exporters will hurt more than importers, communist regimes can be brittle as USSR noted, those with downtrodden minorities even more vulnerable), the usual potential for explosion in the persian gulf, growing acceptance for walking away, rising unemployment, rising crime, state layoffs, complete collapse of commercial real estate construction, Chrysler collapse, (later) japan crisis as retiring workers are no longer able to buy japan's bonds, ... I don't see much chance for offsetting positives.
Today's risk/reward ratio does not favor equities.
It is interesting that rising oil prices have seemed to help fuel rising equities...Perhaps they will fall together. it is counter-intuitive that consumers sending more money overseas will help local companies. I exited my oils in feb, too early too bad, still think the poor economy will trump PO until 2012/3 or so, i.e. until saudi spare capacity is in use and the effect of sliding investment has a chance to work its way through the snake. The question, of course, will be just how much the reduced work force making less money can afford to buy.
Re: Saudi Spare Capacity
US annual oil prices were $26 in 2002, $57 in 2005 and $100 in 2008.
From 2003-2005 inclusive, EIA data showed that Saudi Arabia (net) exported 9.4 Gb.
During this time frame (2004), here is what the Saudis said about oil prices:
http://www.independent.co.uk/news/business/news/opec-studying-plan-to-bo...
Opec studying plan to boost oil price band by a third
By Saeed Shah Wednesday, 28 April 2004
From 2006-2008 inclusive, Saudi Arabia (net) exported 9.1 Gb.
So they (net) exported less oil as oil prices went from $57 to $100, an increase of $43, than they (net) exported as oil prices went from $26 to $57, an increase of $31.
Note that following the 2004 Saudi comments about being committed to the $22-$28 price band, they did increase their net oil exports to 9.1 mbpd in 2005 (the recent annual record), so I actually think that they were trying to bring prices down. But in early 2006, the Saudis started complaining about not being able to find buyers for all of their oil, "Even their light, sweet oil." As I have previously noted, Texas has experienced a similar shortage of buyers for light, sweet crude for the past 36 years.
Saudi Net Oil Exports (EIA):
Monthly U.S. Net Imports from Saudi Arabia:
I think it is better to track net imports (from different sources) rather than net exports (i.e. claimed production less consumption).
I suppose this would be relevant if the US were the only oil importer in the world. If we pretend that China is the only oil importer in the world, one gets a different picture.
IEA provides data for IEA Member Countries: http://www.theoildrum.com/node/5576/520854
Simmons (after 6 minutes) regarding Saudis claim of 9.7 mbpd production last summer:
- "It doesn't show up in any export statistics of the IEA"
http://www.cnbc.com/id/15840232?video=809266970&play=1
I was hoping that there would be a post on Matt's talk. I suspect that the flaw in his argument is non-OECD imports, but I don't know if the IEA tracks non-OECD imports.
In any case, what the US & China charts show is that many oil importing non-OECD countries, e.g. China, have increased their consumption and net oil imports, in response to oil prices rising at 20%/year from 1998 to 2008, while many oil importing OECD countries, e.g., the US, were forced to reduce their consumption and net oil imports. I expect to see this pattern continuing, but in any case I suspect that non-OECD demand will be the primary factor determining oil prices, as OECD demand falls, and as we see, IMO, an accelerating rate of decline in net oil exports.
I agree:
At the beginning of March we said that a large rally was imminent, that it would last about 6 months and would take the Dow back to about 10,000. Now we are saying it is essentially over, but we are also warning people that shorting could well be banned if the markets enter a larger cascade, so even being right about the trend might not be enough to make money. You may need to be both right and lucky, or you could sit on the sidelines in cash and preserve capital rather than going for the big (but risky) payout. We're pretty risk averse, so we usually suggest the cashing out option, except for aggressive speculators comfortable with very high risk.
http://online.wsj.com/article/SB125694507086819833.html?mod=WSJ_hps_LEFT...
Banks Get New Rules on Property
fwiw - we're applying this same accounting gimmick to our planetary situation. A mark to reality including all externalities would be too painful.
It looks like this administration will do anything to prolong our bleak outcome. Did you notice no Banks were shut down yesterday, no way would they shut them down with the fall in the stock market.I feel like were all being hand fed info so we don't panic.Its obvious that the Gov will do everything it can to prop up the Banks. If they don't like the rules they just change them in the middle of the game. So now we all know that the powers that be, will keep putting money in to the system pushing back the our date with destiny. If you want to see something crazy call your local county assessors office and ask them how many foreclosed homes have been put on contentious the number will shock you.
Also for the OP.
Since our Debt to GDP was a lot higher in the depression and WW2. Did we just manufacture are way out of it. My point is, we climbed out of it then, Can't we climb our way out of it now ? A lot of people think it does not matter how much debt we have has a country. The USA has a credit card with no limit on it.
Sorry I spoke to soon 9 banks were shut down yesterday LOL. But the Info just came out. Monday should be interesting.
The USA was the #1 industrial nation as it climbed out of the 30s-now it is a post industrial, financial economy. Not to pick on this administration, but does he even talk to one person representing American manufacturing? All his experts are still spinning the yarn that the USA can financially engineer its way to the top (even now).
Obama's 'experts' are the same people who got us into this mess, through excessive deregulation of the financial sector, when they were part of a previous administration. Financial innovation (ie leverage) is the cause of our difficulties, not a cure.
pocampo,
In the depths of the US great depression, when many defaults had not yet happened but the GDP had declined, total public and private debt peaked at about 250% GDP. The current US total public and private debt is at 375% of GDP and rising.
This level of debt is historically unprecedented. To make matters worse, during the great depression the US was a net oil exporter, we now borrow money to import oil.
The Fed would love to just print up enough money to pay off most of this debt, but they have to maintain a pretense that there is some collateral value behind the dollar or oil producers won't accept them in exchange for something of value (oil),
You are making a big statement; that the world faces significant deflation and effective collapse. That is despite it not happening in over a century.
If this is to be a scientific postulate (and not the dismal 'science' type either) then it needs to be testable and it needs to make predictions.
So short of the world actually turning down into a death spiral, can you make a testable prediction from your hypothesis that would demonstrate the correctness of your case ahead of time?
Given the timeline assumed for your hypothesis, that effectively means a short term, unexpected outcome of the world following the path you suggest. Currently the world is doing what they central banks said it would do - so where does it part company and show which viewpoint it correct?
