Off the keyboard of Steve from Virginia
Published on Economic Undertow on May 6, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
There is a point in your life when you wake up in the morning and realize you have become a cliché …
‘The End is Near’, David Sipress (The Phoenix) … when you realize it is impossible for anyone to take you seriously. You are beating your head against the wall, others laugh at you or they hate you because you are exposed and an easy ‘hate target’. You cannot accomplish anything, you are a boat beating against the current … borne back ceaselessly into ridicule, you are spitting into the wind, up a creek without a paddle, betting the wrong horse. Think of the others who have been pounding that same wall for decades … Nothing changes … the speculators always win, you are a muppet.
Dow Reaches 15,000 as Jobs Growth Exceeds Forecasts!Inyoung Hwang – Lu Wang – May 3, 2013 (Bloomberg)!U.S. stocks rose, sending the Dow Jones Industrial Average above 15,000 for the first time, as employment picked up more than forecast in April and the jobless rate unexpectedly declined to a four-year low!!!!!!
So much for any crash, Happy Days are Here Again! White is the ‘New Black’: unemployment decreases because citizens stop looking for work. Ex-workers are removed from the unemployment relief rolls … they are then deemed to have ‘left the labor force’ or have retired. Being unemployed in this fashion is counted the same as being employed … That this is a fraud doesn’t matter: the unemployment number goes down for whatever reason, the stock market number goes up. This latter is the only number in America that matters. Indeed, we all live for the right number: Tigers 7, Astros 3 … Yay, Tigers! Because Americans live vicarious, derivative lives, the victory of the Tigers is our victory. When the Tigers lose we all die a little inside.
We should feel good about ourselves because some house flippers in California, Florida and Arizona have been brought back from the dead like vampires. This is courtesy of trillion$ in Federal government subsidies, central bank- crammed down interest rates and easy to obtain low-doc and no-doc guaranteed mortgages. Even beaten-down Detroiters have been able to garner a (small) piece of the house-flipping action. Clearly the animal spirit of unearned success and boundless avarice has refused to flicker out in the Motor City: (from Realtytrac).
It doesn’t matter that college graduates are unable to find work in their chosen fields or that 48 million of our countrymen require government assistance in order to afford to eat … it is the success of gamblers in different finance casinos, to whom everything- and everyone else is sacrificed.
Figure 1: US gasoline sales volume declines to levels not seen ten years ago. National Public Radio says the reason is because we are buying expensive new cars, instead of being too broke to buy gas.
Howard Gruenspecht, the EIA’s acting administrator says there are many reasons for the declining demand for gasoline. They include government mandates for the use of biofuels, like ethanol; and some demographic changes -— for instance, the graying of America (older people tend to drive less). The main factor, though, is the increasing efficiency of new cars and trucks.Rebecca Lindland, director of research for IHS Automotive, says 27 percent of the new vehicles sold in 2011 were smaller, lighter, car-based versions of the SUV, called “crossovers.”“Those tend to get significantly better fuel economy than our traditional truck-based SUVs that used to account for 20 percent of all the vehicles we bought,” she says.
How the addition of a fewer than ten million new vehicles with slightly better than mediocre gas mileage within a three-year period can effect the overall consumption of a 255 million vehicle fleet is not explained by NPR or the EIA. Keep in mind that the vehicles the new crossovers replace are not the ‘traditional truck-based SUVs’ … these remain in service as used cars with new owners. Rather, crossovers replace the much older vehicles that are wrecked or retired from service. A percentage of these retirees were very small cars that happened to get much better mileage than do any of the newer vehicles. Of course, this does not matter … what is important is (blind) faith in progress working properly and (unjustified) business confidence.
Selling out is so easy: ex-hippie Stewart Brand pimps ‘squatter cities’ along with nuclear reactors: prosperity is on the march, resistance is futile! It is a far, far better thing to ask, “Where’s mine?” than to criticize. The critic becomes nothing more than another brick in the Wall of Worry that the hard-nosed American Business Man must climb over in order to ‘innovate’ (MIT-Sloan).
As the expression goes, stocks are climbing a wall of worry. And by our estimates, despite economic malaise, the stock market hasn’t peaked, and we’re still on the way up. Here are some reasons why:– The market largely reacts early in the cycle (and just remember: We are largely no higher than we were at the 2000 peak);– We’re stimulating the market fiscally with low interest rates for some time to come;– Businesses have cleaned up their balance sheets after the financial crisis and are now liquid (in fact many are sitting on huge cash reserves); and– Companies are finding ways to achieve higher earnings despite a difficult political and regulatory environment.
Don’t fight the Fed. Dow 46,000! It’s never too late to jump in! Interestingly, MIT-Sloan does not mention slums as a means to prosperity, nor do they mention reactors, they must have made a spreadsheet error.
The world’s ‘Progress Economies’ have so far swallowed management outrages such as the depositor theft in Cyprus and the repeated bailouts of the Giant Banks by pensioners and others. Consequences have so far been iffy. There have been no market crashes or runs out of the banks, no additional reactor meltdowns or cities drowned by climate change, no bubbles are reverting to mean, no insurrections or violent government overthrows. The children have vanished into their parents’ basements and X-boxes. Occupy and similar social movements have enjoyed their fifteen-seconds of fame and have retreated into well-deserved obscurity; there are no replacements lurking over the horizon. The liberalizing impulses that once flared across the Middle East and North Africa have faded into power-politics-as-usual in places where open warfare has not broken out. Without consequences more outrages are certain to come. This state of affairs will remain in force as long as the promise of material plenty tomorrow remains more credible than the promise of it all unraveling.
“Poverty is therefore a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. It is the lot of man — it is the source of wealth since without poverty there would be no labour, and without labour there could be no riches, no refinement, no comfort and no benefit to those who may be possessed of wealth — inasmuch as without a large proportion of poverty surplus labour could never be rendered productive in procuring either the conveniences or luxuries of life.”… from Patrick Colquhoun; ‘A Treatise On Indigence:
Exhibiting a general view of the national resources for productive labour; with propositions for ameliorating the condition of the poor, and improving the moral habits and increasing the comforts of the labouring people … (1806)
A single person gains from the losses and efforts of the multitude; modernity offers the Invisible Thumb permanently on the balance of human affairs … as well as a collection of ‘seriously good reasons’ why this should always remain so.
” — Historian Niall Ferguson says he was “doubly stupid” for suggesting British economist John Maynard Keynes did not care about the future because he was gay.Ferguson — Laurence Tisch professor of history at Harvard University and author of a number of historical works, including a history of money — made the remark in response to a question at an Altegris Strategic Investment Conference in Carlsbad, Calif., The Boston Globe reported.He had been asked about one of Keynes’ most famous remarks talking about long-run investment strategies: “In the long run, we are all dead.”Ferguson responded that Keynes, presumed to be a homosexual, did not have children and was therefore presumably not interested in the “long run” effects of the economic policies he advocated.
What comes after cliché? The Void: there is little incentive for the establishment to buy from the cliché what can be had for free everywhere else. Clichés are not dangerous. First they ignore you, then they fight you … then they go back to ignoring you some more! The establishment doesn’t have to out-perform clichés, it has only to frame every element in every discussion in terms that serve its own — extremely short term — interests: clichés are part of the frame.
The only alternative the establishment offers to individuals at this moment is to be a victim — that is, to be ‘surplus labour’ or a market fool. Far better to cliché oneself out of the line of fire … the system is too gigantic, reflexive and insensitive. It is too committed to the status quo to accept- or even understand directions that do not continually reinforce the same status quo. Resistance is futile, indeed!
Opting out is not just an expedient to avoid pesky non-linearities, it is a sea-change, a fundamental and voluntary realignment of interests away from the cannibalistic regime. By doing so the individual short-sells the status quo, at the same time he- or she fleshes out a marketplace where such short sales become meaningful … where a marketplace currently exists only in outline.
Keep in mind, the establishment itself is nothing more than an abstract idea, it is not a concrete ‘thing’. It is not formidable even though it puffs itself up in order to appear to be so … our business- and management enterprises are suicidal, they devour themselves and do so faster whenever the chance appears. Carried along with the idea are all the mechanical wind-up ‘things’ that the idea brings into being … however, every element or increment is dependent upon all of the other elements functioning predictably and providing necessary subsidies. The establishment is a very long chain masquerading as a four-dimensional lattice. This chain has no substance, only shared prejudices and fantasies. The concrete ‘things’ are fetishes, they cannot pay for themselves. As has been seen throughout our period of crisis, individuals are the unwitting bankers to the never-finished enterprises that once-upon-a-time made up modernity and that now make up its demise. Without the deluded citizen eagerly and greedily playing along there is nothing but a shell; what remains are empty promises, junk and circus tricks.
Even if the industrialists are able to make good on some of their fantasies such as pocket-sized nuclear reactors, by opting out, you will escape becoming the subsidy-of-last-resort for them. Let those who offer fantasies as ‘goods’ pay for them out of their own pockets, not borrow then demand for others to retire the resulting debts.
– Get simple. The establishment is complexity made material: the system’s response to complexity’s shortcomings is to add to it. Becoming independent from- or less dependent upon interconnected engineered systems is a way to avoid others’ costs.
– Get Small! Ditch the growth idea starting at home. Size = vulnerability, giant size = collapse. Steve’s First Law of Economics: The costs of managing any surplus increase with it to the point where costs ultimately exceed the worth of the thing itself.
– Get Free. Pay off debts and flee from the Giant Banks! Stay out of the casino(s): hold onto your money and starve the tycoons: holding increases money’s worth at the same time the rich are denied access to it. They are unable to repay their own monstrous debts and are thereby ruined.
– Get close to food! Grow some yourself, patronize farmers’ markets or start one. Most communities in the United States are nowhere near able to feed themselves … even in rural areas! Industrial mono-agriculture produces ‘crops’ which are not human food. At the fringes, growing human food is making a comeback with real invention and perseverance on the part of a growing percentage of farmers. The ‘wild card’? Climate change …
– Get real! Disconnect from the mediastream: throw away the television, cancel the NetFlix subscription, use a real telephone and ditch the smartphone and its endless ‘connectivity’. What comes your way is advertising.
– Get creative. The establishment is a naked emperor. Make fun of it, tweak it, laugh at it, annoy it, make it bleed money defending its precious ‘prestige’. The use of screen-printing is encouraged.
– Get rid of the car. If you have two, sell one of them. If you have a big one, get a smaller one. If you can, become car free and enjoy life.
– Learn a skill or trade even if it seems silly. For example, learning how to sew or make hats — and buying the necessary tools — appears dumb where clothing can be had for a few dollars at a store. Learning a practical skill is an investment in yourself. The market for such things is always there, perhaps bubbling under the surface. Everyone on Planet Earth wears clothing. The current regime of cheap goods from China and elsewhere is not guaranteed over the longer term.
– Find a place to live where you are comfortable: that is, a place that has friendly people and is appealing; that is not overly expensive, dangerous, contaminated, decrepit or badly managed.
– Learn how to entertain yourself … and others. Draw, write, paint, fiddle, sing, act … garden, volunteer, carpenter, become a fire fighter, feed the hungry and destitute, become politically active … once removed from the mediastream the time must be filled with something else. Make hooked rugs.
– Be flexible. Non-linear = unpredictable. Learn to avoid rigid, doctrinaire approaches … to everything.
– Think toward nature’s parsimonious ‘economy of needs’. These are simple: food and water, clothing, shelter along with delight – love, sex and a stimulating and beautiful environment. Compare this to the industrial regime of robots and furnaces; capital consumption, waste, and profits … of material excess alongside the artificial scarcity of abstract ‘money’; of toxic contamination, greed and violence and their tyranny over all things and the extinguishing of life itself.
Over the course of hundreds of millions of years … nature has learned how to provide sustenance to our planet’s inhabitants within the boundaries of what is freely available in the form of material resources along with energy from the sun and from within the Earth. We refuse to learn, we insist there are better, more expedient ways conceived over the past fifteen-minutes, ways that ignore everything that has gone before. The river does not borrow money in order to flow. The tree does not need a permit or plan to grow; the bird flies as it will when it feels the urge to do so.
Nature builds without furnaces or plans, without debts or money, without pointless destruction. To change, we must become more like nature and less like our precious selves. Time to do so is running short: the End is Near.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on April 23,2012
Discuss this article at the Gold Table inside the Diner
Events emerging from the murk of crisis bring to mind Billy Batts.
In Nicolas Pileggi’s book ‘Wiseguy’, Henry Hill describes a 1970 “welcome home” party held at a lounge called ‘The Suite’, in Queens, NY, for William “Billy Batts” Bentvena, 49, a mid-level soldier in New York’s Gambino crime family. The Suite was a mob hangout owned by Hill, an associate of Lucchese family gangster James ‘Jimmie the Gent’ Burke, who later became notorious for the December, 1978 Lufthansa Heist of $5.8 million dollars in cash-plus valuables from JFK International Airport.Bentvena had just been released from prison after serving a six-year term for drug possession. Hill states that Bentvena saw Burke enforcer Tommy DeSimone and asked him if he still shined shoes … DeSimone took this as an insult. Hill also stated that Bentvena provoked DeSimone to impress mobsters from another crime family.Shortly afterward, intoxicated Bentvena was ambushed in the bar, pistol-whipped repeatedly and stomped by DeSimone and Burke. Believing he was dead, the three placed Bentvena’s body into the trunk of Hill’s car and removed him to rural Connecticut. During the trip — with a stop at DeSimone’s mother’s house to obtain a shovel — the three men discovered Bentvena was still alive in the trunk. Hill claims, after stabbing the wounded Bentvena ‘thirty or forty times’, Burke and DeSimone finished him off by beating him with a tire iron and the shovel. The men later buried him under a dog kennel.
There are several versions of the Batts killing, which put the beating in different bars with different resting places for Batts. While he was incarcerated, Batts’ drug- and loan-sharking operations had been taken over by Burke and his crew, Burke was loathe to give them up which was his motivation for killing Batts. In 1979, DeSimone was lured to a Gambino hideout on the pretext of ‘being made’ and summarily executed — presumably by John Gotti or Thomas Agro — for the brutal killing of Bentvena and other transgressions against the Gambino hierarchy. Bentvena was a ‘made man’ — that is, an Italian by blood who had performed at least one contract killing at the orders of the organization — as such, Batts was an untouchable to common criminals such as the psychopath DeSimone.
Like Bentvena’s, DeSimone’s body was never recovered.
Another made man? … or a man unmade? Come to your own conclusions …
Figure 1: (TFC Charts), In two trading days gold is whacked: “Where’s the shine box … Bernanke?” (New York Times)
“We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions,” Dennis Gartman, a closely followed gold investor, wrote to clients on Monday.The shift in gold’s fortunes presents a moment of reckoning for many so-called gold bugs, who had expected their financial lodestar to continue moving up in response to the Federal Reserve’s effort to stimulate the economy through bond-buying programs.
The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs.
“Gold has had all the reason in the world to be moving higher — but it hasn’t been able to do it,” said Matt Zeman, a metals trader at Kingsview Financial. “The situation has not deteriorated the way that a lot of people thought it could.”
The recent drop in gold prices has been partly attributed to signals from powerful members of the Fed that the central bank may begin to wind down its bond-buying programs. But the list of reasons to sell gold grows longer by the day. European politicians have indicated that Cyprus may need to sell off some of its gold holdings to pay for its bank bailout, which could lead other countries to do the same.
Selling the modest gold-holdings in marginal Euro-states — or threatening to do so — would not move the futures’ market 20% over the course of four days. If forced to sell, the Cypriots would do so carefully rather than dumping gold in such a way as to crush the price … anyone making repayment demands on Cyprus would want them to obtain a high price as well. The suggestion that other countries or large holders would senselessly dump their gold … or gold derivatives in advance of such sales … just to do so … does not make sense.
The suggestion that the price-dive is a response to economic improvement in the US and elsewhere is also complete nonsense. Economic improvement removes the immediate urgency to exit perceived-as-risky long positions. During upswings prices tend to inflate, supported by organic credit expansion and willing buyers. It is hard times and panic — deflation and credit contraction — that initiates runs out of assets, not bull markets.
A real recovery might indeed result in a decline in the gold price over time … then again it might not. Gold is a hedge against systemic risk: not always and at all times. If risk diminishes gold does not become instantly worthless. In any event, hedgers and speculators would act out of self-interest and close their positions incrementally so as to minimize loss. At no point would they simply jettison positions out of any kind of market context, losing collectively millions- or billions by doing so.
Is there a deflationary panic in gold? Possibly, as gold is an asset artificially supported by credit that is now eroding. At the same time, gold is an asset that hedges against the sort of systemic monetary risk that is the form that deflation is now taking. A ‘run’ out of gold is a run out of the lifeboat back onto the Titanic.
Figure 2: Is gold a deflating ‘bubble’ … or something else? (Gold Price UK, click on for big.) Gold prices are influenced by central banks which are largest holders of the metal. Prices have increased since the early 2000′s largely because of central bank purchasing just as they were flat from 1980 to 2000 due to central bank selling. There are also other large private purchasers besides the banks.
Extraction of gold has become less profitable due to rising costs. Given further declines in profitability there will be less gold on the physical marketplace. As with petroleum, supply and demand indicates support for higher price for gold relative to other goods and services: even if the nominal price of gold declines. Unlike petroleum, gold tends to be the property of the wealthy who can afford gold at any price, persons who — unlike gasoline consumers — are unaffected adversely by price increases.
There is no indication that central bankers decided over the past weekend to dump large holdings at once, although it is possible that the banks have made large forward sales in the futures markets so as to reduce the cost of their own physical purchases. They may also have leased their gold holdings and cannot now recover them and must now bail out the bullion banks or COMEX. The strategy would be to drive ‘gold bulls’ from the marketplace allowing the banks to obtain the needed gold at an affordable price. If this is so the central bankers have outwitted themselves as physical sellers are not selling at the low futures’ price or are inundated with bargain hunters who are crowding aside the banks.
Central bank fundamentals have not changed since 2009: banks are expanding their balance sheets and taking on more dubious assets as collateral … edging toward insolvency as a result. They have become the world’s credit providers of last resort. Direct purchase of gold by the banks is not to be confused with liquidity provision or bond ‘purchases’. In a world filled with dubious- and redundant abstract claims gold is not an asset, rather it is a natural resource and as such, capital.
The finance shills paint a picture of marketplaces (re)acting rationally and impartially: the ‘Invisible Hand’ at work. Look instead to the tire-iron-to-the-head beat-downs of the mafia crews … to the economic high-jackings in Spain, to the bludgeoning of Cyprus, of Greece, Ireland, … to the theft-without-end in China, the ‘Flash Crashes’ on Wall Street, the Libor manipulation, the in-your-face MF Global heist, Morgan’s ‘London Whale’, Bruno Iksil … The flash crash in gold is more of the same, another finance crime.
Where’s the shine box, Columbia University professor Jeffery Sachs, Director of the Earth Institute? (HT: Jesse’s Café Américain).
I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably.These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people… counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.
If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say… both parties are up to their necks in this.
… But what it’s led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it’s very very unhealthy, I have waited for four years… five years now to see one figure on Wall Street speak in a moral language. And I’ve have not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not gonna happen any time soon, it seems.
Where’s the shine-box Nigel Farage? As the rotting enterprise of industrial modernism sinks beneath the waves nothing remains but pillage … The fact that the thefts are blatant and that the establishment makes no excuses … speaks voluminously for itself:
There is no difference between how the Establishment manage their affairs and the wiseguys …
Paulie is Paul Vario, a capo in the Lucchese crime family associated with James Burke and Henry Hill. Vario controlled activities in and around JFK International Airport in the 1960s and 70s, activities included truck hijackings, cargo thefts and extortion. Vario’s crew also controlled gambling, drug trafficking, business shakedowns, loan-sharking, embezzlement and other crimes in the Brownsville-East New York area of Brooklyn and the Ozone Park/Howard Beach area of Queens.
In the clip, Vario becomes a silent partner of a restauranteur (Greece) in exchange for a favor (bailout): his crew (Troika) strips it of every worthwhile asset then burns what’s left for the insurance.
Assets are sold out the back door … “Paulie can do anything … especially run-up bills on the joint’s credit. And why not? Nobody’s going to pay for it anyway! and soon as deliveries are made in the front door, you move the stuff out the back and sell it at a discount. You take a $200 case of booze (a hotel in Athens) and sell it for a hundred. It doesn’t matter … it’s all profit!And then, finally … when there’s nothing left … he can’t borrow another buck from the bank or buy another case of booze … you bust the joint out … you light a match.”
‘On 10 December 2009, Mr Kypri [the Chairman of the Bank of Cyprus] informed the market that BoC had sold €1.7 billion of GGBS [Greek government bonds], stating that from the beginning of the year, the Bank had decreased its exposure of GGBs to €o.1 billion. On 10 December 2009 (ie, the same day), BoC began repurchasing GGBs, with a rapid increase in the Bank’s GGB portfolio to almost €2.4 billion by June 2010.’
Clearly Yiannis Kypri, he being not entirely dumb, lied to the markets in order to avoid a run-panic about buying Greek bonds. The big unknown here is WTF he bought them in the first place.
Two separate sources have told me over the last three months that Kypri was ordered to support Greece by person or persons as yet unsubstantiated. That belief is widespread among the business community here in Athens. As he had nothing personal to gain from this insanity, I can only conclude the sources are probably right. It might have been Venizelos, might have been Lagarde, might have been Schäuble, and probably was Trichet. But whatever: as a result of this patriotic hari-kiri, BoC lost just shy of a billion euros in the lender subordination later ordered by your friend and mine, Mario Draghi.Within a short period of time after the Berlin-am-Brussels smash-and-grab raid on Nicosia, the Troika “terminated the services” of Kypri as well as the board of directors at the Bank of Cyprus, the country’s largest lender. The report cited sources who said the action is “necessary” due to the legislation approved by Cypriot lawmakers to restructure the country’s financial sector by having the Bank of Cyprus absorb the “good” assets of Laiki Popular Bank. These assets would not, however, have needed good ones without the forced purchase of Greek bonds in the first place.
The outcome of the process is the same, everywhere: survivors searching through the debris, looking for something to eat (Ward in Greece):
Today, in April 2013, everything in Greece is for sale. Two days ago a small girl – aged no more than ten I would estimate – came up to me, playing her violin in a main market thoroughfare close to the Acropolis. She wasn’t much of a violinist, but after finishing the piece, she said something to me … and of course, I didn’t understand. A man watching nearby, resigned of expression, said “She is saying she costs very little for your pleasure”.I gave the kid a small coin and asked the bloke if this was commonplace. “Not common,” he replied, “but not rare either. These bastards will reduce us to an animal state”. I wanted to ask him more, but he waved me away. I don’t blame him; imagine how I’d feel in my own country, being asked by a passing Swede if all English prepubescent kids now whored on the streets.
In a Telegraph piece posted last night from Rhodes by Harriet Alexander, she notes that a Mr. George Georgas told her, “We are like a bankrupt housewife forced to sell the silver, to save the family,” he said. “Greece has no choice.” On the island of Rhodes, the 1,850-hectare Afandou estate, on the peninsula of Prasonisi – a paradise for windsurfers – is up for grabs … and grab (as in land) is the operative word.
Antonis Samaras the Greek Prime Minister knows only too well that flogging off bits of Greece is vital in order for his country to get the lifeline monies from the Troika. These monies, of course, zoom from an escrow account straight into the copious pockets of various lending institutions anything up to 9000 miles from Athens. The Greek people – his electorate – are left manage on their own. The ‘Government’ headed by Samaras offers them less and less help while demanding more and more of their money.
It is becoming clear that the sure way to succeed in post-petroleum world is not to become an organic farmer or an artisan but to become a criminal. The opportunities are without end. By doing so one takes the side of one’s betters who are also criminals: the bankers, the ‘leadership cadres’ and ‘business managers’, the public economists and the other rationalizers. What is there to lose?
Instead of putting in cabbage, backyard chickens and goat cheese, far better to put in some machine guns, dope, ‘rigged’ gaming tables and truckloads of cigarettes; use some of the proceeds to pay off the police. Burglarize houses, steal cars and money, sell the loot in your own black market offering a share to the more powerful crooks. In a society that offers diminished opportunities … to be a slave and to give thanks for the chance to be one … criminality offers a harsh and uncertain path to self-determination and dignity … but a path, nevertheless.
Being a criminal also offers to become notorious and immortal thereby: here is fashionable determinism run to its logical conclusion, the unnatural war of all against all, with the Pyrrhic winner taking everything that remains … of the pile of corpses … of a world that has been destroyed.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on April 14, 2013
Discuss this article at the Economics Table inside the Diner
In 2013 it is 2007 all over again, there is a sense of foreboding. Markets are breaking down except for the self-funded stock markets. When these markets begin to break … ?
A difference between now and the ‘good old days’ is that management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero and cannot be effectively lowered. Torrents of cheap credit flow from central banks toward commercial finance. Bad loans have been shifted from the private sector to the public’s accounts. Trillions in all currencies have been borrowed and spent by governments … largely to benefit finance. Every one of these are rear-guard efforts, behind them there is nothing, only desperate flailing, arbitrary confiscation, stealing what remains to steal … capitulation to reality … and ruin.
Figure 1: What a fuel price hedge looks like along with its collapse, the Incredible US Housing Recovery compared to the monumental surge in housing churn that took place from 1990 to 2007. The ‘recovery’ is the tendril on the far right. Realtors want Americans to believe what is underway right now is the start of another ramp-up in house building and selling. This is a lie: Americans are broke, suburbia is too expensive to duplicate. A palatable alternative to suburbia in 2013 does not exist.
What would make a ‘recovery’ sustainable? Fuel prices returning to sub-$20 per barrel of crude oil. Otherwise, most of what is seen on the chart is a stranded ‘investment’.
What would derail any hope of recovery and leave the world a sustainable ruin? Fuel prices returned to sub-$20 per barrel of crude oil. At that price there would be very little crude oil available, there would be insufficient buying power to lift the hard-to-reach petroleum that now remains.
|Crude Oil (WTI)||USD/bbl.||91.29||-2.22||-2.37%||May 13|
|Crude Oil (Brent)||USD/bbl.||103.11||-1.16||-1.11%||May 13|
|RBOB Gasoline||USd/gal.||280.18||-2.92||-1.03%||May 13|
|NYMEX Natural Gas||USD/MMBtu||4.22||+0.08||+2.01%||May 13|
|COMEX Gold||USD/t oz.||1,501.40||-63.50||-4.06%||Jun 13|
|Gold Spot||USD/t oz.||1,482.75||-78.75||-5.04%||N/A|
|COMEX Silver||USD/t oz.||26.33||-1.37||-4.93%||May 13|
|COMEX Copper||USd/lb.||335.00||-8.35||-2.43%||May 13|
|Platinum Spot||USD/t oz.||1,486.75||-45.55||-2.97%||N/A|
Bloomberg commodities: precious metals and US petroleum were hammered on Friday. Metals have been leading indicators, petroleum is declining to the price level where drilling becomes unprofitable. Without new drilling there is no replacement for rapidly depleting existing reserves.
As reserves are exhausted so is the ability pay for them. The fuel waste process is collateral for fuel extraction, not the fuel itself. The reason for this should be obvious: as soon as fuel is extracted it is destroyed, it is useless as collateral. Instead, the fuel wasting implements become collateral for the funds used to waste more. As credit expands, it first becomes more costly then unaffordable. Industrial output — which is nothing more than non-remunerative waste — becomes impossible to finance. Ultimately, credit contracts, the nominal prices decline … as the ability to meet prices declines faster … we are entering into the credit contraction phase now.
This is a dynamic that escapes conventional analysis, which assumes an economy running normally in the background and providing credit … even as its fuel supply is depleted. Meanwhile, the economy runs down in real time, credit is diminished and analysts are perplexed.
Figure 2: (Click for big), Brent crude @ $118 in February accompanied the robbery/crash of Cyprus, panic in Japan and deflation. Brent crude today is $103.11, nearing the marginal level where extraction becomes unprofitable. Chart by TFC Charts.
Since 2008 the world has been in the grip of deflation which reflects facts on the ground. With depleting resources, multiplying claims against these same resources or adding wasting implements does not create anything new but depletes what we have access to, faster. Deflation exposes claims as worthless, the fuel extraction process itself is stranded. We have so successfully cannibalized ourselves that it is becoming too late to do anything useful about it.
Figure 3: (ZeroHedge) Japan 20 year bond yields have become massively volatile: bonds are offered for sale driving up yields which retreat as the Bank of Japan steps up to buy. For Japan’s central bank to meet its targets it must flood the world’s markets with … more credit. This credit-for-credit exchange is a charade, it cannot alter the trajectory of Japan’s fuel- and resource reality, it cannot even change Japan’s finance reality … it is capitulation, the wheels finally coming off in Japan.
Bond-holders ‘sell’ their holdings for yen then swap these for dollars or euros in forex markets. Volatility is increased because of the enormity of the trades required to move the generally liquid bond markets. Large lenders to Japan such as banks and insurance companies appear to be dumping bonds, exiting their positions. These lenders become yen sellers as well: because there are more sellers than buyers, the currency is depreciated. There is no real increase in the overall supply of money. Sean Corrigan @ Diapason Commodities Management, (ZeroHedge):
Net new debt issues are currently being penciled in at around the Y42 trillion mark a year and, with the BOJ scheduled to buy Y70 trillion p.a., it might seem that JGBs offer a one-way bet even here, but with a current overhang of Y942 trillion as we write, the possibility is not to be overlooked that while the Bank may be comfortably able to mop up the new flow, it might have its work cut out if others decide to use its resting bid to get rid of some of their enormous existing stock of claims.Prime candidates would be foreigners (with Y87tln to hand and steep currency losses to hazard), the banks (which, we have seen, hold Y425tln in government claims, of which Y360tln in JGBS per se), and insurance companies (with Y222 trillion in debt and Y184 trillion in JGBs & TBs combined). In its last concerted attempt at re-inflation, conducted in 2002-3, the BOJ briefly pushed up both the monetary base and overall M1 by around 30%. The response of prices was modest to say the least: CPI moved from -1.4% to +0.5% three years later. If the same thing were to happen again, all that would have been achieved would be to have introduced an unnecessary disturbance of the pricing structure between inland and foreign trade and, at the margin, between those living off current income and those reliant upon stored past income. Debt would, of course, have climbed inexorably skyward, as would the debt/nominal income ratio.
The reason for the gambit is Japan’s vanished trade surplus which had overseas customers subsidizing resource waste by the Japanese. Exports never provided any return for Japan’s customers: they are now broke, they cannot subsidize anyone. The depreciation is a futile attempt to retrieve the irretrievable.
There are two potentially market moving sections in the report. The Treasury Department planted a “dirty bomb” at the Bank of Japan, and tossed a grenade at the Swiss National Bank. I’m thinking of all the folks who are big long USDJPY. They are going to have to sweat the next 50 hours. They have to hold their cards and wait. I suspect that quite a few FX players will have their weekends ruined.The key words on Japan (from US Treasury Secretary Jack Lew):
“We will continue to press Japan to adhere to the commitments agreed to in the G7 and G 20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”
“I think we just had the Jack Lew moment that I was anticipating. I believe that Jackie Boy has made a mistake. He picked a public fight with Japan that he can’t win. Having picked the fight, he can’t back off. When the BOJ and the markets make him look silly (USDJPY = 110+) there is going to be pressure on him. Jackie has set himself up for a fall.
In all my years of watching (and participating) in the FX markets I have never once seen a situation where “talk” accomplished a damn thing. In fact, idle talk often creates the opposite reaction to what was intended. So for those who are having sphincter problems this weekend over a long USDJPY book, and the 50 hours you have to wait to find out what happens, I say relax. By the opening in NY on Monday, you will be okay again. In a few weeks you’ll be buying hot cars and houses.”
Keep in mind, the Treasury Secretary doesn’t act by himself, he has a fleet of ‘associates’ at the Big Banks pulling his strings. If he makes a mistake they lose and they don’t like to lose = they pull the strings as needed.
Meanwhile, the fundamentals are ignored: the effects of Japan’s maneuvering are likely to be negligible. Management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero … torrents of cheap credit flow, etc. Things cannot be improved, only be made worse.
Japan — like all the other countries — has no independent monetary policy. This is because the price of money has nothing to do with interest rates or trades on forex markets. Rather, it’s priced at gasoline stations around the world by millions of motorists every single day. If gas prices are too high — because of currency depreciation or some other reason — drivers buy less and economies deflate. This undoes the efforts of the money-managers.