We do make predictions at TAE, based on the human herding behaviour theory of markets. In early March we said that a rally was coming that would last about 6 months and would take the Dow back to about 10,000. Now we are saying that the rally is essentially over and the next phase of the credit crunch is about to begin. As it stands currently, the high was October 19th. I believe we will see a huge fall (ie thousands of points) before we see another significant rally on the scale of the one that is over/ending (although there will certainly be less significant rallies along the way).
That's good. Its a tractable and quickly checkable prediction against the prevailing market view. I await the next few months with interest to see if you are right. I hope you're not.
However I want to pick up on something you said, that also comes out of my analysis of your hypothesis. Everything within your chain of causality seems to rely on selfish behaviour. Import tariffs, credit constriction, defaults; all leading to the deflation outcome as trade/credit crawls to a halt.
However, excepting the performance of the banks, it seems like the story of the last year has been one of joint action and forward looking methodologies that emphasise brighter times if everyone plays ball. For all the next decade looks to be one of higher taxation and lower standards of living - people are generally pulling together, although with a sense of resigned acceptance.
Are you falling into the trap of assuming the system consists of dumb actors, optimising the immediate only? It's not looking like that at the moment.
Looking at the system mapping myself I don't see the drivers for a credit unwinding - principally because although the debt situation is insane; it's in nobody's interest to call a stop to it. Bankers would lose, politicians, the public, exporters, everyone. Too many negative feedback loops. As such, and assuming they are NOT dumb actors, the situation is more likely to stabilise than spiral downwards. Add to that the extreme hatred of the idea of deflation in all actors and I think the long term perspective (the bit you miss out) acts to stabilise the situation.
Nope, to me we are looking at our old friend, oil decline, to be catalyst of system stability collapse - changing the fundamental weights of the linkages in inflation and global economic health until the capacity to act of the participants is overwhelmed.
Gary,
I posted my specific words, with the dates they appeared on our comments section, in a response to Charles MacKay (downthread I think, although there are so many comments now that I'm not quite sure where anything is).
Everyone playing ball is a characteristic of expansionary times. Contractionary times lead to every man for himself or beggar thy neighbour. The psychological shift is a large part of why declines manifest as they do, and undershoot to the downside just as they overshot to the upside.
There are far more positive feedback loops than negative ones. Credit expansions are inherently self-limiting - they proceed until they can't anymore. Most parties are hanging on for the top tick, thinking that they'll be able to get out early when the stampede starts. Most won't though. They'll be trapped along with everyone else, having to watch on the sidelines while overwhelmed exchanges can't trade (just as happened in 1929). Hardly anyone will be able to cash out, and most of those will be those who did so well in advance.
You mention the long term perspective, but that effectively ceases to exist under such circumstances. Discount rates shoot up and people don't think further than the end of their noses. Just when we need careful thought and planning, people will be running around like headless chickens.
The point I was making Stoneleigh, one I think borne out by these words, is that you are assuming the stampede, the dumb actor working only for his immediate interests. As such its no wonder you get the result you do - its built in.
However if that axiom is wrong, if the actors behave with foresight and don't play for local optimisation; then your hypothesis breaks down.
Over the last year we have seen the antithesis of your axiom - with national players getting together to undertake concerted unselfish action with the eye firmly on the big picture.
If you want to suggest your hypothesis is true, then you need to explain how that will breakdown. In addition you need to explain how the sustaining negative feedback loops that keep things in stability will be broken, and how all those people (bankers, politicians, public, exporters) who will be disadvantaged by credit unrolling will undertake actions they understand will hurt them.
I'm not saying you can't do it, but at present you are assuming a herd mentality that's not in keeping with the facts.
With things as they are, the bounce will continue until there are drivers that stop it. Sentiment is built on sentiment, even if the level of debt is insane. You need some event to push the global economy over a tipping point into renewed crash AND a change in the reaction to that crash. Neither is there to date.
Oh, please explain that one.
Which players, what unselfish action and what big picture are we looking at here?
We are presently experiencing an optimistic herd mentality, but that will be a casualty of the coming decline IMO. Most of us in the developed world have not seen the side of human nature that is likely to manifest during this bear market, as we have lived for so long under conditions of increasingly manic optimism (with a few setbacks).
For more on my view of herding behaviour and markets see Markets and the Lemming Factor.
But "the coming decline" relies on the nonexistance of "an optimistic herd mentality". If they don't act selfishly, you don't get your deflationary spiral. Your particular chicken needs an egg to hatch from.
You can suggest that the 'potential' for a deflationary spiral exists, but without some certain prime cause to change prevailing attitudes - that's all it is, potential.
For all you have a nice feedback model towards TEOTWAWKI, you need to put some work into the tipping points and the shape of the behavioural attractors which govern the actions of these non-dumb actors - IMHO. Its a big hole in your hypothesis at the moment because dumb herd doesn't cover it.
Oh, come on, Gary, you want to continue attacking S. for not -in your mind- sufficiently defining her parameters while you yourself bluntly refuse to define your own statement that there are...
How credible do you think that looks?
Since I see no other candidates on the scene that fit the description, I'm going to have to assume that you are referring to the teabaggers party.
ilargi
I chose not to reply to your previous statement because I thought you were spoiling for a fight rather than looking to engage is reasoned debate.
Looks like I was right.
I'm not interested in 'attacking' Stoneleigh, or you; more testing her hypothesis for what I see as an axiomatic hole in reasoning. I think reference to the G20 and the actions of the market in rescuing troubled institutions were fairly obvious and didn't need rehearsing. Even dubya was averse to protectionist US-first policies.
From Wikipedia:
http://en.wikipedia.org/wiki/2008_G-20_Washington_summit
In the US the "rescuing of troubled institutions" has resulted in the biggest transfer of wealth in history, from the former middle class to the elite.
If anything besides political grandstanding was accomplished by the G20 it would have to be the continued dupability of the gullible.
biggest transfer of wealth in history, from the former middle class to the elite.
Do you have a source for that?
Hmmm, now I begin to understand why S&I simply quit replying.
mmm. Perhaps I should have explained why that didn't look right.
OK. The fact is, that because incomes in the US are so unequal, income taxes come very unequally from the rich as well. So, it's not so clear that this was a massive transfer from the middle classs to the rich.
OTOH, if you're right about something, it shouldn't be that hard to explain it.
And, just because something seems to be a common idea doesn't make it true.
Mood shifts are endogenous and therefore do not require external causation. Something will be rationalized after the fact as a cause, but that does not mean it actually was. On balance of probabilities (as always), the next leg of the decline began on October 19th. Anything that may happen now will not be the cause of a move that is already underway. For much more on this topic, I suggest reading Bob Prechter's books. This fractal model is called Elliottwaves, and dates back to the 1930s. It's major strength is identifying tipping points.