Enter the post-1998 peak oil paradigm shift: when gas prices fall drivers buy more fuel but there is quickly less available, prices either increase again or shortages occur. The real price of fuel — that relative to other goods and services — increases relentlessly. Eventually, this real price bankrupts countries like Japan!
Think of the old-fashioned ‘gold standard’ constraining the money supply as well as industry and commerce as it did during the 1930s. With the ‘gasoline standard’ there are the same constraints except it is impossible to go off petroleum and grow the economy as could be done by ‘going off gold’. The only way to escape the gas standard is to jettison cars and other fuel-guzzling gadgets, this also annihilates economic growth which is dependent upon more and more of these things being sold. Meanwhile, in the background where the analysts pretend not to notice, the gasoline standard strands cars and other fuel guzzling gadgets anyway: at the end of the modernity’s ever-shortening gangplank there is no room to maneuver.
Fiddling with nominal prices is pointless: any possible currency-driven export gains are offset exactly by currency-driven import costs. Because Japan is nothing more or less than a car factory with radioactive beaches it cannot gain anything by depreciating its currency. Its export prices are determined entirely by what it pays for imports … including fuel! The only effect of so-called monetary ‘policy’ is steal funds from workers and shift them to plutocrats. Everything else remains the same.
The blowup in Japan is part of the de-carring process which is underway right now everywhere in the World. Depreciating the yen does not bring one drop of petroleum fuel onto the market. The only question is how soon the ‘Abenomics’ experiment will fail and what form the failure will take. As holders of yen and yen-denominated bonds reduce their ‘exposure’ and dump their bonds there is less credit available rather than more. Prices for fuel decline … as they are doing so now! This does not help the Japanese exporters because their customers are still broke … regardless of the price of credit.
When the price of crude declines below the cost of extraction there will be physical shortages. These will reduce credit further which will in turn shut in more crude in a vicious cycle. There will be a return to recession with no way to end it: conservation by other means.
What sort of country does Japan become? A place to look is Egypt which has its own currency but depends upon foreign exchange same as Japan:
Short of Money, Egypt Sees Crisis on Fuel and FoodDavid D. Kirkbpatrick (NY Times)A fuel shortage has helped send food prices soaring. Electricity is blacking out even before the summer. And gas-line gunfights have killed at least five people and wounded dozens over the past two weeks.The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals.
The establishment insists that the fuel shortage is the result of a money-credit shortage. Instead, the reverse is true: there is a shortage of fuel; there is no useful collateral for new credit, only (obsolete) waste enablers.
Portugal’s elder statesman calls for ‘Argentine-style’ defaultAmbrose Evans-Pritchard (Telegraph UK)Mario Soares, who steered the country to democracy after the Salazar dictatorship, said all political forces should unite to “bring down the government” and repudiate the austerity policies of the EU-IMF Troika.“Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened,” he told Antena 1.The former socialist premier and president said the Portuguese government has become a servant of German Chancellor Angela Merkel, meekly doing whatever it is told.
“In their eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal,” he said.
Raoul Ruparel from Open Europe said Portugal had reached the limits of austerity. “The previous political consensus in parliament has evaporated. As so often in this crisis, the eurozone is coming up against the full force of national democracy.”
The rallying cry by Mr. Soares comes a week after Portugal’s top court ruled that pay and pension cuts for public workers are illegal, forcing premier Pedro Passos Coelho to search for new cuts. The ruling calls into question the government’s whole policy “internal devaluation” aimed at lowering labour costs.
A leaked report from the Troika warned that the country is at risk of a debt spiral, with financing needs surging to €15bn by 2015, a third higher than the levels that precipitated the debt crisis in 2011. “There is substantial funding risk,” it said.
To operate its massive fleet of cars, Portugal must compete with China and America for fuel. These countries’ can generate their own credit, Portugal cannot, in fact none of the eurozone nations are able do so. Right now Portugal must borrow from Wall Street by way of EU banks, so as to repay Wall Street. Portugal has borrowed to buy fuel, it must borrow additional amounts to buy more fuel at the same time service and repay its dead-money debts.
The end result for all these countries is the same: there are debts that cannot be retired, industrial obligations that cannot possibly be met. As during the early years of the 20th century, the wheels are falling off all over the world … we shall not see them turn again in our lifetime …
Off the keyboard of Steve from Virginia
Published on Economic Undertow on April 3, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
What is underway in this world right now is more of the same. It’s a song: ‘La la-la- la-la … more of the same!
There is more of the same thievery on the part of the establishment, everywhere in the world. There is more of the same poverty, there is more of the same denial … There is more of the same advertising for unlimited resources, more of the same consumer sales, more of the same real estate rebounds, more of the same freeway lane-miles added to more of the same freeways …
More of the same hollow, pointless ‘progress’.
More of the same, the management systems the world has relied upon since the end of World War Two are breaking down but more applications of the same failed management approaches are underway. To support more of the same failures there is more of the same moral hazard, more of the same credit provision, more of the same propaganda and lies. There is more of the same breakages with more of the same exponentially increasing consequences. There is more of the same corruption, more of the same outright pillage and bullying.
There more of the same indifference and refusal to face reality. There is more of the same flight out of banking deposits into risky currency traps even as there is more of the same flight into banking deposits! There is more of the same sense of foreboding, that there is no way out of the traps that we have built for ourselves, that the end of the ‘good old days’ is right around the corner. At the same time, there is more of the same begging/wishing for more of the same ‘good old days’.
With more of the same taking place right now, less of the same will certainly be a whole lot worse. Pray thee Lord for more of the same.
More or the same makes life easy for the analyst even as it makes it more difficult. More of the same becomes very hard to become outraged about. More of the same evil: how do Alex Jones or Yves Smith remain enraged at the highest pitch day after day about more of the same perfidy? The government will be just as conniving next year as it was ten years ago, the big Wall Street banks will still shove more of the same blood funnels seeking more of the same easy payoffs and more of the same bonuses. Who really cares?
The market can offer more of the same a lot longer than you can remain solvent!
At the same time, more of the same analysis becomes very simple: readers can turn to older articles to see how the same really was when it first emerged. It’s more of the same now! It can’t get any easier!
Singularity = self-writing analytical articles!
Unknown photographer: Dr. Edward Chapotin house and his medical practice next door in 1915, on Woodward Avenue @ Woodbridge Street, from the Burton Historical Collection, Detroit Public Library- University of Michigan. Note the streetcar tracks on Woodward. This business/residence was located within a few blocks of the Detroit River.
More of the same lurks on both sides of the political divide from Richard Alford by way of Yves Smith, (Naked Capitalism):
Richard Alford: Fed Policy – (more of the same) Old Wine in New Bottles
Yves here. This is an important post, in that it describes how the Fed, despite the unconventional look of some of its measures, is using more extreme variants of traditional policy approaches, and why that is not such a hot idea.One place where I quibble with Alford is in attributing the way Greenspan dropped short term rates dramatically in the early 1990s recession as driven by unemployment policy. At the time, there was considerable concern about the health and stability of banks in the US. It wasn’t just savings and loans that were hemorrhaging losses. Citibank nearly went under. Some major commercial banks in Texas and the Southwest had lent heavily to spec commercial real estate projects at just the wrong time. And although it was mainly foreign banks that hoovered up participations in LBO financings, like Campeau, that came a cropper, US financial firms had exposures as well. Greenspan’s driving short term rates to the floor created an extremely large spread between short and long term interest rates, enabling wounded banks to borrow short and lend long, and rebuild their capital bases out of artificially high profits.
Another quibble is at the very end, where Alford is correctly concerned about our sustained trade deficits, but also is unduly exercised about our fiscal deficits. They are in fact necessary and desirable as long as the business sector keeps net saving, which it did even in the years immediately preceding the crisis. If capitalists refuse to play their proper role and loot rather than dedicate resources to future growth, government has to step in. But as we are seeing now, what is unsustainable about this arrangement is the politics much more than the economics.
But Have We Seen It All Before?
For all their differences in perspective and emphasis, most of the opposing evaluations of the merits of Fed policy have one element in common: They all appear to be largely prisoners of a Phillips Curve mentality. Policy is set based only on the current levels of unemployment and inflation. Policymakers, economists and pundits do not look beyond near-term changes in unemployment and inflation when evaluate the risks and returns of alternative policy responses.
However, there may be a more troublesome risk attached to current monetary policy. The risk is that the current policy stance – low interest rates as well as QE- is reducing the probability of a return to self–sustaining economic growth … “
Alford is a very bright guy and he’s paid his dues within the money management ‘racket’. Yves = ditto. Nevertheless, it’s impossible to take either one seriously. What does ‘sustainable’ mean? More of the same tract houses? More of the same auto sales? More of the same insurance and finance? More of the same strip malls and Pizza Huts? More of the same F-35 fighter jets? More of the same coal mines, gas pipelines, VLCCs … how about more of the same airports? What is sustainable about any of this? How about those tens- of thousands of tombstone-like concrete towers in China? How many more-of-the-same vacant apartments are needed before the Chinese get to sustainability heaven?
How does everyone get there? There are seven billion of us meat-bags right now on Planet ‘E’ and only 15% have automobiles. Do we ‘arrive’ when 30% become automotive? How about 50%? Where do we put the 800 million or so extra cars? Where do we get the fuel for them? Does the US build another 55,000 mile interstate highway system to go along with the 55,000 mile system we already have? We cannot afford to fix our roads now! How is more of the same sustainable again?
‘Sustainable’ is gross abuse of the language. In order to ‘have’ our desired industrial goodies we must borrow. Our machines do not pay their own way. If they did there would be no debts as deploying machines would retire them. That they do not do so is self-evident. With thousands of millions of machines there is an exponential increase in debt required to assemble them and provide them with fuel. This is debt that even the entire world’s bloated finance establishment cannot provide.
Credit is a resource in the sense that it is a means to allocate other resources: with less of these other resources to allocate, adding credit becomes pointless and unaffordable. US recessions from 1970- onward were the result of fuel shortages- and price shocks including the current version. Even the modest credit demands of the earlier time periods … were breaking. Today’s high real credit requirements are destructive in and of themselves without the added blows of high fuel prices.
People must understand: the Glory Days are gone and never coming back … ! Santa Claus is not going to come down the chimney with some kind of industry … to take the human race by the hand and lead it into the Promised Land. Our collective future is binary: we are either joint-and severally destroyed by shortages and inability to adjust to them … or we escape destruction by the skin on our noses.
Watch what the plutocrats are doing right now! They know what’s going on because they can afford ‘intelligence’ and are ruthless enough to take advantage! They use the time remaining … to steal … then leave the rest of us to Mad Max.
It will take every single inner resource the human race possesses … clarity, honor, courage, perseverance, helpfulness, strength, wisdom … the willingness to endure tremendous suffering and hardship for decades and perhaps centuries … what is absent in popular culture particularly among finance analysts … it will take all of these things and more to escape our self-constructed annihilation.
Right now, this isn’t happening. There is too much fantasy thinking and denial about redistribution … what is there to redistribute, exactly? Deck chairs on the Titanic?
Here is another variation on the theme … from Bill Buckler @ ZeroHedge:
The Puppet Master – Government For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly, successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century – the time since World War One – to all but totally submerge that legacy in a new wave of government dependency.The old and tired phrase – “I’m from the government and I’m here to help you” – is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.
The great myth is that our industrial economy is ‘productive’, that it is saddled temporarily by parasitic governments (fascists) or bankers (socialists). Get rid of one or the other and the industrial economy will spread its wings and fly off to consumer good paradise, taking the American Worker along with it.
This is false: the product of industrial economies is waste. Because waste is not a good there are no organic returns for industrial activities. Instead, the cost of the activities must be met with credit. To provide the needed credit there are bankers, to service the debts there are governments.
That this is so is self-evident: if industry was productive — if there was any product at all other than waste — there would be no crisis and no debts. Any shortfalls would be met by deploying additional machines, which would pay for themselves, thereby retiring their own debts … and ours besides.
The intersection of Woodward Avenue and Woodbridge Street is long-gone, so are Doctor Chapotin’s restrained yet whimsical houses. All of them are replaced by the urban equivalent of the place-mat, the concrete pad and grassy area(s). Note the occasional tree.
Forsaken and bleak … the backdrop for a homicide, here is the adjacent 1 Civic Center Plaza. Perhaps Chernobyl is more soulless, then again … perhaps not.
Today, there are more and more machines, these do not pay anything. Instead these machines must be subsidized by robbing from savers, retirees, workers and business customers. Meanwhile, the world’s economies are burdened by hundreds of trillions of dollars worth of non-repayable debt … taken on to build and run the machines.
Without credit, there is no industry. Meanwhile, our precious fleet of machines strip-mines the world of credit along with resources. This stripping process is underway right now in Europe and elsewhere … coming soon to your town! (It’s already happened if you live in Detroit.)
The underlying cause is centuries’ long destruction of resource capital. The consequence is diminishing resource throughput, diminished capital with a large and increasing scarcity premium attached to it. There is simply no more (of the same) capital to waste affordably. What capital remains is too valuable: the cost of retiring debts is greater than the worth of debts themselves. Whether the managers admit it or not, the markets right now are pricing the true costs of waste beyond the reach of today’s wasters … also tomorrow’s.
Because ‘more of the same waste’ is a physical process, it doesn’t matter who manages it, Austrian or Marxist, neo-Liberal or Friedmanite, salt-water or fresh-water. All of them will fail. Regardless of who is in charge there will always be less.
Don’t let the common sense baffle you! It’s not that hard to figure out. If prosperity = waste, nobody can promise prosperity any longer.
The ONLY solution is stringent energy- and resource conservation. There is no other solution, only evasions: to do nothing or to attempt more of the same waste means conservation will occur ‘by other means’. See ‘Cyprus’ as the latest example.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on March 24, 2013
Discuss this article at the Economics Table inside the Diner
The world’s economic enterprise is a tightly-coupled, massively complexarray of interlocking establishments, each highly complex in their own right. The failure of one component effects all the others. The analog is removing a pinwheel from a watch: the watch will still appear to be a watch but it won’t keep time.
The relative scale of the European economic enterprise compared to Cyprus is the same as the gigantic balloon relative to the tiny pin … any hole the pin might cause has consequences to the balloon wildly out of proportion to its size.
The Russians can simply refuse to accept euros, they will accept only dollars, instead!
The David Whitney house in winter, 1955, on Woodward and Canfield Street in Detroit, Michigan, from the Burton Historical collection, Detroit Public Library, University of Michigan. In our shiny new zero-sum post-petroleum world, some places succeed because other places are disposable. Detroit is the way Detroit is because New York City is the way New York City is.
Germany is the way Germany is because Spain, Portugal, Ireland, Greece — and Cyprus — are they way they are. The worse it is for them, the better it is for Germany.
On the Circus in Europe
I’m flabbergasted that Cyprus is the cause of the circus in Europe. Cyprus was an avoidable problem in my opinion. That view is supported by the fact that all of the words, actions (and threats) by the deciders in Northern Europe have been decidedly negative. There was no “Can Do” talk. All I heard was, “We won’t do” or “Here is a deadline” – “Here’s a gun to your head”.
Two possibilities – Either this was a completely bungled effort in Brussels. Or this this was a deliberate effort to weed out the weak members of the EU. If the intent was the latter, this will not stop with little Cyprus.
Next week there will some broad confusion following the resolution in Cyprus. Either Cyprus is out of the Euro zone by Wednesday, or the +E100k depositors are going to get whacked big. There is no soft landing potential any longer. If the folks in Brussels and Berlin who are pulling the strings are really serious about stabilizing the Euro zone they will respond with a series of “positive” measures next week. Things that might be considered to ring-fence Cyprus include:
- Doubling the deposit guaranty to E200.
- Creating a Transaction Account Guarantee. This would insure all accounts that were related to the settlement of goods and trade. (protect the economy)
- Financial measures – From some minor stimulus stuff, to monetary measures like LTRO or a cut in % rates.
These would be “calming” steps. They would be proactive in that the intent would be to get ahead of any contagion. We could also see “nothing” from Brussels. That silence would be a “tell” that “they” don’t want to resist gravity any longer. The most significant sign would be if capital controls were established more broadly in Europe over the next few weeks. These will scare the crap out of folks, especially those in Spain and Italy.