External events do not drive markets or mood. Instead mood drives both markets and the way events are perceived, hence relatively positive headlines near major tops (regardless of what is actually going on), and panic-striken headlines near major bottoms. We are currently hovering around a significant top, hence we still hear talk of green shoots and the recovery. I would argue that people are going to wake up and have a better look at the awful fundamentals they have been ignoring for the last several months.
I don't think we're going to get any closer to agreement.
I think that the actors (which include national governments) are not playing this game via 'herd' or 'mood' - but with a degree more intelligent deliberation. While 'rmood' might be a worthwhile understanding of behavioural drivers for the everyday market, I don't think its accounting for behaviou in this crisis.
You, I think, assume that market players will "wake up" and switch mood into a protectionist, deflationary spiral. I, on the other hand, think they are intimately aware of the reality of the debt situation, but are being driven by other thoughts.
Near term future will show who's got it right !
While I agree completely that the arrival – and passing – of peak oil has enormous negative economic implications, I see it very unlikely that the US will experience consumer goods price deflation going forward.
Despite all the talk above about falling credit demands and the possibility of a falling money supply, the evidence in 2009 does not support at all the theory of deflation put forth. According to the Federal Reserve, total outstanding credit has been expanding at a 5% rate in the first half of 2009. In recent years it had been about 9% - so it is somewhat hyperbolic to call a move from 9% credit growth to 5% credit growth a “credit collapse”. The M1 money supply has advanced at a 16% rate over the last three months. Does anyone here really think that can be labeled a symptom of deflation?
Granted many businesses will close up, and many individuals will lose a respectable employment income - basically forever. That’s what can be expected in the post-peak world. Also at some point in time, probably not in the too distant future, oil supplies will fall below a level where the US economic and financial system can smoothly function. But even them I don’t see deflation arriving, as governments react by printing up money even faster. Think Zimbabwe.
This last year has seen the most explosive expansion of monetary policy of the Fed, ECB, China, and also quietly - the IMF - in history. Remember in addition to the Fed’s $1 trillion – and climbing – ongoing monetization of Treasury and mortgages that the ECB added more than $300 billion worth of Euros around July 1, and we had the IMF adding almost $300 billion worth of SDRs about September 1.
Did I mention that China’s money supply has been consistently growing about 28% year over year for many months?
It’s quite likely that the effects of these inflationary monetary policies will eventually fuel a dramatic rise in natural resource prices, as investors and central banks with large stocks of paper currencies choose between microscopic interest rates and looming resource shortages.
The rise in basic commodity prices will in all likelihood be met by further inflationary fiscal and economic policies to help consumers meet their basic survival needs.
Conventional money supply measures do not acknowledge the vital role of credit, which has been contracting dramatically. The effective money supply (the supply of money AND credit) is in contraction despite the best efforts of central banks, and IMO that contraction is about to accelerate significantly, aggravated by a fall in the velocity of money. Emerging markets will be badly affected as their export markets collapse and much of their excess productive capacity decays.
Our Zimbabwe experience is much further down the road, after deflation has run its course and the international debt financing model is dead. At that point we will be looking at currency hyperinflation, as opposed to the credit expansion of recent years. The distinction is crucial, as credit expansions are ponzi schemes and are thus inherently self-limiting.
There is no evidence that - including government efforts to borrow record amounts of debt - that US credit is contracting:
http://www.federalreserve.gov/releases/z1/Current/z1r-1.pdf
The same is true for China - money supply continues to soar and credit continues to expand. Please note that I am not disputing the underlying fall in credit quality, but as long as governments (the US and China in particular) keep assuming bad debts, total credit outstanding is not falling.
Thanks for your prediction going foward. Also can you make it easy for us and just point out where you predicted a huge stock market rally off March lows? And - are you also making a prediction as to the price of oil, gold, etc? I am already on record as saying we will see $100 oil within months, and while I am at it, there is a possibility of $1200 gold in early 2010, and $1500 gold about April 2010.
TAE comments Feb 20/09
Stoneleigh: The rally could last several months and should be accompanied by considerable optimism by its end. I can imagine people patting Obama and his team on the back for saving the world, just before the next phase of the decline sets in. And that next phase should carry the market down much further than anything we've seen so far. By the end of 2010 I'd be surprised if the DJIA was still over 1000.
Question: Dr doom expects the index to reach 11,000 by the end of the year. That means a rise of some 40% at todays number of 7900.
Stoneleigh: A rise of 40% is quite possible for a major rally. In fact counter-trend moves can commonly retrace over 60% of the preceding decline, and less commonly can retrace up to nearly 80%. In this case that would mean retracing a large percentage of the decline from over 14,000 to wherever the Dow ends up at the end of this phase of the decline. I don't think we'll see the index up there by the end of the year though. We may see it in the summer, but I think the rally will be over by late summer and the market will probably crash again this autumn. By the end of the year I think it will be much lower.
TAE comments Mar 2/09
Stoneleigh: We are getting closer to a bottom for this leg of the decline. My guess is that we could see a temporary bottom this month, somewhere in the neighbourhood of the low 6000s or high 5000s. The announcement of a major bankruptcy would be typical for a low of this magnitude. That should be the kick off for a significant rally lasting perhaps as long as several months. Such a rally could retrace a relatively large percentage of the preceding decline (from October 2007). Counter-trend rallies are best used to position oneself for the next phase of the decline. This autumn we should see another market cascade - a longer and stronger move (still interspersed with rallies) than we have seen from October 2007-March 2009. Autumn 2009 and all of 2010 should be an unparalleled disaster. Sitting on the sidelines in cash is by far the safest option.
Unfortunately people will become less receptive by the day once a serious rally gets underway. When things appear to be back on track, dire predictions suddenly look much less credible. When I first started talking about these events online in October 2005, people thought I was a raving lunatic, as it was the height of the housing bubble. People really need to read for long enough to see the underlying situation. The fundamentals will still be awful despite the rally, although some surface measures may become a little less awful for a while. Even housing could see a temporary rebound as some liquidity returns to the market. By summer, people could be really optimistic and complacent again, just in time to have the rug pulled out from under their feet again.
I think we could see oil at $20/barrel within a few months to a year, but then at $500/barrel within 5 years (demand collapse followed by supply collapse).
I expect the price of gold to be cut in half within a year or two, followed by a sharp rebound.
Thanks, but that's not exactly what you claimed to predict earlier.