If the EU was serious about managing the currency/credit flows there would be some discussion of the foregoing already. In fact there would have been discussions along these lines long before last weekend.
Instead there is noise about confiscating deposits in Italy and Europe-wide capital controls. In a currency union, capital controls are a death sentence. The ‘natural’ form of control is different currencies for each state. Under the condition of currency controls there are de-facto independent ‘euros’ with different prices for each. The next step — toward independent currencies — is a very small one.
What is underway is beyond the reach of language to adequately describe. Not only have best practices for deposit banking for 200 years been undone but so has long-standing management policy of money-capital flows across national boundaries. It can be inferred that every euro sent to Russia since 2000 has been a fraudulent instrument. Why would Russia sell more fuels to Europe under current uncertain circumstances? If the Russians do not accept euros, why would Saudi Arabia or any other oil producer?
Apoplectic Steve Keen says the Russians can cut off European natural gas supply.
Steve from Virginia says the Russians can simply refuse to accept euros, they will accept only dollars, instead! How retro! How … 1990!
Why would the Russians accept euros when they are subject to confiscation? Why would they accept French francs or Spanish pesetas? It’s the same bunch of thieves … the same bankrupt national economies!
The entire euro-as-energy-hedge is undone in an instant. By stiffing bank depositors, the EU has defaulted. There are no two ways around it.
The Chinese bosses are reaching for those Maalox bottles right now. China holds a trillion in euro-denominated debt instruments, so does Japan. Germany appears not to have thought this through. Regardless of what happens in/with the eurozone, Germany is on the hook for the overseas euro-trillions. Germany is the only EU country with money: it is responsible for all those Target 2 liabilities as well — this is another trillion euros. If not Germany, who picks up the tab?
Germany is declaring that overseas holders of euro currency are going to pick it up — starting with the Russians! Off the hook is the euro-establishment itself and its pet tycoons. High-level finance acumen is not necessary to understand how outrageous and destabilizing such an arbitrary action is: head-loppage was never part of the euro sales pitch! The euro was to be a ‘better, sounder’ dollar, always ‘good as gold’. Now, its fairy money, worthless in the hands of ‘not-quite-special friends’ who only discover they are so after the fact.
Exposure to currency derivatives presently denominated in euros is another liability. According to the Bank for International Settlements, the current derivative exposure including options and futures is twenty-four trillion euros. Who is on the hook for that? If the answer is ‘nobody’ then the entire edifice comes crashing down.
From here is looks like a lot of agony to come around the world: if Germany doesn’t default it is ruined by its ‘share’ of EU liabilities. If Germany defaults then China’s finance system is bankrupted along with Japan’s.
Don’t be surprised to see the European ‘bank run’ materialize over the next few weeks in the foreign exchange markets as countries seek to offload their euro risk onto suckers and market fools as quickly as possible. Unlike the bond and equities markets, F/X markets are difficult to manipulate. One reason is because they are too large: trillions of dollars and other currencies are exchanged every day. Who would volunteer to be the sucker? Not even the Fed is large enough — or dumb enough — to take over China’s or Japan’s massive euro positions.
Who is going to take over these positions? If the answer is nobody China and Japan — along with Russia — are left with with massive, instant F/X risk.
One outcome of this risk would be an increase in interest rates! Such a rate increase in the US and elsewhere would be very unpleasant: there would be instant hits to government spending as borrowing would become less affordable. Government bond holders would face immense losses. Eventually, the governments would be forced to bail out their bond markets simply to function!
Sacre Bleu! Capital flight to support the dollar and bond prices would only last as long as the euro was a viable currency. If the euro fails there is no readily available substitute for it. If Germany made good euro liabilities with d-marks … it would be for show only. The European euro-liabilities are simply too enormous. The end-game would be Germany refusing all non-German liabilities and restricting d-mark circulation to native Germans within Germany. Euro-credit everywhere would be re-denominated into (worthless) local currencies. There would be intense competition for international dollars, a massive deflationary contraction as these dollars vanish from circulation.
Believe it or not the Fed cannot ‘print money’. It can only make loans against ‘good’ collateral. The demand for US dollar currency would become overwhelming … Congress would have to act … in the highly complex, interconnected finance universe, the smallest perturbation effects everything else.
All of this could take place next
month week! Look to the world’s money authorities to start leaning on the eurozone to put the genie back into the bottle. Matters could spiral rapidly out of control.
The motive behind this nonsense is presumably ‘bailout fatigue’: to spare the Germans the minuscule cost of keeping Cyprus banks functioning until after the German elections in September. There is no reason why the ECB could not continue to fund these banks by way of ELA and use the time to craft a solution that leaves depositors intact.
Export of petroleum consumption is the real reason behind the onrushing European default. When countries fail their allotment of petroleum is exportable. There is no substantial difference between the thievery underway in Cyprus and that in Libya or Egypt. Ultimately, all of Europe’s petroleum consumption is exportable leaving the various citizens in distress. The hope is to default on the small scale and hive Cyprus’ petroleum consumption and divert it toward the rest of Europe. The hope is that the default is contained and that the loss in Cyprus can be offset by more affordable fuel for the rest of Europe.
Cyprus is a test case. If the Cypriots can be jettisoned from the EU energy hedge then other countries can be safely ejected such as Spain and Italy. These countries can fend for themselves in the fuel-for-dollar market while the ‘core’ uses the hard euro to gain that fuel price discount and a guaranteed supply.
Europe’s strategy can only work if the euro-establishment is able to convince the Russians there are currency gains to offset depositor losses. The problem is that deflation follows its own rules: harder currencies cut into consumption which in turn presses the fuel suppliers. When customers hoard hard currency they do not buy fuel, the fuel suppliers go out of business. This is the reason why fuel prices have been declining since February.
Figure 1: Brent spot crude from yCharts (click on for big). Along with consumption export is the recent rise in fuel price to near $120 per barrel on Brent market. $120 is the new $147: the fuel price is too high, there are the ugliest of all possible noises coming out of Europe …
Cyprus imports 95% of its fossil fuel energy. The euro- and euro denominated credit have been the means by which Cyprus could afford fuel and the thousands of cars needed to waste it. Cyprus earned exactly nothing by driving those cars: nothing remains to retire the multi-billion-euro debts taken on to facilitate the waste. Meanwhile, the country fashioned itself into a mercantile (banking) state so as to arbitrage fuel like Japan. Its banking products have now been deemed redundant and expendable to the European mercantilists. Cyprus’ arbitrage has been devoured by the greater European version. Cyprus was a poor relative to the rest prior to the euro, it is on the way to becoming a poor relative again.
What is occurring in Cyprus is destruction of purchasing power by administrative fiat: this is, conservation by other means. Cyprus’ consumption is exported, its citizens will drive less because they will have less money, what money remains will be hoarded. Fuel not purchased in Cyprus will be available elsewhere so that others can drive in the Cypriots’ place.
Right now it is clear that the establishment will sacrifice anything — good relations with other countries and peoples, economic stability and predictability and best financial practices — to be able to continue to drive automobiles.
– One casualty of default is the media-promoted pseudo-recovery in America and elsewhere. This farce is now a child’s fantasy that can be safely dumped into the trash. Economies that required more easy credit last month now require human sacrifices. Today Cyprus gets the Black Spot, next month’s fall guy is France. Who’s next?
– Bernanke could come up with the ten-billion-or-so euros needed by the EU and end the panic. If he was smart he would do so — very publicly — tomorrow morning. This would buy some time and allow a chance for a comprehensive … etc. round of can kicking.
– If there is an EU ‘handshake’ with Russia => Panic in Southern Europe => contagion and derivatives implosion. This does not have to happen, but avoiding it will require extraordinary efforts, that will cost much more than anything gained at Cyprus’ — and Russia’s — expense.
– If there is no handshake — which seems likely as the European establishment is incompetent — Default in Cyprus is part of generalized euro default => failure of the euro, contagion in China and Japan => severe worldwide recession => collapse of fuel prices and physical shortages.
– Right now, Europeans are busy, opening new bank accounts in Norway, UK, Miami, Panama City and even Switzerland … It takes time to set up yr bank run, there has to be a place to run to.
– The Cypriots are trying to figure out how to evade the capital controls sure to come. Russians are trying to figure out how to remove their funds … Greeks are figuring out how to emulate the Cypriots who in turn are reading about the Icelanders. There is a lot of scheming — and fretting — going on right now.
– Nobody on Planet Earth wants a Greater Depression, everyone knows the score, this is the ‘Big One’ and people have their game face on. If a crisis can be avoided with a small payment most people will make the payment and not complain. It is the analysts who are upset about the consequences of the past few days. Most of the analysts are wrong about which consequences matter the most. They are wrong b/c they ignore the big energy story right under their noses.
– Citizens generally aren’t libertarians and they don’t take ideological positions, they are flexible. Right now the system does not appear to be ruined. That it is indeed ruined has to be proven by events.
The David Whitney house in Detroit in 2013. Out of the current wreckage some fragments will survive.
The only possible exit from currency death by energy strangulation is stringent conservation. Europe needs to cut its fuel bill in half right now. So does the rest of the world. This word ‘conservation’ is never mentioned, the conservationist is excluded from the management dialog. The conservationist offers options that are unhappy for the capital wasters. What the system managers refuse to understand is this: if nothing is done to conserve voluntarily there will be conservation by other, ongoing, extremely unpleasant means.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on March 17, 2012
Figure 1: Does the crude market unravel due to hoarding of funds or is there a ferocious price spike followed by a crash? The EU plays with fire. Chart comparing costs for replacement crude oil to what the customer can afford to pay: by TFC Charts (click on for big). The time remaining to adjust or make positive changes in policy direction has become shorter and more uncertain. The window of roughly two years until fuel supply shocks presumed no policy errors on the part of the establishment.
Discuss this article at the Economics Table inside the Diner
Welcome to the new, improved bank run!
The European Union bosses have levied a tax against bank depositors in Cyprus, the purpose being to maintain the drive-first status quo. By doing so they appear to have stepped off the end of the gangplank (NY Times):
Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks Liz Alderman, NY TimesATHENS — In a move that could set off new fears of contagion across the euro zone, anxious depositors drained cash from automated teller machines in Cyprus on Saturday, hours after European officials in Brussels required that part of a new 10 billion euro bailout be paid for directly from the bank accounts of ordinary savers.After Negotiations, Cyprus Agrees to a Euro Zone Bailout Package (March 17, 2013)The move — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.
This is naked confiscation of funds from ordinary citizens, there is no correlating increase in worth of the remaining funds or expansion of the Cypriot economy. It is simply shoveling more good money down the euro rat hole to save senior secured creditors to the banks from loss … as well as support the automotive waste status quo.
Athens, Greece is flooded with rainwater as well as with endless streams of traffic. Europeans do not realize that as long as one car is running in Europe and elsewhere, there will be economic decline. Globalization at work: the Europeans are subsidizing fuel demand in China which increases competitive cost pressure in Europe. This decline is spread to Cyprus by way of its banks, an afterthought to the crisis that has engulfed Greece and the other euro-states.
Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits under that amount are to be taxed at 6.75 percent, meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.
Problems in Cyprus are not new, the country’s banks have loaned large amounts to Greek businesses and banks, the loans are multiples of Cypriot GDP. As Greece falls further into bankruptcy, so do the Cypriot banks.
Cyprus is also in the cross-hairs of European bank regulators as Russian ‘investment’ funds flow into Cypriot banks from Russia … then back out again. Regulators accuse Cypriot bankers of laundering funds of Russian gangsters and oligarchs. The source of particular funds is unclear but in aggregate, all euros in the hands of Russian depositors are from European energy consumers buying Russian non-renewables including natural gas and crude oil.
The Washington Post says:
Why today’s Cyprus bailout could be the start of the next financial crisis Neil IrwinIt is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.Early Saturday, the nation reached an agreement with international lenders (IMF, European Central Bank and European Union) for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut. Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.
The idea that emerges is that banks — like real estate — are currency traps, that there is no ‘safety’ for funds … anywhere. - A bank run has been underway in Europe for several years. Part of this is the foreign exchange aspect of the eurozone and is structural.
Figure 2: The God-like Unholy Trinity which determines the course of foreign exchange for all countries including those in Europe. A country can have an independent monetary policy, it can maintain a currency peg with another country or countries and it can enjoy the free flow of capital across its borders. It can effect two of these, or two can be denied, but never all three at once.
The worth of money is determined — not by central banks — but by its voluntary exchange for a valuable physical good on demand … at gasoline stations around the world millions of times a day. Even with policy rates set to zero and the all-out lending to governments by central banks there is no independent monetary policy … anywhere. The worth of money is determined by its exchange for crude and crude products and nothing else. The only policies that central banks can effect are those that make matters worse.
The euro is not a currency in the sense that it is the product of a nation named ‘Europe’, rather it is the collection of currencies of individual European nations that all happen to be called the euro. These currencies are all pegged to each other, a source of Europe’s misery as there is no way for the individual euros to be repriced independently of the others. Europe has the pegged currencies and no independent monetary policy: all that remains is the free flow of capital or not across European borders … that is, bank runs.
Bank runs are baked into the cake to some degree because of the use of the European Stability Mechanism (ESM) which is a credit-laundering machine to allow the ECB to make unsecured loans. This is fatal to the central bank because it has insufficient capital and its assets are the same assets that have bankrupted the various commercial banks. Once implemented — due in April — here is no effective lender of last resort in Europe. The ECB is simply another insolvent European commercial lender.
The system is clearly worth more to the Europeans than the funds it contains. The system is embodied in the euro which = gasoline. Stripped to essentials, the Europeans are choosing to drive over maintaining a functioning economy. Granted, the economy has depended upon driving to maintain cash flows, but this waste-based approach is unraveling. Cash flows will be interrupted regardless of what the Europeans choose to do. It would be best for the Europeans to jettison the driving and use the money to re-capitalize a less wasteful economy.
When the euro system fails it will be as a result of eurozone countries being bankrupt, not defects of the euro itself. When a country is bankrupt to the degree it torpedoes the euro that country cannot do better with any other currency! In other words, these countries in Europe could dollarize and they would still be bankrupt.
At this point in the five-year decline in Europe, policy errors are unavoidable. Bank assets in Europe are worthless. They are essentially car loans … along with loans to enable the Europeans to buy fuel which has been burned up for absolutely no return. This is why the countries are bankrupt, not because of the euro which is simply a currency.
Europe has made itself vulnerable to push-back from Russians who are large depositors to Cypriot banks. Russia will pay itself at the front end of the natural gas pipeline: 10% less deposits, 10% less gas. All Putin has to do is order pet Gazprom to turn a valve and the Europeans freeze inside their houses.
Not the first time depositors have been ravaged in Europe: Spanish depositors have been made into stockholders of combined banks after smaller home-loan banks failed. When the combined banks failed in turn the new shareholders were completely wiped out.
From the ‘shooting oneself in the foot and liking it’ department: the entire euro banking system collateral is the same system’s deposits. European banks need more deposits not less! Instead of stifling contagion in Europe as is claimed by the managers, this action looks to be the trigger for Continent-wide bank runs.
It will be very hard for the establishment to put this particular genie back into the bottle. Even discussions about withdrawing the action will be destabilizing as every word will be freighted with consequences to depositors, not just in Cyprus but elsewhere.
The strategy to solving money laundering is to deal with it directly, by prosecuting criminals rather than penalizing ordinary bank customers. It isn’t the customers’ fault that Russian- and other overseas criminals use Cypriot banks, there is nothing ordinary bank customers can do about it, either.
Whatever the Troika hopes to gain by annexing deposits will be lost by the European Central Bank and the banking system as a whole.
Notice that the action took place on a weekend, as was the case during the ‘Lehman breakdown’. Also notice that Cypriot banks are now to be closed on Tuesday as well (Monday is a Cypriot national holiday).
“(Cyprus President Nicos) Anastasiades explained that Cyprus gave way after the ECB threatened to push the island into a disorderly default by withdrawing liquidity support for Laiki, its second-biggest bank, on Tuesday.
He said Cyprus had a choice between “a catastrophic scenario of disorderly bankruptcy, or a scenario of a painful but controlled management of the crisis”.
According to Cyprus sources, the IMF and German managers wanted a 40% haircut. 7-10% is only the first installment. The Cyprus bank insolvency cannot be cured, only the money interests made whole by the rest.