Also, in March, I see you also made an unambiguous prediction that the US dollar was going to rally very strongly, and as we know, the dollar has since dropped sharply.
Therefore I'm having some difficulty seeing the relationship between various events and indicators that you do.
For example, I can only envision $20 oil in a fairly complete abandonment of the inflationary economic and financial policies we are now pursuing around the world. What events would cause most countries to suddenly abandon these policies?
If we take a careful review of the US economy after Roosevelt took office, you can see that the US adopted a very inflationary policy of dollar devaluation and deficit spending that resulted in a rather large increase in consumer price inflation around 1934 and 1935. After that the Federal Reserve grew very cautious, and is now blamed by Bernanke – among many – for causing the US economy to fall back into depression in the later 1930s.
So the lesson I see from the ‘deflationary 30s’ is that even in the most dire circumstances the US has ever faced economically, the US government was able to ‘create’ inflation.
History is on the side of inflation, not deflation.
I gave you a couple of examples, but there are many more in relation to this rally and also the smaller preceding ones. Market timing is an interest of mine.
The dollar has been moving in the opposite direction to the market, as both are driven by the ebb and flow of liquidity. As the market rallied, the dollar fell, and now those trends are reversing. My guess is that the dollar will rally for a year or more.
The 'inflationary policies' are not causing inflation, only the fear of inflation. Eventually they will be abandonned on spiking interest rates that cause a deflationary tsunami of debt default.
Stoneleigh --
Could you explain how you derived the $500 figure for oil in 5 years. I expected oil to rise significantly, but this exceeds any estimates I've seen or contemplated.
Thank you
That is a best initial guess based on the scale of the supply collapse I am expecting. I am not making a specific prediction as to that exact figure, but I do think we will be looking at that ballpark. Bearing in mind that this would be at a time when $5 would seem like a lot of money, thanks to deflation, helps to put such a figure in context.
Deflation or inflation?
The USA experienced structural deflation during the 19th Century and up till the removal of gold backing of currency to US citizens in 1933. The deflation was due to productivity gains from steam power, Bessemer steel, railroads, electrification, farm mechanization, chemical fertilizers, scientific management, assembly lines, mass production and other factors, such as energy efficiency. These powerful productivity forces have nearly exhausted themselves and productivity growth has slowed from 4% to about 1%. Going forward productivity will turn negative due to declining EROEI and declining natural resource quality.
It is entirely likely that we will have continuing asset deflation, especially for real estate and many paper assets. However, liquidity injected in the capital markets will turn to the only safe place under the circumstances of runaway money printing, that is, commodities, especially those needed by developing nations.
Unfortunately our leaders are not smart enough to plan a transition to a society without growth. Thus the crushing debt burden from trying to maintain business as usual in the face of structural economic changes like global wage arbitrage, ageing population and resource depletion.
A sensible plan would be to phase out private automobiles in favor of mass transit, build truly modern energy efficient housing, employ more manufacturing robots and shift the tax burden away from labor to energy and natural resources.
Health care costs are now 16% of the US economy. This is the only sector, besides natural resources, where productivity works in reverse. Where are the industrial engineers and business analysts who look at processes to improve efficiency? And why can't we provide legal protection to doctors to reduce defensive medicine expenses? And wasn't information technology supposed to save the world in the "new economy" filled with knowledge workers?
IMO we will see commodity prices fall substantially (at least in nominal terms) on a wave of global demand destruction that knocks price support out from under almost everything. There should be very little liquidity available, as that is precisely what a liqudity crunch, or liquidity trap, implies. For a while we should see a supply glut for many things, even those which are essential and relatively rare. However, conditions of demand destruction and lack of investment (even in maintenance of existing assets) set the stage for supply collapse. As Jeff has pointed out up thread, the supply collapse is already beginning, although I think the demand collapse will be faster initially.
This theme in media lately is ubiquitous - I am struck by the number of people who are vociferously debating inflation or deflation as it pertains to their investments. As I presented at ASPO, my own thought is that a de-emphasizing of financial assets both as individuals and a society will be probably safer and healthier. Allocating serious mental time and energy to financial futures will not generate the social return it once did.
What about all the inflationists (Jones, Paulson, Einhorn, etc.) who are piling into gold - Einhorn going so far as to start storing physical gold - will there come a time when those folks trade all this gold for paper money? (Or is it more likely to just be 'owned' perpetually?) And the deflationist cash hoarders - will there come a day when the cash will be appropriate to spend? I am sure there are answers to these questions - but investing in financial assets isn't what it used to be - both with respect to risks, and rewards. We have attributed far too high of priority to financial capital as a % of our net worth - and thus far too high a priority on those who are the best managers and prognosticators of financial capital. (I don't include Stoneleigh in this grouping - and as I know her personally, I consider her analysis as more about our social situation than any intent to personally profit from it).
In the end those that agree on financial and real estate collapse but differ on whether its via higher or lower consumer prices strikes me as a bit morbid, just under the surface.
I'm fairly certain you've read enough of TAE to know their work is not a paean to the gods of economics, but observation, warning and recommendation to prepare.
Without meaning to speak for them, I think one could boil their work in its entirety as:
1. OMFG! Watch out!
2. Get skilled!
3. Into the fallout shelter!
4. Rebuild!
Cheers
An expanding population, dwindling natural resources, and a government that has to print large quantities of money to pay it's debt does not equal deflation.
The major problem with these terms-inflation and deflation is that most make assumptions based on them. You are predicting very high inflation-would this accompany slumping wages for the vast majority, or will wages increase? Wages in the USA will only increase with major political change which is nowhere in sight right now.
No I don't see any upward pressure on wages. In fact, wages will actually be lower because of a devalued dollar. World population growth and globalization puts a low value on wage earners. What the next generation faces is low wages combined with higher housing and energy costs. Politically, the Democrats' agenda is to push for free public health care. They want to pass it as quickly as possible and sign up as many as they can on the plan to garner up support for the 2010 elections. The Cap & Trade bill will not reduce CO2 levels, but will generate more revenue for more government spending programs.
Deflation or inflation doesn't mean equal deflation or equal inflation for everyone. Any time you have a major change in the economy, you have winners and losers. The government and the official "talking head" economists love to talk in terms of aggregate data, because this obscured the fact that what they are doing actually does cause some people to gain and some people to lose. This is exactly what has happened wrt free trade. All the talk was about how this would benefit the US in the aggregate. There was never any acknowledgement that such a big change would create winners (a few) and losers (many). Same thing with deflation or inflation. Either one creates winners and losers. The lists might be different depending upon which it is. Surprisingly, there are a few who manage to maneuver themselves on to the winners list no matter which way it goes. Of course, ordinary people like myself usually end up on the losers list either way. Economic stability and a fair and level playing field is the only set of circumstances that actually benefit ordinary citizens. That is the one thing that the politicians don't want, because it is the one set of circumstances that do not leave them with an opportunity to create winners and losers, and thus to give people a reason to pay for the privilege of being winners.