All EU depositors — in countries with similar finance problems as Cyprus or not — are facing theft of funds. In Cyprus, funds are stolen from depositors and handed to senior secured creditors of the Cypriot banks, preferred shareholders, lenders to the Cyprus state and depositors to Cypriot banks outside of Cyprus. The establishment is afraid the bondholders won’t lend any more. The EU system is broken, nobody knows what to do, there is no reason to lend, anyway.
With the cost of new fuel rising due to geological constraints, with access to credit diminishing due to high energy prices, there has been a rapidly shrinking window of opportunity for the managers to take appropriate actions to strengthen the money- system and to conserve resources/capital. That window is now being slammed shut by foolish managers.
Notice how the ‘system’ works, nothing really changes except the scale: from, “Hiding in plain sight”:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Q: How would you describe the economy?
A: It is a system that allows a select few to borrow immense fortunes. The rest of us … you, me, everyone else … repay the debts.
Q: That’s it?
A: That’s it.
The face of Peak Oil. 
We are in the middle of a crisis that has been ongoing for almost five years now: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?
A: Pensioners. (Bank depositors.)
The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Ireland, Portugal, in the US … in cities and states pensions everywhere are under attack.
Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying pensioners (and bank depositors)? Technology is supposed to save us but the raiding of pensions — and bank accounts — insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology won’t work, from the people who are in a position to know.
What happens after the retirements (and bank accounts) are pilfered? Who knows? Nobody has a plan.
The world is shocked to discover a shortage of capital, not for investments but to prop sagging balance sheets. Who could have guessed as capital has been shoveled into the furnaces of ‘development’ for decades? Only economists and bureaucrats believe that we never run out of inputs.
Neil Gough (NY Times)
China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital after an aggressive lending spree that was encouraged by the government.
Maybe they are profitable and maybe not. “Starved for capital,” suggests not. The operating idea is that capital is money rather than material inputs. These inputs are mispriced so that the money-equations used by industrialists add up to something ‘positive’. Cheating works until it doesn’t any more: substituting debt for unaffordable inputs doesn’t produce anything. Debt isn’t capital and self-delusion isn’t capitalism. Maybe we should call our economic system ‘Delusionism’ and be done with it.
Within the last year (2011), seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion ) in new funds, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion. Banks around the world have been tapping investors for new funds as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs.
Chinese bankers and business tycoons, each more corrupt than the last: raise that Red Flag high! The Chinese need capital because so many are stealing it and removing themselves overseas.
The problem is that paying out high dividends blows holes in their base capital. Thus, banks need to continue tapping the markets for fresh funds, often diluting minority shareholders by issuing new shares. The finance ministry, the banks’ ultimate controlling shareholder, always buys in, keeping its stakes topped up.
Somebody at the bottom always takes it in the neck. Today, it’s the minority shareholders, tomorrow it will be the senior bondholders or the pensioners or the schoolchildren forced to eat radioactive school lunches. This is part of an ongoing process, not a new feature within delusionism. It was invisible when everyone was busy getting rich: now that the abuses are visible it can only be on account that fewer are getting rich. The endgame heaves into view.
The journey from ATM to ATM to withdraw money is just beginning in Europe, as it was years ago in Argentina. After that comes the banging of pots and pans in the streets, then come bomb attacks on police stations. This is not a good journey for the Europeans to be embarked upon.
 Unidentified cinematographer, ‘The Character Humongous from the film, Road Warrior’.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on March 7, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
It’s hard to miss the Big Idea that the wheels are coming off the grand twentieth-century capitalist experiment; waste for its own sake, or waste for the sake of moving all-important ‘economic indicators’, waste for the purpose of enriching the even-more-important ‘entrepreneurs’ and ‘innovators’. The list of falling wheels would have to include China, Japan and Europe, but there are many more on a long list. It’s hard to think of a country in this world that doesn’t have major problems, the countries are interconnected by trade, treaty or finance so all are infected with each others’ problems in addition to their own: (Washington Post):
CDC says ‘nightmare bacteria’ a growing threat
Lena H. Sun
Federal officials warned Tuesday that “nightmare bacteria” — including the deadly superbug that struck a National Institutes of Health facility two years ago — are increasingly resistant to even the strongest antibiotics, posing a growing threat to hospitals and nursing homes nationwide.
Thomas Frieden, director of the Centers for Disease Control and Prevention, said at a news conference: “It’s not often that our scientists come to me and say we have a very serious problem and we need to sound an alarm. But that’s exactly what we are doing today.”
He called on doctors, hospital leaders and health officials to work together to stop the spread of the infections. “Our strongest antibiotics don’t work, and patients are left with potentially untreatable infections,” he said.
Just like the finance economy, the biosphere, the political economy; there are “potentially untreatable … infections”. The treatments remaining in the pharmacy are the same treatments that spawned the problems in the first place: repeat applications of MORE, everywhere in the world. If MORE cannot be had immediately there are earnest promises of MORE to come … tomorrow!
A ‘Big Idea’ that is making the rounds has the various countries engaged in a currency war. Nations actively depreciate their own currencies so that they might gain export trade advantage at the expense of others.
Instead, the nations are engaged in a war for petroleum that is being waged with currency. As in all wars there are the winners who will gain fuel imports, the losers will have limited access to petroleum, their domestic fuel consumption will be exported to the winners.
In this war all the countries are engaged, to do otherwise would be to give up claims on petroleum in the future. To have a seat at the table or have any chance of winning, the countries must waste as much- as fast as possible, as waste is the collateral for the needed (depreciated) currency. The advantage lies with the United States, not only does it waste more than the others, but it produces as a consequence much of the world’s credit. The waste of other countries such as China is collateral for American credit, that is, collateral for even more American waste.
Figure 1: China crude oil imports vs. exports from Mazama Science (click on for big). So far, China is winning, it must waste or be left behind: China currency is tethered to the dollar, its fate is intertwined with ours. To run in place the Chinese must waste more than the Americans, adding to both countries’ prodigious waste- costs.
As in America, China’s waste is promoted to the citizens as ‘progress’. These ‘improvements’ never acknowledge China’s multi-thousand-year traditions or even meet any real human needs. Instead, grandiose follies are heaped upon monstrous excesses … the process serves to rationalize the excesses’ so-called ‘value’. As with the other developed countries, sunk capital has the country by the neck. China’s vast waste is collateral for China’s vast debts, to service the debts it must add to collateral. The country devours energy today so that it might devour even more tomorrow. It’s always tomorrow, good or ill, China must devour otherwise the hated Americans will do so in its place.
The bravado of the xenophobic industrialism rings hollow, to win this war over resources is to lose: permanent smog, water pollution, desertification, land theft, an out of control loan-shark economy and high level capital flight. China growth is gained by constructing buildings rather than using them: ‘growth’ is thousands upon thousands of gigantic
stone heads concrete towers.
Credit-driven speculation in apartments and office towers in China is intended to be a hedge against rising energy costs, just like recent credit-speculation in tract houses in the US and Tokyo office buildings twenty years ago. The Big Idea is that building prices will rise faster than the credit-inflated fuel prices. By this way of thinking, fuel is always affordable because what sets the price — credit — is the means to meet the price — credit driven momentum-chasing in asset markets. Fuel is simply another asset, rationed by access to credit.
These kinds of hedges arbitrage stupidity, they live in the hedgers’ minds and nowhere else. On Planet Earth fuel is either plentiful or not: what sets the price of fuel is the credit-cost to pull it from the ground plus a supply-and-demand driven scarcity premium. The real cost of fuel increases relentlessly over time because of depletion, meanwhile, the internal costs of the hedges increase as well. Even when fuel costs remain low, as they were from the mid-eighties to the end of the millennium, the hedges become unprofitable and collapse.
For hedgers to gain their fuel, the asset(s) must be sold to others more effectively greedy than the hedger. Whether they sell to actual customers or take out loans against their investment doesn’t matter. The selling reduces the number of potential customers: sooner or later they run out, even in populous China! That is the end of the hedge.
The Chinese who buy these buildings are unwitting conscripts in the great global currency war over petroleum. Millions of relatively prosperous Chinese have invested the life-savings of generations in future energy waste. In a world with diminishing energy supplies, the investments are stranded. The Chinese cannot afford to make use of all the currently empty buildings and the cities that contain them, otherwise they would be doing so! The Chinese would have been much better served to invest in conservation, instead they have invested in ‘conservation by other means’.
Another reason for the Chinese building frenzy is to literally set in concrete the claims of developers and urbanites over prior occupants of China’s countryside. This Big Idea is no different from Anglo-American claims that were perfected on native lands in the 19th century with farms and mines, railroads, towns and barbed wire cattle fences. There are certainly less costly ways that are equally effective and more equitable than the Big Stone Head approach.
Keep in mind, when the Chinese property bubble unravels like all the others, the banking system will be ruined. So too if one of the major currencies such as the euro, sterling or yen fails … that is, if China wins the currency war. China holds hundreds of billions- or trillions of these currencies as reserves, its positions are far too large to unwind. A currency failure, a run out of banks or a bond market hiccup would bankrupt China finance … which in turn would bankrupt the rest of the world’s finance.
Mercantilism is another Big Idea energy hedge. A country obtains petroleum at a price and uses some of it to make high-worth goods such as (fake) Gucci handbags or Lexuses which are sold to customers overseas. The gains from the sale pay for the country’s fuel plus profits to the manufacturers.
The mercantile country and its firms borrow against the overseas trading partners’ accounts. Exporter’s fuel consumption grows larger than what it ordinarily would be without the trade. This is the presumed intent of today’s currency combatants, for each become successful mercantilists and have ‘others’ subsidize their fuel waste.
Figure 2: Japan is going broke because its fuel imports are too costly to be met by export of its goods to increasingly broke customers. The reason the customers are broke is high fuel prices! They cannot find any countries to subsidize their own fuel waste.
If Japan doesn’t depreciate its currency it cannot export or win the petroleum war. At the same time, if it depreciates any gains from exports will offset by increased fuel cost. If the yen is sufficiently beaten down the world’s fuel suppliers will not accept it and demand dollars instead.
Japan has large foreign currency reserves but these are collateral for domestic debt. Like China, Japan has few options to free up its collateral: whatever collateral it can access is over-committed.
Japan is orbiting the drain, the recent trade deficit is the last straw, the country has too many obligations to meet … all of them coming due at once. The inflow of overseas funds into Japan and the carry trade have been the means by which the country has endured deflation without the associated depression. Japan now needs more waste — growth — or a return to the inflow of overseas funds.
Depreciating the yen is a symptom of Japan’s “potentially untreatable infection” — its past success is now killing the country. Japan is beyond desperate: on deck is nominal GDP (NGDP) targeting. This is the Bank of Japan making unsecured loans (because the Japanese private sector finance is not making any).
Sadly, the Japanese establishment does not understand why the private finance does not lend … they are in denial like the rest of the industrialized world. The private sector is bankrupt, it cannot borrow! So are Japan’s overseas customers, they just aren’t announcing it. Instead, they pretend and hope nobody is paying attention.
Deflation feeds on remedies designed to defeat it. All avenues here lead to entropy: if the private sector delevers, the government itself becomes insolvent. If Japan’s central bank leverages itself, it too becomes insolvent and there is no lender of last resort. The result is a run on Japanese banks and out of yen.
Around the world, various finance markets are pressurized, the Big Idea is to wring out volatility and create a Potemkin market that can pass as the real thing; ditto commodities, particularly gold, copper, foodstuffs and petroleum.
Time marches on and costs of volatility suppression are added to other ex-market costs, volatility emerges where the suppression forces are weakest. Right now, this is the currency markets. Switzerland can peg its currency to the euro at an affordable cost, just like the Chinese can peg its currency to dollars. Today’s question is where and how does Japan fit in particularly with its new trade deficit?
Japan has its own currency, unlike Europe, its treasury can issue yen to retire debt, extinguishing the self-created currency along with the debt. However, this remedy is likely too late to apply b/c the Japanese banking system is insolvent. An issue of government notes sufficient to effect Japan’s debt market would cause the banks to collapse.
Meanwhile, the Big Idea in Europe is the purposeful absence of any ideas at all! The technocrats are disappearing leaving a vacuum, to be filled by demagogues.
Figure 3: Europe produces about twenty-percent of its own petroleum fuel from rapidly depleting native sources, the rest must be imported. The mercantile states Germany and Italy export energy waste to others to meet their expenses, however, these customers cannot use the exporters’ waste to meet theirs. Like Japan, Europe is bankrupt.
The big difference between Europe and Japan the euro non-currency. Factionalism suggests Europe is set to lose the currency war and have its petroleum consumption shifted to others such as China and the United States. In other words, Europe cannot afford the euro, any currencies it can afford are nut suitable for the petroleum import trade. Because the euro is the currency of none of Europe’s states, there is no real issuer nor any lender of last resort, only a pretender.
Europe’s approach to the euro has been typical of the humans’ approach to everything else: to grasp what is immediately wanted then ignore life-cycle consequences. Europe wanted the euro as an energy hedge: it gave smaller countries the means to import waste from both Germany and OPEC. Now, these small countries cannot pay for the imports and the currency does not allow for the transfer of these costs to ‘others’. The waste — of course — is worthless, it cannot be ‘repossessed’.
The outcome is a Europe frozen on the spot. If it tries to pay for the expensive euro the entire continent will be ruined and unable to afford petroleum. This is the ‘austerity’ dynamic in force currently. If any country abandons the euro, the entire enterprise falls apart and there is nothing left to the Europeans with which to gain fuel. It is hardly likely that any petroleum supplier will accept a national currency from a bankrupt nation if the same nation’s bankruptcy has fatally undermined the euro! Of course, if the euro fails so will China finance, which holds massive amounts of euro-denominated debt as reserves, far too many to be readily rid of … without precipitating the disaster that it so desperately seeks to avoid.
Like so many other countries, Europe has an unraveling property bubble/energy hedge that also failed.
Meanwhile, the exit of the technocrat is the last step in post-petroleum down escalator toward chaos. After the technocrat comes zero-government, factionalism or abdication of governing authority. This is not to say that political and administrative reform is not possible; without new resources or an ‘upside down’ approach that husbands capital there is no foundation for reforms. The factions all promise MORE and a return to waste: the broken government is able to export fuel consumption elsewhere more efficiently and with less cost than do the factions, technocrats or ineffective government.
The problem in Europe and elsewhere is at the end of the everyone’s driveway. Every single day the Europeans must import twelve million barrels of crude oil at staggering cost, they must borrow from New York and London financiers to do so, as they have for ever day since the end of World War Two. Europe’s pathetic car industries cannot pay their own way much less the wasteful continent’s gigantic fuel bill. Europe is beyond insolvent, beyond broke, by rights it should never borrow again, ever, from this point in time until the sun consumes itself and balloons to fill the solar system. Europe’s bosses believe with this bit- or that bit of beautifully embellished central bank promises it can claim a good that is vanishingly rare and valuable … so that this good might be burned up for time-wasting entertainment purposes and economists’ reputations only.
This is the real Big Idea, it has not materialized in the imagination of the modern world … yet. It emerges from a concrete Big Reality that the modern human works hard to ignore. Modernity is intrinsically dysfunctional, its products are entropy and ruin. Its managers defend their right to waste as they please at the expense of the rest, the non-managers demand the right to waste along with the managers: this is madness! That a war might be waged with competitive waste as a tactic speaks to the inherent moral and physical bankruptcy of the ‘modern’ idea: it has hollowed itself out. At the end of the day the competitors are all smashed, together. There can realistically be no other outcome.
The next Big Idea must be an economy that rewards conservation and the husbandry of capital by every and all means, that treats all of capital as precious, rather than a substitutable ‘input’. It isn’t such a hard idea to grasp, its application is becoming a desperate necessity. Stewardship is less difficult than competitive depreciation financed by increased resource waste. In a well-functioning conservation economy shepherds of capital become rich and by so doing the others would become rich along with them. There is still entropy, but not the Hammer of Thor.
Time is running out … we adapt or else.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 26, 2013
Figure 1: Detroit city tax map from WDWOT (click on for interactive big), (HT Atlantic Cities): Detroit is a good model for the rest of the United States as the country sinks into post-petroleum depression. One symptom is the inability of the city to provide basic services for its citizens because of shrinking revenue. Owners in the city are unable or unwilling to pay property taxes.
Discuss this article at the Epicurean Delights Smorgasboard inside the Diner
The map illustrates properties which are current, properties in arrears and those in states of foreclosure. Only a handful of neighborhoods within the city are home to owners current on their property taxes. You can adjust the map to determine the degree to which property in the city is impaired, for instance half the city looks to be in tax arrears and under threat of tax auction.
Here’s Atlantic Cities:
Detroit’s Property Tax Black Hole, in Map Form John MetcalfeTo get a handle on how bad of a tax mess Detroit is sitting in right now, look no further than (above) depressing map showing every property in the city suffering “tax distress.”What looks like a big hunk of moldy cheese is in fact the property-tax status of 384,861* properties, as logged by Wayne County’s online tax portal. The lighter yellow boxes represent more than 59,000 distressed buildings where the owners haven’t paid their taxes. Squished among them are a honeycomb of orange boxes, indicating that these properties have such a large backlog of delinquent taxes that they’re now subject to foreclosure. (Count those up and you arrive at about 74,000 doomed properties.) The plots shown in red, meanwhile, are the 18,246 properties that have already been foreclosed.
On the bright side, gray areas mean those places don’t have tax issues. Lucky!
The gray areas are highways and city streets, parkland, commercial structures that earn enough in rent to pay expenses and non-taxable city property.
Detroit does not currently have a purely technocratic city administration but one looms over the horizon. Perhaps the establishment in Michigan can rethink the process as technocracy is an endgame, it will fail in Detroit as it has in Greece and Italy.
What is technocracy? It’s an establishment- installed ‘non-political’ manager with powers to restructure a jurisdiction to protect big business interests regardless of social or political consequences. Jurisdictions that have lost the ability to borrow and thence roll-over debts and pay interest are candidates for the technocratic ‘fix’. Meanwhile, the same inability to borrow strands the technocrats who have no tools to work with.
Technocracy tends to be the last step before default/repudiation of non-payable debts. After technocracy comes ‘zero-government’; the capitulation of the establishment, its dissolution into factions and chaos. This is part of the transition to a post-petroleum economy and breakdown of the status quo. Arguably, Detroit has endured ineffective, paternalistic ‘pro-business’ leadership since World War Two: the non-government is a necessary precondition to technocracy which surrenders shortly afterward to zero-government.
Hat meet rabbit: an emergency managers cannot magically deliver the means to repay tax arrears or interest on loans. To do so requires the creation of thousands of new jobs which is never within managers’ scope of employment. Their duty is to cut jobs. Technocrats lack imagination, they are repo-men They provide administrative smokescreens behind which the creditor interests pick over and privatize remaining marketable assets that have previously been too costly to pillage. The problem is … when governments reach the technocratic inflection point assets aren’t worth anything.
Here is the current Emergency Manager of the Detroit Public School System:
Roy S. Roberts was appointed by Gov. Rick Snyder in May 2011 to serve as Detroit Public Schools Emergency Manager under the Local Government and School District Fiscal Accountability Act. Mr. Roberts, who was most recently Managing director at Reliant Equity Investors, has decades of managerial, financial and organizational experience, having served as the highest-ranking African-American executive in the U.S. automobile industry as Group Vice President for North American Vehicle Sales, Service and Marketing of General Motors Corporation from July 1999 to April 2000. Prior to that, Mr. Roberts also served as Vice President and Group Executive, North American Vehicle Sales, Service and Marketing of General Motors Corporation from October 1998 to July 1999. He was Vice President and General Manager in charge of Field Sales, Service and Parts for the Vehicle Sales, Service and Marketing Group of General Motors Corporation from August 1998 to October 1998. He served as General Manager of the Pontiac-GMC Division from February 1996 to October 1998, presiding over the merger of Pontiac-GMC …
Do you laugh or cry? Roberts offers management expertise to a bankrupt school system gained from within the bankrupt General Motors as a glorified car salesman! Roberts is not expected to improve learning in Detroit, but to facilitate the flow of public funds toward the private sector … this is what technocrats do.
3.1 Salary The Emergency Manager’s salary for services rendered under this Contract shall be $250,000.00 per year, paid by the District.
He is additionally compensated for personal expenses. Unsurprisingly, the citizens refuse to pay taxes. Tax evasion/declining government revenue is a characteristic of technocracies: why throw good money after bad? Here’s Mike ‘Mish’ Shedlock:
Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy The hollowing out of Detroit is nearly complete. All that’s left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.The Detroit News reports Half of Detroit Property Owners Don’t Pay Taxes.“Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.
The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city’s taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.
Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don’t pay question why they should in a city that struggles to light its streets or keep police on them.
“Why pay taxes?” asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. “Why should I send them taxes when they aren’t supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came.”
Shedlock’s ‘solution’ is technocratic: to quash the unions and fire workers. It would be far better to fire the automobiles instead. Raising taxes in a depression is a failure, blaming the city workers is blaming the victims.
In Detroit, homeowners are broke and unable to pay, others are in dispute with the city over the amount of tax due: real estate worth has plummeted over the past 20 years and assessments are ‘uncertain’. There are questions about durable title particularly on foreclosed properties. The large banks and mortgage servicers own multiple properties they look to shift the burdens each property represents onto the taxpayers.
Many thousands of houses in Detroit are burn-outs or dilapidated and require demolition. By not paying taxes, the banks force the city to take over properties and demolish buildings at city’s- rather the banks’ expense. In Detroit, the cost of demolition is not much less than the average cost of a house.
Occasionally the government runs amok: houses in Detroit are demolished after people buy them … to save them from demolition. Why pay taxes and support ineptitude or criminals?
It is likely to be difficult for Michigan’s governor to find another car salesman willing to become Detroit’s Next Great Technocrat! Pre-failure failure in Detroit, (Huffington):
Asked during a short, one-on-one session with The Associated Press if any potential candidates for such a job (emergency manager) had already declined it, Snyder responded: “Oh yeah. There were quite a few people who were in that camp. Because if you think about it, and this is not to imply we’re going to do one, but it would be an extremely challenging position.” Challenging may be an understatement.Mayor Dave Bing has placed the city’s current budget deficit at about $327 million. The report given to Snyder Tuesday by the state-appointed review team said the accumulated deficit as of June 30, 2012, would have topped $900 million if Detroit leaders in recent years had not issued bonds to pay some of its bills.Long-term liabilities, including underfunded pensions, is more than $14 billion, and in recent months the city has relied on bond money from an escrow account to meet its dwindling cash flow needs and to pay city workers.
The review team also said that because of its cash deficit the city would have to either increase revenues or decrease expenditures, or both, by about $15 million per month between January and March to “remain financially viable.”
In areas where technocracy has been installed such as Greece, both the initial conditions and the failure of the process is blamed on the inhabitants. Greeks are ‘corrupt tax-cheats and lazy’. Detroiters are ‘stupid, drug-crazed Negro savages bent on murder and destruction’, French are ‘near-communists and cowards’, Irish are ‘ugly … drunken child molesters’. The purpose of the blame game is distraction while retirement savings are stolen by the establishment. The elderly ‘deserve what they (don’t) get! The blame game hits the target by appearing to miss it.
In Detroit, the citizens didn’t chase retail stores away, they didn’t over-invest in the auto industry, they didn’t ghettoize the city with ill-conceived developments and a web of freeways, they didn’t pollute the city with lead, zinc, chromium, mercury, toxic petroleum-based chemicals, they didn’t sell the city out to billionaire developers.
The citizens didn’t pave the city over with parking lots or built thousands of monstrously ugly concrete box- buildings. Detroiters are being shot by criminals, being driven out by block busting and urban decay, losing what little property wealth they had, having already lost hundreds of thousands of jobs. Detroiters have been abandoned by their country not the other way around.
The US spends hundreds of billions of dollars in Afghanistan, why not Detroit?
Detroit’s notorious crime problem appears to be the result of lead pollution from fuel additives and manufacturing residues in the soil along with fumes from burning lead paint spewed into the air from the thousands of building fires taking place every year in the city … rather than skin color.
The black establishment in Detroit has never been able to stand up to the white establishment which owns everything important, which controls the city’s budget, which anoints various city administrations, which constantly looks for opportunities to blame blacks for everything gone wrong.
Since 1920 the auto industry has run Detroit like a coal mining ‘company town’. Most of the housing stock in Detroit was sub-standard as built: cheap frame houses thrown up as rapidly as possible on an unrelenting grid. Detroiters are learning the hard way: land use and urban design matter. The citizens did not design the buildings or lay out the streets. What charm the city once possessed has been swept away for parking lots and cheap commercial and institutional ‘facilities’. The citizens did not do this, it was business interests seeking the quick buck for themselves at the expense of everyone else.
Following the Great Wave of European master craftsmen to the city in the 19th century, most of the emigres in decades following have been unskilled, uneducated agricultural workers seeking assembly-line jobs. They added little to the community other than modest paychecks and a burning desire to relocate themselves to the suburbs as soon as possible. Even in the 1950s, when the auto workers union gained touted increases in pay and benefits, the companies they worked for were shrinking, first by way of automation then by ruinous competition and business failure.
The unraveling of the US car industry has been the decline and fall of Detroit: the population has shrunk from 1.8 million to less than 700,000. Who is to live in the abandoned houses? Even without the fires and the blight, half of the ‘original city’ would be empty. Where are the jobs?
Meanwhile, the Detroiters are on the hook for tens billions of dollars of debt taken on to run the ossified city government, pay pensions, build football and baseball stadiums … arenas, improvements for casinos and retail ‘big-box’ stores. The reason Michigan keeps Detroit at arm’s length is because the state is as bankrupt as the city. If it does nothing, the city’s finance burdens will crush the state, if it tries to ‘fix’ the city the effort will crush the state just as well.
The establishment has created this mess, not the Detroiters. Meanwhile, technocracy marches over the edge of the cliff around the world:
– Japan’s ‘democracy’ has been a facade that masks control by business cartels, in this way all recent governments in Japan are technocratic. Japanese citizens are confronted with the doubling of consumption taxes by 2014: these are taxes levied to meet the spiraling cost of servicing Japan’s monumental debt. Enter the new ‘Shinzo Abe 2.0′ government promising to borrow more, faster … presuming Japan’s total debt burden can be added to without causing a crash. Increasing numbers of Japan’s citizens are elderly, they do not consume, they are unwilling to pay more taxes. Meanwhile, Japan’s overseas customers are broke. They cannot buy Japanese products and by doing so lend to the Japanese.
The outcome is a currency market panic … that is not likely to end well.
– The Greeks are bankrupt, the European Union has bailed out (some of) Greece’s lenders while burdening Greeks with higher taxes that the Greeks refuse to pay. The technocratic government installed by the IMF, European Central Bank and the EU has collapsed, the country now has post-technocratic ‘zero government’.
– Italians have been confronted with higher technocrat-imposed taxes: they evade them or refuse to pay. Voters have just now jettisoned the current IMF-supported technocrat regime. The outcome is post-technocratic zero-government in Italy.
– The French unraveling is well underway the current government is the precursor to a technocracy. The Socialists are incoherent, they appear to have no set strategy or clear understanding of their dilemma which is the consequence of extinguished capital. When the French cannot borrow cheaply, they will be given the ‘Italian Choice’: to install a technocratic regime or be frozen out of credit markets.
– Sequester in the US is technocracy-by-the-numbers, the theft of retirements under the guise of ‘responsible government’ for the benefit of lenders. After technocracy fails comes zero-government.
Moderns look to waste resources but the outcome is to become Detroit in every sense. Japan and Greece have passed their respective points of no-return. Their ability to waste resources is collapsing because their external debt subsidies have been curtailed, they cannot borrow to repay their debts so they cannot borrow to obtain fuel. Meanwhile, working out of debt is beyond what can be done with human labor or what modest remaining capital can leverage.
The wild card in Italian politics: by John Hooper and Lizzy Davies (Guardian UK):
Italy on Monday night risked pitching into political turmoil as projections of the result of its general election pointed to a hung parliament and confirmed that the anti-establishment Five Star Movement (M5S), led by an ex-comedian, Beppe Grillo, had exploded onto the national stage. So far, Grillo has ruled out supporting either side in his drive to sweep away Italy’s existing political parties and the cronyistic culture they support.
In an earthquake result, the Five Star protest movement of comedian Beppe Grillo looked likely to emerge as the biggest single party in the lower house. The scourge of bankers and corrupt elites, Mr Grillo has campaigned for a return to the lira and a restructuring of Italy’s €1.9 trillion (£1.64 trillion) public debt. The conservative bloc of ex-premier Silvio Berlusconi looked poised to win the senate, coming back from the political grave with vows to rip up the EU’s austerity plans and push through tax cuts to pull Italy out of deep slump.“The majority of Italians have clearly voted against the Brussels consensus. That is a damning indictment,” said Mats Persson from Open Europe.A euphoric rally on European bond and stock markets early on Monday gave way to abrupt selling as it became clear that Italy would be left with a hung parliament and no consensus over fundamental policies, leaving the country almost ungovernable.
There is little chance of escape for Italy from zero-government, just like Detroit. The innovation of the Five Star Movement is that it spurns TV and the need for officials to sell themselves to business interests in order to raise advertising money. Five Star candidates offer their platforms on Facebook and Twitter. None of this addresses our evaporating capital problem. Italy and the rest need new ideas about how to wisely use what capital remains: to husband it for the future rather than burning it up faster and faster.
Our current economy uses the destruction of capital as collateral for ‘infinite’ loans. This process must be voluntarily ended or it will be ended for us with zero-government as a component of the process.
Europe and the rest of the world is being de-carred: this is because cars are unaffordable luxuries. For some reason, this is too complex and difficult a problem for economists and policy makers to grasp! What is ‘growth’? Always more and more cars. Why isn’t there any growth? Because adding more cars amplifies the car-cost problem, which is the increasingly efficient destruction of capital. The solution to our capital destruction problem isn’t baling out lenders … presumably so they might lend again … but to end cars and their monstrous claims against capital!
The world’s fuel supply is shrinking along with credit availability. Without a constant supply of new fuel there are shortfalls. Economic activity is curtailed as a result. Without that constant supply of new credit, nobody can retire old loans or service them, nobody can obtain fuel. Credit is constrained further in a vicious cycle … there is no way out.
The establishment insists that the problems in Detroit and elsewhere is the social safety net/excess savings. Lenders complain about the safety net, insisting savings impinges debt repayment. Yet gutting it represents only a temporary reprieve, the debts cannot be repaid because the collateral for the debt is waste and the instrument of waste is cars. In a way, Detroit is a victim of its own success.
The cars’ days are numbered: the car and tire manufacturers, the fuel industry, the highway construction industry, the tract house industry, the big-box retailer industry, the truck-transport industry, the gigantic 80-story concrete penis in the middle of town industry, the military industrial complexes, the finance and insurance industries … all of the automobile dependencies are bankrupt, a gigantic, worldwide dinosaur that has cut its own head cut off by way of its pointless success … too stupid to lay down and die.
Die it will and very soon, children, very soon … not before threshing everything in the world to bits, first.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 19, 2012
You Know You’re In Trouble When ..
… the President lies on TV about energy:
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
According to the president, the country has 100 years’ supply of natural gas … everyone knows this, even the president who is a square, the last to know everything. Right?
When a president mentions energy in any speech is a big red flag. The word energy from the president always has ‘problem’ lurking somewhere in the background: remember Jimmy Carter. The president suggests our problem is a matter of perception: this must be ‘the audacity of something-or-other’ that the ‘frantic urgency of nothing in particlar’ that have become part of the national conversation as a consequence of Mr. Obama’s presidency.
Frantic urgency to waste: keep in mind at all times that every single word and phrase of the president’s State of the Union Address is scrutinized and measured by flotillas of lawyers and professionals … and algorithms. The president does not write the speech, highly paid national security specialists … and algorithms … write the speech. Every word in the speech is there for a specific purpose. The president just didn’t blurt out by accident that the country has 100 years supply of natural gas: this misstatement was calibrated … by an algorithm.
The algorithm conveniently overlooked proven reserves or the rate of consumption, whether that rate would increase or decrease. For example, if we use no gas we have hundreds of thousands of years of supply. If the US had the same proven reserves as Saudi Arabia — or a bit better – we would have 13 years at the current rates of consumption.
Wiki — and the US EIA — gives the US about 9 trillion cubic meters of proven reserves.