Most wage earners are ordinary people. Unions now only repreent about 12% of the labor force and have very limited clout. Mostly, they only have political influence to assure that their people benefit at the expense of the non-unionized workforce, and even that is just to a very minor extent. Unions have no influence at all over more general macroeconomic policy. Thus, it is predictable that ordinary wage earners are going to see their income decline in terms of real purchasing power, and relative to the rest of the world. This has been going on for a long time already, and is inevitable. If you remove the trade barriers, then the inevitable result is that low wage countries get more business and their wage levels go up, while high wage countries suffer and their wage levels decline; reversion to mean. This was never explained to the American people, for the simple reason that if it were ever made clear, there would have been a near revolution in this country against foreign trade. The only one who came close to speak the truth about it was Ross Perot, and he was widely seen as a discredited kook. (In moments of dark paranoia, I wonder if it was in fact no accident that he was the one chosen as the "official opponent" to free trade just for that reason - an opponent that few would take seriously.)
Regardless of whether we have deflation or inflation on the macro level, real US wages will be declining relative to other things, relative to the past, and relative to the global mean. This you can count upon.
Exactly.
What about the theory of comparative advantage?
Everything you read about comparative advantage is always couched in terms of the aggregate. According to the theory, if different nations with differing comparative advantages trade freely, each will be better off IN THE AGGREGATE. Indeed they will. What is never acknowledged is that any change from a previous state of equilibrium - in this case an economy that was protected behind trade barriers - will result in a complex chain of events that end up creating both winners and losers. It is quite possible - indeed, almost certain - that an economy could become better off "in the aggregate" but that some people could still be losers. Indeed, it is quite possible that in an economy that becomes better off "in the aggregate", only a small minority will reap almost all of the gain for themselves, while the majority of the population ends up being worse off - losers. Not just possible, I would argue that this is pretty much exactly what happened in the USA.
According to the theory, if different nations with differing comparative advantages trade freely, each will be better off IN THE AGGREGATE,
More importantly, according to the theory, different industries with differing comparative advantages will have very different experiences. Those whose prices are higher than the average will suffer, while those whose prices are lower will do well. The idea here is that industries don't compete based on absolute costs or wage levels, but on relative averages.
Comparative advantage has more meaning when you are talking about agricultural products that grow best in certain climates and producing finished goods from bulky raw materials, making transport less expensive. However, the main comparative advantage in today's market is the labor rate. Compare $2/day to $50/hr. Now consider that the item being manufactured is a cell phone or other highly valuable electronic gadget that cost almost nothing to ship.
The pursuit of comparative advantage has created a major systemic vulnerability to disruption of supply lines. I am expecting a collapse of global trade amid a flurry of protectionism, as happened in the 1930s. I am also expecting the reintroduction of capital controls. Countries which have outsourced essential supplies or functions are going to find themselves in a very uncomfortable position IMO.
The US defense department is already in the unfortunate position of having many suppliers of key components and spare parts go out of business, with the ciritcal plant, equipment and design information no longer in existance.
Heck, you tried even finding a made in USA screw, nut or bolt lately? They aren't being made any more. Should make for some interesting times if we are suddenly thrown back on our own domestic industry to keep our military and the rest of the economy supplied.
Things become much clearer if we make comparisons in real terms. In nominal terms wages will fall and so will housing and energy costs IMO, as purchasing power will fall faster than price in a deflation (in other words lower prices do not mean greater affordability) . In real terms wages should be drastically lower and housing and energy costs higher. Deflation can render things unaffordable much more quickly and comprehensively than inflation.
A credit expansion of unprecedented proportions does. First we live through the implosion of the credit bubble, then we experience the inflation that your scenario points to. IMO inflation is several years down the road at the earliest.
I think you hit the nail on the head there Nate. Too many people are seeing the future inflationary/deflationary collapse as a cyclical event that they need to position themselves for as a speculative strategy. In doing so, making themselves similar to the Generals planning to fight the last war. They're not rally heeding the warning that major change is coming and outmoded thinking will leave them as victims of the change rather than profiting from it.
The whole concept of investment is likely to change, especially in terms of capital, finance and money. Such things may be achieved without the intermediation of banks or other institutions which are ubiquitous today for example. Truly profitable enterprises may be accessible only via social capital and community, leaving financial capital out in the cold. The very notion of what is profit and profitable may change beyond recognition even.
So as you said; "We have attributed far too high of priority to financial capital as a % of our net worth".
What we are trying to do at TAE is not to generate obscene profits for anyone or encourage vulturism by the wealthy. We are trying to help ordinary people to survive. When people have limited means they will have relatively few choices. For instance, they will need to choose between the various priorities (getting out of debt, holding liquidity and having as much control as possible over the essentials of their own existences). For many, buying hard assets now is simply not possible. The best they can hope to do is to get out of debt and hold enough cash to be able to buy the hard assets they need later at a lower price (cheaper only for the few who have managed to preserve capital). While this means missing out on precious learning curve time for using hard assets, if one cannot afford them now without going into debt (and therefore losing them later anyway), then so be it.
We prominently suggest that people pool resources in order to get further down the list than they otherwise could, as we recognize how important real structures (social and otherwise) are to being able to weather a massive storm. Working with others will be absolutely essential.
Just to clarify for a moment, we at TAE are not fund managers. We do not mange anyone else's money and we do not issue investment advice. We do not stand to profit in any way from what people do with what they have. We simply couldn't sleep at night if we didn't warn people. Financial insiders can look after themselves, but the little guy needs a heads up. We want ordinary people who've worked hard all their lives for what they have to be able to hang on to as much of it as possible, rather than see it all disappear into a giant blackhole of credit destruction.
Stoneleigh,
What is the source of the graph in your presentation labeled TOTAL MARKET DEBT AS A PERCENT OF GDP? Some others here and elsewhere claim that our current debt is lower now than in WW2 and the Great Depression. My computer screen will not resolve the source at the bottom. If this graph truly and accurately depicts our current situation it is indeed dire.
Regards...Kevin Spoering
Kevin,
It's Ned Davis Research, at ndr.com.