At the current US rate of consumption, Russia, with six-times US reserves, would give us 80 years supply. Perhaps the president’s statement signals the upcoming invasion of Russia! The only way the US would get 100 years out of Russia’s massive reserves would be with stringent conservation! It would also mean no gas at all for Europe, the Baltic states, Belarus or Ukraine … or Russia itself.
Notice the map @ the right. Surprisingly out of focus on the high-definition TV, the map is overlapped with suggestive continent-sized giant, gassy bubbles. The map itself is made up of pink blobs giving the impression that America is bulging with natural gas … that a pin pricking the ground anywhere will cause the gas to flow. There are only a few areas in the country that are gas deposit free: the Eastern Seaboard, Minnesota, Nevada and the Pacific Northwest.
Notice the gas- and oil bearing formations. The map is misleading because there are only a few high-output hot spots within each mauvey-pink play. Other areas are not productive or deplete very rapidly. Once production is underway, the hoped-for vast resources generally turn out to be overstated. Gas or oil that cannot be retrieved may as well not exist.
The productivity of gas or oil wells follows a curve: for every hot spot a larger number of wells must be drilled that produce an average amount then rapidly deplete. There are also large numbers of dry holes. The technology that everyone raves about doesn’t make individual wells more productive but rather cuts the number of (costly) dry holes … technology such as ’3D seismic’ (reflection seismology).
The president never mentions cost: gaining gas from shale formations requires companies to drill far more wells than were required to extract from conventional hydrocarbon-bearing formations. He never mentions the customers ability to pay for the wells, nor does he mention the effects of drilling and hydrofracking everywhere in the country on the nation’s drinking water supply. He never mentions whether the water we have is enough … to extract the promised oil and gas.
It is the fact of the lie that is more important than the content or nature of the lie. It insists that within this government, nothing is true until it is officially denied.
You know you are in trouble when the president is not lying when he is lying.
The US actually is bubbling with natural gas, the president is right! The problem is the gas is dispersed and flows are intermittent and irretrievable. Methane gas leaks out of landfills, from marshes, from undersea clathrates, from melting permafrost, leaking around fracked wells and coal mines, it emerges from animal waste, from peat bogs … none of these are useful ‘reserves’ for the natural gas industry or its customers. Instead, the gas circles the globe in the atmosphere, contributing to climate change. Millions of cubic feet of gas are simply flared:
(TRC Solutions) Flaring natural gas from Bakken oil well. Funds are always available to lavish on waste, proper husbandry of capital and gaining the maximum return is unaffordable. Here is the perverse waste-based US energy policy made manifest: citizens and firms are given every incentive to burn through non-renewable natural resources as fast as possible. Flaring suggests that the world will come to an end if the associated oil is kept in the ground for a few more months until gas transmission infrastructure can be installed.
It also suggests there isn’t enough oil or gas to worry about, not enough to pay the bills.
You know you’re in trouble when corruption and influence peddling becomes so commonplace as to be invisible, the background noise behind ordinary business-as-usual.
Comes now another billionaire … to take his rightful place in the leadership cadre, as potential boss of the Department of Energy, (Washington Post):
Billionaire has unique role in official Washington: climate change radical
When Thomas Steyer — a San Francisco billionaire and major Democratic donor — discusses climate change, he feels as if one of two things is true: What he’s saying is blindingly obvious, or insane.
“I feel like the guy in the movie who goes into the diner and says, ‘There are zombies in the woods and they’re eating our children,’ ” Steyer said during a recent breakfast at the Georgetown Four Seasons, his first appointment in a day that included meetings with a senator, a White House confidant and other D.C. luminaries.
It’s a somewhat shocking statement for someone who’s in the running to succeed the cerebral Steven Chu as energy secretary. Granted, he’s a long shot — the leading contender is MIT professor Ernest Moniz, who served as the department’s undersecretary during the Clinton administration …
Unsurprising that leading nominee Moniz is a Clinton retread and nuclear industry whore. Recycled insiders from previous regimes has been a characteristic of the Obama administration … bet the rent on Moniz (Reuters).
Moniz, who was undersecretary at the Energy Department during the Clinton administration, is a familiar figure on Capitol Hill, where he has often talked to lawmakers about how abundant supplies of U.S. natural gas will gradually replace coal as a source of electricity. Moniz is director of MIT’s Energy Initiative, a research group that gets funding from industry heavyweights including BP, Chevron, and Saudi Aramco for academic work on projects aimed at reducing climate-changing greenhouse gases. (Reporting by Roberta Rampton and Jeff Mason; Editing by Paul Simao)
While Moniz is a tycoon enabler, Steyer is an actual tycoon. He offers more upside to Obama than the technocrat Moniz. With Steyer’s connections, Obama could wind up being somebody after he’s finished with his probationary period as president … Steyer might even capitalize an Obama hedge fund!
Steyer is taking on a more prominent public role. On Sunday, he spoke to a crowd that organizers estimated at 35,000, gathered on the Mall to call for a stronger national climate policy.“I’m not the first person you’d expect to be here today. I’m not a college professor and I don’t run an environmental organization,” he said. “For the last 30 years I’ve been a professional investor and I’ve been looking at billion-dollar investments for decades and I’m here to tell you one thing: The Keystone pipeline is not a good investment.” The move stems from an uncomfortable conclusion Steyer has reached: The incremental political victories he and others have been celebrating fall well short of what’s needed to avert catastrophic global warming. “If we can win every single battle and lose the war, then we’re doing something wrong,” he said, moments after consuming two mochas on the table before him.The simultaneous mocha-drinking is understandable: Steyer had arrived just hours before on the red-eye, which he chooses over a private jet to reduce his carbon footprint. He may have built one of the nation’s most successful hedge funds — Farallon Capital Management, named after the waters off San Francisco Bay teeming with great white sharks — but he’s not flashy.
It’s good to know billionaires are ordinary folks just like you and me … while at the same time inhabitants of the rarefied precincts of sacred money. As a consequence, star-struck Eilperin avoids shining any light into the dark corners of Steyer’s fund, (Wikipedia):
Tom Steyer founded Farallon in January 1986 with $15 million in seed capital. Previously, Steyer worked for San Francisco-based private equity firm Hellman & Friedman, as a risk arbitrage trader, under Robert Rubin, at Goldman Sachs and in Morgan Stanley’s corporate mergers and acquisitions department.
Rubin … Goldman-Sachs … take it back: Steyer is certainly equally qualified- if not more so than ‘Brand X’ candidate Moniz. In Washington, DC, where money talks, Steyer carries his own lobbyist around in his wallet.
Steyer knows coal because Farallon once owned the 2d largest coal-fired power plant in Indonesia! The following is from a report criticizing Steyer’s handling of university endowment funds (Amanda Ciafone, Working Group on Globalization and Culture, Yale University):
(Un)Fa(i)rallon in the Endowment:
Tracking Yale’s Global Capitalism In 2002, when Farallon purchased a 51% stake of Indonesia’s Bank Central Asia for $520 million dollars the fund could not avoid the high visibility of mainstream media attention. Bank Central Asia was the “crown jewel” of Indonesia’s banking sector with approximately $10 billion in assets and eight million customer accounts. In 1998, when the Asian financial crisis brought on by foreign investment and currency speculation brought Indonesia’s banks “to the brink of ruin,” the Indonesian government nationalized the bank, bailing it out and taking on its debtors by replacing unpaid loans with government bonds.In line with demands from the IMF, the sale of Bank Central Asia was seen as crucial to the overall success of the government’s privatization program: “international lenders and the IMF placed great emphasis on BCA’s divestment as a yardstick of economic reform, threatening to withhold financial aid if it was not completed.” Private investors could now buy an Asian bank on the cheap. Although it offered 25 rupiah a share less and has never run a bank, Farallon was chosen over other bidders. In fact, Farallon had won a huge asset for Yale and its other investors; for the $520 million it paid, it bought a bank predicted to earn $650 million in government interest payments a year for the next few years. In actuality, the Indonesian government was paying Farallon interest on its own bonds originally issued to save the bank that Farallon now owns.
Ciafone questions how non-Indonesian Farallon could buy the bank with both the lower bid and zero-experience in running a financial institution? It emerged that Farallon was well connected in Indonesia and could leverage its friends in high places (IMF) better than the other financiers.
Some of Farallon’s (Yale’s) money was invested in Paiton I, Indonesia’s first private power venture and “one of the most expensive power deals of the decade.” As the first private power project in the country the huge Paiton I coal burning power plant set the tone for subsequent private power ventures which “cut overpriced, politically influenced deals that undermined the Indonesian economy.” Although little is known about Farallon’s connection to the Paiton project, the financial press revealed that Farallon held a “controlling position in the $180 million [bond] issue” of Indonesia’s Paiton I plant. But much is known about the nature of the Paiton I project; three Wall Street Journal investigative articles detail the crony capitalism, price gauging, and environmental risks surrounding the plant in Indonesia.
It’s hard to say who would be worse as DOE Boss: captive insider Moniz or finance criminal Steyer. Both are creatures of the money-establishment: the end result is more of the current status-quo: lies and continuing incentives to waste, more theft from the citizens by tycoons. Regardless who whomever becomes DOE Boss, don’t expect any real change as to do so might adversely effect tycoons’ two-fisted lifestyles.
Meanwhile, you know you are in trouble when the Federal Reserve is lending $85 billion dollars to the Federal Government and the mortgage business every month.
It is both worrisome and suggestive that the central bank is such a large lender to the government. Are there no other lenders? This is a tremendous red flag: this sort of direct monetization suggests the government is a credit risk.
Is is also worrisome and suggestive when the Fed is lending billions every day to the mortgage industry. If the industry was solvent it would not need a continuing $40 billion-per-month bailout! At the same time, it is worrisome that the Fed is guaranteeing bank deposits. When the Fed accepts securities as collateral during open market operations such as ongoing Quantitative Easing (QE) it credits the banks with ‘excess’ reserves. These reserves are never deployed (into circulation) unless the banks’ balance sheets are collapsing … as when there are runs on the banks.
Does the Fed know something about the banks we should worry about?
You know you are in trouble when the inflation/deflation argument is still with us.
Deflation tends to be described as a change in prices for goods, a fall in the general price level or a contraction of credit and available money. Rather, deflation is where the cost of repayment of any debt is greater in real terms than the worth of the debt.
Current deflation is meaningless out of context of debt and energy. The world is running out of energy and has taken on $640 trillion$ in debt in order to run out of energy.
There is debt deflation when the cost of repaying a debt increases as the debt is repaid, because the act of repayment extinguishes currency. The scarcity premium of currency increases faster than the rate at which the debt(s) can be retired. In fact, debt repayments by 3d parties has the effect of rendering all debts unaffordably costly to repay. Read Irving Fisher’s paper on ‘Debt Deflation’ (1933).
Energy deflation occurs when energy becomes scarce and more expensive in real terms, there is a scarcity premium added to fuel that the customers cannot afford … fuel becomes too valuable to waste by driving tens of millions of useless cars in circles from gas station(s) to gas station(s).
Fuel is hoarded or unaffordable, so is money used to buy fuel. If currency is more useful to gain fuel than credit, there is no credit. The cycle is broken only when there is no fuel or no demand for it.
Economists are blind to the distinction between ledger loans (amounts noted on spreadsheets as due and payable) and circulating money.
Central banks offer ledger loans as do private sector lenders. The latter offer unsecured loans to customers. Ledger loans are credits made to borrowers’ accounts, funds thereto are simply ‘invented’. As the name implies, circulating money is loans that have changed hands to 3d (or more) parties in the marketplace where their worth is determined.
Banks’ offering unsecured loans is called ‘inflation’, demanding circulating money as repayment for unsecured loans is called ‘deflation’. Since most repayment is made by taking out greater loans, inflation tends to be a background condition. Unsecured loans represent economic ‘growth’ as their tally makes up the components of GDP.
Private sector lenders demand repayment in circulating money which is always in limited/finite supply. Borrowers cannot offer ledger repayments! They must earn, borrow or steal the funds demanded for repayment from others who then do not have the funds. Repayment reduces the amount of money in circulation which reduces GDP. When repayment demands exceed the amount of new loans there is a recession.
Clearly, offering more ledger credit — which costs very little — and gaining circulating money in return — which costs everything — is good business for lenders. Everyone is robbed whether they borrow or not because of the increased scarcity and cost of needed circulating money!
Central banks cannot make unsecured loans (loans in excess of collateral) therefor there is no such thing as central bank ‘money printing’. Because reserve banks have no capital structure — they are reserve banks after all — they cannot extend unsecured credit. Any central bank that offers unsecured loans is instantly and permanently insolvent!
This is not an Economic Undertow supposition but a condition like gravity. If ordinary commercial or depository banks are rendered insolvent by excess leverage and bad loans, a central bank which leverages itself while taking on the bad loans of its clients is ruined just the same as the other banks, for the same reason!
Under such circumstances, there is no effective lender of last resort, the only real collateral for all loans is currency on deposit. There are bank runs to redeem as much as possible … (as are underway in Europe and commencing in Japan).
The outcome of the discussion is delay in implementing reforms. Meanwhile, there is ongoing energy- and resource waste.
You know you are in trouble when your world burns 88.8 million barrels of petroleum per day … and is fantastically in debt by trillions of dollars!
That petroleum is gone forever. Another 88.8 million barrels will flush down the toilet tomorrow and another 88.8 million the day after … day after day after day!
and the day after that. What do we get in return for 88.8 million barrels per day? People laugh at the Medievals but they left behind some nice towns and useful buildings. What do we have to show … for the million barrels … burned up for nothing every single day for decades?
We have some used cars, some potholed ‘infrastructure’, millions of ugly buildings … we’re bankrupt.
In order to burn the 88.8 million barrels we’ve had to borrow billions of dollars from bankers and finance every day, as well, The total amount we owe to the financiers is $640 TRILLION dollars (Bank for International Settlements, PDF warning)!
Don’t listen to the soothing bromides of the analysts. Each swap noted on BIS ledgers cost someone real money, they hedge something real, the total system credit including that derived by way of foreign exchange.
We burn instead of holding onto our oil until someone can figure out something better to do with it. We rush to burn as much as possible as fast as possible. We want to burn it faster so that we can change some ‘indicators’ and allow tycoons, ‘entrepreneurs’ and ‘innovators’ to borrow some more.
We are like a family that has inherited a palace: we have burned all the furniture in order to keep warm now the furniture is gone we must burn the house. Well-dressed salesmen knock on the door offering efficient saws and furnaces to cut the house apart and burn it.
Madness … whatever is happening to us we deserve it.
Off the keyboard of Steve fromVirginia
Published on Economic Undertow on February 10, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
The North Dakota Department of Mineral Resources made a presentation to native peoples’ tribal leaders in the state last fall regarding oil and gas production in the Bakken area, (PDF alert). It’s a comprehensive report and worth the time to examine it. This jumped out:
Figure 1: the cost of Brent crude vs. the ability of crude customers to pay for it made graphic, from TFC Charts. What the chart can’t say is that the industrial world is impoverished by the high cost of crude in a vicious cycle. What it also doesn’t show is that real fuel prices will increase relative to other costs, even when nominal prices decline. Funds must be diverted toward obtaining fuel away from the purchase of non-fuel goods and services. When the drillers gain credit the customers are deprived of it … the alternative is less fuel.
Little has changed over the past two weeks except that Brent prices are a little higher due to war fears in the Middle East, moral hazard by central banks and nonsense bullish frenzy that has overtaken asset speculators. Right now, customers are borrowing at the expense of drillers. If the prices climb high enough, listen for ugly noises from the euro-zone or Japan as the higher prices bite hard … and businesses (banks) start to fail. That will be the end of the bullishness.
Keep in mind if the economy starts deleveraging (again), there is little the establishment and central banks can do but stand aside and wring their hands. Everything has been committed already: interest rates are at near zero, governments are at the borrowing limit, there is little in the way of collateral remaining for central banks to take on as security for new loans.