Note: the graph depicts total credit market debt, not the government debt I think you are referring to. As for the claims that our debt now is lower than at the end of WW2, that may be true for government debt -though that too is doubtful, it depends what you count and what not-, but it is certainly not for private -consumer- debt and least of all for the debts that reside inside the banking system.
Crap, I hope this is not to far down the page then know one ever finds it. Discuss please.
and compared to other countrys:
I would ask some questions to those who say a crisis is near. For example: Why us and why now? How can Japan thrive with a debt to GDP of more than twice ours? Why didn't such a disaster happen when our own debt to GDP ratio went much higher than it is today for around 10 years? How can we explain the increase in economic activity in the years after we reached those highs in debt? What exactly is going to trigger such a collapse? After all, Jefferson assumed such a thing would happen the second we moved to paper currency. People said the same thing would happen when we went off the gold standard, and when our national debt first hit $1 trillion. These are the questions that come into my mind. I'm not suggesting that there aren't answers for each of them, but I haven't been able to find them so far.
Japan is a socialistic country that self-finances its government spending. The USA has and continues to borrow money from foreign interests to finance its government spending. The USA does not generate enough savings to pay for the operation of its federal government, unlike Japan. I don't expect mentioning any of this will slow down the endless comments that Japan and the USA are clones.
Thanks ilargi for the link. As the chart does a percentage of GDP comparision in should be valid over it's entire timeframe.
As for me I have been a lurker here for awhile. In the past I have been a chemist for an adhesives company, a white collar job. Also we farm 300 acres with beef cattle. In addition to farming I have a blue collar union job in nearby Springfield, MO in a beverage plant making a well known coffee and dairy based product. Business has slowed down and there has been layoffs. Over the past years I have been somewhat anti-union but here in SW MO I see vast numbers of people unemployed and underemployed, with the local companies taking advantage of this with low wages, slavery of a sort many would say. This has been going on for decades. So I do strongly believe in the union movement, as I have been on both sides of the aisle, and as many are aware of it is tough sledding ahead for wages and contract negotiations.
I chose the name POSITRONIC, sorry about the capitals, because, even though peak oil seems to be most probably here, over the next few decades and a century and more we should see many technological 'miracles' including nanomachines that will do amazing things. Yes, development may slow but it will still march on.
This was an excellent post. Thanks for this. I would be cautious of the direct comparison of the Great Depression (1929) with the present Great Depression. Because of the difference in size of the economies, I'm not sure the simple scaling factors often used are accurate.
At the recent SEG there was an introductory talk and depending on whom you heard the geologic system has either 1 or 2 trillion barrels of accessible hydrocarbons. It was a great meeting.
I'd guess their is 1 trillion that we can just about afford with current economic model - being produced at ever lower rates, and 1 trillion that will require a step change in energy efficiency for us to be able to afford it.
This was a day after the White House concluded the recession was over, (and because of their announcement the dow went up near 200 pts., but then the following day dropped 250!) How can they draw that conclusion when so many banks are failing, many others are lending very little, millions of homes will probably go into foreclosure in the coming years as ARMS reset, and National unemployment is officially at 9.8% but probably much higher?
I voted for Obama but it seems like the same ol' run around when the Govt. tries to cajole us into positive thoughts, thinking that will somehow translate into more activity and a robust economy. The 3.6% economic expansion, increase in GDP this last quarter was in great part due to the cash for clunkers deal, which accounted for 1.77 % of that 3.6%, or almost 1/2. But the cash for clunkers was from borrowed money from China, and I understand now some of that money was used for purchasing golf carts! Also, if you take out that portion attributable to the Stimulus, then what is the increase in GDP from regular day to day non-govt. initiated transactions? Maybe even less than zero!
Don't get me wrong - I'm not anti-Obama. I know they got handed a raw deal when innaugerated, but let's not get too carried away from an increase in GDP resulting from money doled out from money borrowed. And money borrowed must be paid back, which gets back to this article, and I am in agreement that it is looking more and more like its unrealisitic to think it can ever be paid back, especially as net energy declines.
Obama's "Baghdad Bob" routine is quite entertaining. I guess he really thinks he has Communist Dictatorship type control over the media. lol
Will the earth stand still?
Among so many comments there is not one commenting on the overall projection of Mr. Stoneleigh. Everyone is busy to discuss M1 and M2 money supply, inflation, etc. I for my part have never read such a negative view on future that, in comparison, puts Stieglitz and Roubini (alias Dr. Doom) in the jolly marry-go-round camp. The article describes a scenario that can arise if the Martians attach the earth. Mr. Stoneleigh made numerous remarks that are simply not supported by history, as for example “…in an inflationary environment cash is king”. That is only true if one country is in it while the rest of the world is stable as was the case with Germany were one US Dollar, based on Gold equivalent, could buy a bicycle, and is true now in Zimbabwe. If, however, the whole world is in an inflationary environment, as the article predicts, then the money I saved now will buy very little.
But my focus is on crude oil and there is also no comment on the article. As demand dwindles, supply also dwindles. Oil producing companies will shut down. This in turn, after an initial phase, will raise oil prices since billions of people have to cook, heat/cool the houses, take transport to work, etc., etc. Peak oil does not care what is happening on earth and will nevertheless arrive with some insignificant (a few years) delay.
TOD offers an interesting view of Doomer psychosis.
That is not an accurate statement at all-you haven't read enough posts. One example: any criticism of Barack Obama is very poorly received on this site-the overall confidence in the guy is the antithesis of a "doomer" mentality, in fact, it shows a resilient optimism in the face of daunting evidence piling up daily.
My take is that we're about 30-40% doomers, 10-20% technocopians, and 40-60% midrange declinists (that includes me). To those newcomers who have been raised on a steady diet of technocopian optimistic BAU propaganda, even those of us who are declinists must seem shockingly pessimistic, and hard to distinguish from doomers.
The following is a daily chart of the S&P of the past 11 months or so. The line drawn is a trendline. The purpose of a trendline is simply to measure the momentum of a trend on both axis, eg. time and price.
If price keeps breaking down and continues through this trendline with conviction, we can safely say that the momentum of the uptrend that we've gotten used to in the last few months is in jeopardy.
If price rises from this level and makes a higher high (within the a reasonable period of time) we will be able to say that our uptrend and it's momentum is intact.
As of today, the TL can only tell us that we are in a critical area. Our momentum is still intact, but next week that could all change.
Po.
It's Ms. Stoneleigh not Mr. And she didn't say "in an inflationary environment cash is king". The saying she was using is "in a deflationary environment cash is king". Oh! And say hello to your new Martian overlord BTW :)
How many of you watched the PBS special on Brooksley Born called "The Warning"? It tells of Ms. Born, the Commodities Futures Trading Commission chairperson warning of a potential derivatives crisis on the shortly before the 1998 collapse of Long Term Capital Management.
http://en.wikipedia.org/wiki/Brooksley_Born
She was told to shut up by Alan Greenspan and other officials and when she tried to get Congress to pass legislation to regulate derivatives she was the target of a negative publicity campaign.
For an audio summary and commentary see:
http://www.financialsense.com/fsn/main.html Scroll down to Oct 24, 3rd hour SPECIAL EDITION
The scary thing is that some of the people involved are not prominent in the Obama administration.
I do not know why the government tried to hide the derivatives and other “dark markets”. I do know that they were huge profit makers before the situation turned into the bankruptcy of the US government.
I suppose the same logic applies to not mentioning government insolvency while planning to increase health care spending. The same goes for ignoring peak oil.
Have a double feature http://www.youtube.com/watch?v=-wyYE5Lc5oA
To lend support to the vision that the "storm" is just over the horizon here is some analysis in plan language.
http://www.scribd.com/doc/18865179/Sprott-August-2009
To your question of "why?", I do not have the complete answer. I do know that answering the question "Cui bono?" is the road that will lead to those answers. That part of it is pretty simple, but I don't have the time or interest to do all of the research. I'm not sure it really matters that much. I know that those who benefited in no way whatsoever included me (quite the contrary!), and that those who were and still are in government were responsible.
Brooksley Born - Credit Crisis Cassandra
Iris Mack and Brooksley Born
Thanks Stoneleigh. Clear and to the point as usual as is your unwavering focus on how to help the rest of us. You have been right from the start. Congratulations on getting back on The Oil Drum.
Stoneleigh,
What do you think of Professor Hamilton's claim that the Fed has the power to prevent deflation?
October 29, 2008
Deflation risk
"There are plenty of things to worry about in the current economic situation. But deflation isn't one of them.... house price declines have a potential to cause similar problems today as we saw in the 1930s. But I believe it is more than an academic distinction whether we are talking about a relative price change (house prices go down but the dollar price of most other items goes up) or a true deflation (the dollar price of almost everything you buy goes down). The reason is that the latter problem is absolutely one that the Federal Reserve could fix, whereas the former problem may not be.
In a general deflation, the purchasing power of a dollar bill goes higher and higher, and as Greg notes, this can produce big economic problems, as it did for the U.S. in the 1930s or Japan in the 1990s. But it is absolutely a problem that the Federal Reserve can fix. If you increase the quantity of dollar bills fast enough, you're sure to create inflation, not deflation. And the Federal Reserve has unlimited power to increase the quantity of dollar bills.
Some of my colleagues still talk of the possibility of a liquidity trap, in which the central bank supposedly has no power even to cause inflation. Their theory is that interest rates fall so low that when the Fed buys more T-bills, it has no effect on interest rates, and the cash the Fed creates with those T-bill purchases just sits idle in banks.
To which I say, pshaw! If the U.S. were ever to arrive at such a situation, here's what I'd recommend. First, have the Federal Reserve buy up the entire outstanding debt of the U.S. Treasury, which it can do easily enough by just creating new dollars to pay for the Treasury securities. No need to worry about those burdens on future taxpayers now! Then buy up all the commercial paper anybody cares to issue. Bye-bye credit crunch! In fact, you might as well buy up all the equities on the Tokyo Stock Exchange. Fix that nasty trade deficit while we're at it! Print an arbitrarily large quantity of money with which you're allowed to buy whatever you like at fixed nominal prices, and the sky's the limit on what you might set out to do.
Of course, the reason I don't advocate such policies is that they would cause a wee bit of inflation. It's ridiculous to think that people would continue to sell these claims against real assets at a fixed exchange rate against dollar bills when we're flooding the market with a tsunami of newly created dollars. But if inflation is what you want, put me in charge of the Federal Reserve and believe me, I can give you some inflation."
http://www.econbrowser.com/archives/2008/10/deflation_risk.html
Sure, but what the Professor doesn't mention is that this doesn't solve the situation-it is akin to taking all the dirt off your kitchen floor and putting it on your living room floor (then accurately claiming you cleaned the kitchen floor). The economic mess that is the USA cannot be fixed by accounting tricks or devaluing the currency, even though that is the likely result. With inflation/devaluation, you shift the losses to non borrowers and some lenders. What this guy is actually talking about is every single worker in the USA that isn't connected taking a massive wage cut to help out the grifters.
it is akin to taking all the dirt off your kitchen floor and putting it on your living room floor
Moving toxic assets off the books of commercial banks frees them up to lend again.
The economic mess that is the USA cannot be fixed by ...devaluing the currency
That's not what he's suggesting. This is aimed at the question of deflation.
With inflation/devaluation, you shift the losses to non borrowers and some lenders.
He's not suggesting inflation, just noting that it's a risk of massive Fed intervention of this sort aimed at preventing deflation. He's also indulging in a bit of hyperbole, in order to illustrate the powers of the Fed in this area.
I think he's completely wrong.
Well, Professor Hamilton is well respected in the mainstream economics community, and is Peak Oil aware. His work has often been quoted and used as an authority on TOD.
So, could you elaborate?
The Fed does not increase the quantity of dollar bills, they midwife credit expansion. Actual printing would see the US swiftly punished by the bond market, and is thus not an option while the international debt financing model prevails. Professor Hamilton greatly overestimates the power of the FED IMO (a common misconception in my experience, especially among those who tend to see economies as machines that respond to a set of objective rules like the laws of physics, rather than the irrational and subjective human constructs they really are). The Fed does not have a magic wand.
We already stuck in the liquidity trap, where cash is hoarded so that the velocity of money is insufficient to sustain economic activity. The real rate of interest - the nominal rate minus negative inflation (ie adjusted for contraction of the effective money supply due to the evaporation of the credit component) - is actually rising, even as the Fed cuts rates in nominal terms. Even 0% (or perhaps even a moderately negative nominal rate) would not be low enough to reignite lending.
I think short term rates on T-bills could see record low levels as deflation takes hold, as there will be no difficulty persuading investors to buy T-bills, given that there will be a flight to safety (where the return OF capital will be more important than the return ON capital). Credit spreads will widen enormously though, so that interest on other less secure debt (and also longer term debt) will be high and increasing on a huge risk premium.
Actual printing would see the US swiftly punished by the bond market
Could you elaborate on that? Isn't this precisely the kind of action the Fed has taken lately? How and why would the US be punished for this kind of Fed action to support the money supply?
negative inflation (ie adjusted for contraction of the effective money supply due to the evaporation of the credit component)
The Fed uses the GDP deflator (with an emphasis on the core portion). How are you measuring "negative inflation"?
Sorry, you are still getting some of the basic facts about this discussion wrong.
Credit in the US has expanded all year, and outside of brief periods, the money suppy is expanding as fast - or faster - than before, plus your last point about paper money is wrong. The amount of paper money is about $100 billion more than last year - which is about the fastest expansion % ever in one year (in the last 50 years).
So, in sum, I fail to see the signs of deflation that you do.
No idea why you claim such things.
Money supply is in fact tanking dramatically.
Note: both M1 and M2 are incorporated in M3.
Neither shadowstats.com nor M3 seem all that useful to me.
The chart suggests that money supply doubled from 2006 to 2008, and since has declined to 25% of the 2006 level - do either of those changes seem believable?
About as believeable as your inability to comprehend a simple chart.
Oops. You're absolutely right. M3 doesn't seem that useful to me ( http://www.econbrowser.com/archives/2006/05/m3_or_not_m3.html ), and shadowstats seems downright flaky ( http://www.econbrowser.com/archives/2008/09/shadowstats_deb.html ), so I didn't look closely enough.
OK...the graph shows the following M3 growth: 2006 @8%, 2007 @10%, and 2008 @17%, for compound growth of about 40%. Does that look right to you as a description of the behavior of overall US money supply?
That chart has 2008 starting at about 17% YOY and ending 2008 at about 6% YOY. It appears to now be on a trend to go negative YOY which isn't healthy for the whole scheme, OTOH possibly there are a couple innings yet before the whole game is rained out.
Huh??? Most people would interpret 'tanking' to mean negative growth.
M1 has grown 16% over the last year - and accelerating.
M2 is 7% growth, down from 10% - but higher than the bubble years.
They are both part of M3, and I wrote that too.
Are you playing dumb? Do you know what M3 is?
I'm haven't been talking about the M3 - you are.
Attacking me just seems like a diversion from talking about the rapid growth of M1 and M2.
But since you insist, let's talk about M3. All of the recent drop in M3 (but still increasing year over year) is related to withdrawn institutional deposits. Those deposits have been taken out and invested in Treasuries. Granted if the banks didn't have over $1 trillion in free reserves, the loss of some deposits might actually marginally restrict future credit growth.
However slightly smaller bank balance sheets do not mean we are in the middle of a credit collpase since US state and local governments borrowed about $1.5 trillion in the year ending September.
Then again the total money supply doesn't look that bad:
http://upload.wikimedia.org/wikipedia/en/9/95/Components_of_the_United_S...
At first the differences between both graphs may be a bit puzzling, but when you look at the x-axis and y-axis and see that they depict very different things in both graphs, it all falls into place.
It's not puzzling at all. The upper graph is money supply growth and the lower graph is total money supply.
Similar to a savings account. The total amount in the account is not that bad, but the growth rate has been shrinking drastically.
(As opposed to the Wall Street bonus growth rate, which has been increasing by 40%...)
http://www.bloomberg.com/apps/news?pid=20601109&sid=a25cbLmExCXs
the mainstream economics community
And they've done such a fine job of managing things so far, right?
Figure 21 illustrates one of the main reasons that GDP is a very inaccurate measure of economic health.
Thanks Stoneleigh for all the content I also enjoy TAE a lot. I have neglected a lot of adult responsibility to read it.I know this is to far down the page for anybody to read, But just in case I have a few questions.
1, What set off this crash were in right now, In Aug of 07 I had the world by the tail, Now they have me by the balls.
2. The Deflation scenario that you describe above do you see it gradually taking place or more instantaneous.
3. What remedy's are available for our country here in the USA, I tried drinking it did not work.
Thanks again for your hard work, like we say here in Colorado that was real cool.
Po.
Thanks :)
And I've occasionally neglected some to write it, but it's something I have to do.
The self-limiting credit expansion reached its maximum extent, where the debt it created could no longer be supported.
I see it happening relatively quickly, once it reaches critical mass, and I think that will happen within the next couple of years.
No remedies at the national level, but are likely to be things that can be done at the local level (community building, local barter network or local currency for instance). Social capital will be very important.
Stoneleigh, Thanks for providing such an in-depth perspective on where things are heading. My questions are as follows:
1. Do you still see the dow below 1000 by end 2010 and if so, what exactly apart from a black swan would catalyse this to happen?
2. I'm here in the UK and quite frankly, property prices have hardly budged by comparison to steep falls in the US and it actually looks like the worst is over for good if we are to believe mainstream UK media. So has QE worked for the UK or is all this just a fudge waiting to collapse? It's all rather confusing!
By the way, money week say's India has just purchased $6.7 billion of gold from the IMF... is that a sell signal?
This seems way over the top to me. How is it going to lose 90% in under 2 months?
Not two months, 14 months, and I am not specifically predicting that it will lose that much by then. I do think it will lose more than that by the time we reach a lasting bottom (ie one that lasts more than a few months), but I don't expect that to happen before perhaps 2015.
Sorry, I will take reading lessons before comment again ;-)
That is not a specific prediction. I had said ages ago on TAE that I would be somewhat surprised if the DOW was over 1000 by the end of 2010, but I have been surprised before. What I am saying is that I definitely expect the Dow to be thousands of points lower by the end of 2010. The last phase of the decline (October 2007-March 2009) cost the Dow over 7000 points (of the order of 50%), and I think the phase that's beginning now will be worse in percentage terms. Wherever the DOW and other indicies end up, I think we're going to see a financial bloodbath between now and then.
Hold on to your hats in Britain. The housing bubble was much worse than the US and the aftermath will be as well. As for the mainstream media's take on things, they don't have a clue, but are reflecting the optimism of a long rally. That rally has either ended or is ending IMO.
Britain is in terrible trouble, both in energy and financial terms (which is precisely why I no longer live there, despite remaining very fond of the place). It's main sources of revenue were North Sea oil/gas and the fees from money chasing its own tail in the City of London, and both of those stand to be decimated over the next few years. How will Britain heat/power its homes or feed 60 million people on a tiny island when it can't provide for itself domestically and can't earn enough revenue to purchase what it needs from abroad. The Winter of Discontent is going to look like a walk in the park, and the fascist BNP is waiting in the wings to capitalize on the upheaval by turning the anger of the masses against immigrants.