Speculators don’t realize conditions are fundamentally different this time … nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions: the world in its entirety has never run out of energy before, which is what is underway right now.
|Crude Oil (WTI)||USD/bbl.||95.72||-0.11||-0.11%||Mar 13||17:15:00|
|Crude Oil (Brent)||USD/bbl.||118.90||+1.66||+1.42%||Mar 13||18:00:00|
|RBOB Gasoline||USd/gal.||305.88||+5.89||+1.96%||Mar 13||17:15:00|
Is $118 the new $147? Here is another look from Stuart Staniford:
Figure 2: Brent and WTI performing together on the same stage (click on for big). The lower West Texas Intermediate price is good for refiners who can sell products outside the Midwest at the world price. This is a burden for drillers as Bakken formation supports the most expensive, fastest depleting wells on Earth. Landlocked wells put the squeeze on drillers: if the Bakken oil field was near the Gulf coast, drillers could sell their crude at the Brent price, putting the squeeze on refiners instead.
– Drillers have to keep pace with depletion in the Bakken and similar tight fields so large numbers of wells have to be drilled continuously.
– Drillers also have to keep pace with depletion in conventional formations which is occurring at a rate + 4% per year.
– Drillers in the US face an inhospitable environment: oil-field labor shortages, skeptical regulators, anti-fracking activists and the price squeeze.
Rune Likvern (Oil Drum) called keeping up with Bakken depletion rates ‘Running With the Red Queen’ Drillers need to punch holes in the ground at ever-increasing rates just to maintain current rates of output. Any slacking in efforts and flows of product decline sharply, says Likvern:
In reality, it was the growth in the oil price to an apparent structurally higher level that secured commercial support for crude oil production from shales. In that respect it was the oil price that was the true game changer and unleashed the “shale/tight oil revolution”. There is a saying that goes like; “Do not listen to what they say (technology). Look at what they are doing! (spending borrowed money)”. This may as well go for the Bakken formation. The oil service giant Baker Hughes recently expressed concerns about slowing activity levels in shale plays if oil prices moved below $80/Bbl. Further the oil companies Marathon and Occidental recently cut back on their activities in the Bakken formation. Oil and gas companies still care about the colors of the numbers at the bottom line for their projects.
Figure 3: Running with the Ace of Spades: by the time the transportation mess is straightened out the Bakken fields will be depleted.
Coastal refiners must pay world prices for crude while selling high cost products. As a result of the squeeze, coastal refiners are going out of business. Here is a clip from Stillwater Associates:
US East Coast Refinery for Sale: Who’s Buying? Earlier in September, Sunoco had announced plans to sell its Marcus Hook and Philadelphia, PA refineries, noting that the refineries had been profitable for only two of the last 10 quarters, and stating that both refineries would be idled in July 2012 if buyers have not been found. However, in an early November conference call with analyst, Lynn Elsenhans, Sunoco’s CEO and Chairman, stated that “…if at any point we believe it’s in the best interest of the shareholders to either stop operating (Marcus Hook and Philadelphia) or change their utilization rate, up or down, even if that’s before July, 2012, we would take the appropriate action.” Sunoco Refining and Supply reported a $17 million pretax loss for 3Q 2011, the ninth quarter out of the last 11 for which Sunoco Refining and Supply lost money.When ConocoPhillips announced that it was seeking a buyer for the Trainer refinery, Willie Chiang, then ConocoPhillips’ Senior Vice President of Refining, Marketing, Transportation and Commercial, noted that their decision to sell, like Sunoco’s, was based on unfavorable economics caused by a competitive and difficult market environment characterized by “…product imports, weakness in motor fuel demand, and costly regulatory requirements.”So, who will buy these refineries?
Valero has been mentioned by some as a possible buyer, but Valero exited the refining business on the US East Coast when it sold its Paulsboro, NJ and Delaware City, DE refineries in 2010. Valero has said it plans to move gasoline from its recently acquired Pembroke, UK refinery, which can process heavier sour crude, to the US East Coast.
Keep in mind, the transport bottleneck is the reason for so much gas flaring in tight oil formations. Gas does not command a price high enough to support a crash program to build out distribution infrastructure. Meanwhile, enough gas to heat a big city like Minneapolis is wasted.
Keith Schaefer @ Oil and Gas Investment Bulletin says:
A vertical well into a conventional oil field costs something like $1 million. The Bakken’s horizontal, multi-stage frack wells cost an average of $9 million, according to the North Dakota Department of Mineral Resources. That’s a huge upfront cost. Each well produces approximately 615,000 barrels of oil, meaning the breakeven price for each Bakken well ends up in the $70-$90/barrel range, once taxes, royalties, and expenses are included. If oil prices slump below that level, a lot of people say Bakken wells aren’t worth the cost.
A lot of people like grade school arithmetic teachers. Because businesses cannot lose money perpetually, low prices keep crude in the ground … conservation by other means.
As the wells in the Bakken grow closer together, initial production rates are sliding. According to some sets of data, average first year well output climbed steadily from 2005 to a peak in mid-2010, then declined almost 25% over the following 12 months. With more wells tapping into the same resources, there is simply less oil pressure available to each well. And when initial well output starts to fall, an accelerating number of new wells must be brought online to sustain overall production volumes.Such is the heart of the pessimist argument: that sliding initial flow rates will tag-team with the Bakken’s high decline rates to mean that, no matter how many new wells are drilled, production will stagnate.
One thing to keep in mind is when oil-bearing rock is fractured, it is turned into gravel, the stones held apart by propants: sand or ceramic grains. Once rock is fractured, it cannot be fractured a second time. Fracking is ‘one and done’.
Of course, the real problems are on the consumption side, not the production. Consumption is waste, it does not and cannot pay for itself. What does the heavy lifting is debt and lots of it. We’ve had debt around for so long we’ve gotten used to it. What we are starting to realize is the monumental cost alongside the impossible debt dynamic. The debts are too large to repay only refinance with new debts. Meanwhile, costs including repayment obligations compound exponentially. We ‘fix’ debt problems by taking on new debts, falling deeper into a hole with each round of debt.
The outlines of our condition are becoming more defined, the clock is ticking … Numerian says (Economic Populist) HT Usman:
Even if another credit blow-out occurred, we all know how that would end – very badly, as in 2008 credit crisis all over again. Unfortunately, without another credit splurge the results are the same. When the credit stops flowing, income is hit hard, because most of the growth in income in the economy is produced by debt, and it is not organic growth that would result from a normal recovery generated through capital investment, wage and benefit increases, revenue advances, and expanded global trade. This is precisely what the Fed understands, and why it is expanding its balance sheet ceaselessly, and enabling the Congress and Administration to build up debt at the tune of a trillion dollars a year. All this credit is the lifeblood of the economy, allowing the government to make Social Security and Medicare/Medicaid payments, feed 48 million people through food stamps, fight wars in multiple hot spots around the world, pay interest on the debt to keep bondholders happy, and shift unemployment money to the states. The problem for the Fed is that the unraveling is already beginning. The stock market may be testing its highs, and 50 out of 50 economists may be anticipating a solid economic recovery, but without new sources of credit that is going to be impossible to achieve. Credit has already dried up in the real economy, which is why you hear so many retailers say “nobody has any money” …
“Nobody has any money …” should be familiar: What the chart can’t say is that the industrial world is impoverished by the high cost of crude in a vicious cycle.
When credit stops flowing, income is hit hard because ALL of the growth in income in the economy is produced by debt … without it there is no industry!
What we are experiencing are two interrelated phenomena: an energy shortage due to our wonderful economic ‘success’ over a period of 400 years and the consequences of exponential growth of loans needed to ‘buy’ this success..
Debt is taken on to capitalize industries and their customers. More debt is taken on later to fill the pockets of the industrialists and roll over the first rounds of debt. Finally, debt is taken on the service the previous rounds and nothing more, the economy is saturated with debt.
The first round of debt gains the industrialist tools to produce goods and provides customers with purchasing power. The second round gives the industrialist his fortune and repays the venture capitalist: during this round fewer tools are gained and less in the way of goods are produced. The third round pays the moneylenders’ interest and nothing more, customers and industries are bankrupted by their debts.which are unproductive. Eventually, the moneylenders also fail.
‘Moneylenders’ here must also include the central banks.
Our economy is in the third stage and has been here for awhile, perhaps since 1980 and the ‘Reagan Revolution’.
Added to this is the ongoing shortage of liquid fuels which results in higher prices which must be met with debt. The cost of new fuel rises past what customers can borrow using fuel waste … as collateral. Waste of the fuel does not provide an organic return so all returns must be borrowed adding to the demand for debt… during a period when productivity of debt is diminished.
More about central bank-n-market head-fakery and wishful thinking, (Naked Capitalism):
Is the Euro Crisis Over? By Robert Guttmann, Professor of Economics at Hofstra University and a visiting Professor at University of Paris, Nord. Cross posted from Triple Crisis.A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years.This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”
Here is conventional economic analysis that never gets around to mentioning energy.
– A strange calm has settled over Europe … following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro,
Draghi didn’t actually do anything, he talked about it.
– the market panic evaporated.
That’s an assumption. The more likely is credit strangulation eased a bit.
– This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed.
Not by a long shot, the crisis is the cost of energy and the inability of the Europeans to earn anything by wasting it.
– we can see that Ireland, Spain, Portugal or even Greece have been able to lower their current-account deficits substantially,
Automobile sales in these countries along with France have collapsed, petroleum use has significantly declined. Consequently, there is less fuel being imported by these countries. Keep in mind, their fuel use will decline to zero if they do not effect conservation measures. What is underway is not a rehearsal, it is the effects of entropy being felt along with diminishing supply of fuel overall. Fuel is being rationed, conservation by other means.
– renewed turmoil in the sovereign-bond markets will be just a matter of time. Most troubling in this context is the doom-loop dynamic of persistent fiscal austerity across the continent.
Withholding credit is a way to compel the export of European fuel consumption to credit issuers such as the US. Any fuel not burned in Italy or Spain is available to be burned in Los Angeles. America’s energy ‘surplus’ is by way of theft from Europe and elsewhere, not fracking. The problem with the professor is he is not cynical enough!
– This dialectic centers above all on the euro’s trade-adjusted exchange rate.
Not in the sense that the professor implies: the more deflation-priced euro gives those who hold it the means to buy fuel at a bit of a discount … and an incentive to keep the euro. Any replacement currency would be depreciated violently, there would be small likelihood of any petroleum exporter accepting any replacement currency other than d-marks.
– will undermine the competitiveness of the euro-zone’s economies,
The assumption is that countries like Greece or Portugal are industrial countries with factories filled with overpaid proletarian workers like China. Instead, they are senior centers filled with retirees. Peoples’ pensions are being looted, this is called ‘competitiveness’, stealing on a grand scale is what is showing up on the ‘stats’.
– But the euro-zone cannot afford this stop-go pattern of policy-making in the face of a systemic crisis. It will have to undertake far-reaching reform on several fronts beyond what Europe’s leading politicians have been willing to entertain.
Europe is being de-carred by pauperizing the populations. The necessary reform is for governments to take charge of this dynamic and decar the continent on purpose while sparing the citizens. Europe can stand to jettison its useless cars and the fuel waste these things represent. It is the waste that has undermined the European — and world — economies, not trivial real interest rate movements or currency exchange rates. These last are abstractions, petroleum waste is permanent: when the fuel is gone baby, it’s gone, forever.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 2, 2013
Surreality is when the top story in the New York Times is about King Cakes but the idea is to not scare the horses. Informing the readership in plain English of our ongoing unraveling might provoke uncertainty … then panic … leading to questions about why we endure so many stupid managers everywhere in the world. At the very least, the stock market — which is now near all-time highs — might decline. People might then in theory put off buying a new car or a bigger house or not take on bigger loans. Best to roll out the pastries and downplay the Israeli air strike in Syria and the widening war there or the bank nationalization in Netherlands (Washington Post):
Dutch state nationalizes bank and insurer SNS Reaal NV, injects 2 billion euros in capital (Associated Press)
AMSTERDAM — The Netherlands nationalized its fourth-largest bank on Friday, injecting €2 billion ($2.7 billion) to recapitalize SNS Reaal NV and head off any chance of a messy collapse that would threaten the country’s already fragile economy and financial system.
The total cost to the Dutch government will be at least €3.7 billion, Finance Minister Jeroen Dijsselbloem told a press conference. That’s almost certainly enough to ensure that the Netherlands’ budget deficit in 2013 will be higher than the 3 percent allowed under EU rules, unless the Dutch Cabinet — which has already taken a series of unpopular tax hikes and spending cuts — comes up with further austerity measures.
“This isn’t what we wanted,” Dijsselbloem said. But he added that, without the nationalization, SNS “would have gone irrevocably bankrupt,” with potentially dire consequences.
Ah yes, dire consequences: secured (large) lenders to the bank would have lost some money. Much better for the ordinary citizens of Netherlands to take the billions in losses. The citizens haven’t even earned the money yet, they will never know what it is they have lost! Here is the latest innovative technology in action: the finance cost-morphing time machine. The establishment endlessly promises a high-tech utopia tomorrow. What it actually delivers is invisible public bankruptcy: money that is not earned tomorrow because it was diverted to a tycoon … yesterday.
High-tech time machine in operation, Pableaux Johnson (NYTimes)
Depositors and senior creditors (of SNS) won’t lose any money in the nationalization, the Finance Ministry said.
The closest the Dutch get to actual restructuring …
SNS shareholders will be wiped out, along with some junior creditors, including the state itself. SNS owed the government €800 million, including interest, left over from a 2008 bailout. Other junior creditors will lose around €1 billion, the ministry said. The three biggest Dutch banks, ING Groep NV, ABN Amro, and Rabobank will contribute a combined €1 billion to help save SNS — they are required to do so as under the same law by which the state guarantees their retail deposits. The nationalization shows the damage the crisis has wrought on the oversize Dutch financial sector and means that three of the five biggest banks in the country have now come under state control since the start of the crisis: ABN Amro was merged with the former Fortis and both were nationalized back in 2008. In addition, ING received several bailouts which have still not been fully repaid. Only Rabobank, a banking cooperative, has not yet needed state aid.
Big-bank shutdowns are historical indicators of greater finance system failures-to-come. This dynamic has been in force as recently as 2007 with the collapse of el cheap-o mortgage origination firms and two of Bear-Stearns’ hedge funds. The entire mortgage industry, shadow-banking and then Bear-Stearns itself all fell into the pit shortly thereafter. During the entire period there was a soaring stock market and soothing bromides from the establishment …
Attention must be paid to stumbling banks while the happy talk about ‘growth’ and ‘recovery’ is ignored.
The propping up of key-men works for modest periods only. Cures or resolutions must be put in the place of the props … since 1980 or so nothing has been done other than to entrench the status quo, expand credit and inflate serial asset price ‘bubbles’. Finance has not evolved, it has become an unchanging dead weight, a gigantic millstone around the corpse of modernity … ossified finance has become the final manifestation of ‘progress’. To support banks and the industrial welfare queens there are cheap loans offered by central banks, the laundering of assets, bailouts of businesses belonging to ‘special friends’ (owners) of corrupt government officials. All of this is accompanied by loud public proclamations of better times that are sure to come, tomorrow.
It is always tomorrow … when the positive outcomes are certain to emerge! As a fair exchange businessmen will poison the atmosphere and the ocean so that progress can take place. Meanwhile the key-men multiply like rabbits while the props diminish or crack under the strain.
There are banks and bank-like entities faltering in China, in Spain, as well as Italy, where the Banca Monte dei Paschi di Siena SpA is underwater due to self-dealing and looks ripe for failure. All of these situations have the potential to upend the economic applecart. Of course, there are the parallel political scandals in all of these countries including China. One must not overlook the Greek and Cyprus problems … or the foreign exchange ‘war’ that is underway between the US, the eurozone, China, Japan and Korea.
The term ‘Dutch’ can be replaced with the name of just about any country …
‘France is totally bankrupt’: French jobs minister Michel Sapin embarrasses Francois Hollande with shocking statement on state of the country’s economy …
Spain is shocked … shocked! The economy of France is a Ponzi scheme where the funds/capital of other countries is taken in exchange for empty promises … gambling and fashion have bankrupted the country, there is nothing left for France but to become Greece.
Figure 1: Charts of car sales here and there from the New York Times: sales nose-dive in Europe. Sales are dependent upon the constant addition of credit-plus central bank moral hazard … as these offer diminished returns there is nothing to support sales
Industrial production figures exclude construction, and reflect the change in each month from the average of 2006 figures. Car sales figures exclude light trucks, and are based on sales volumes in the United States and on registrations of new cars in Europe and Japan. They reflect the total for each 12-month period compared with the 2006 total. (Sources: Bloomberg, Haver Analytics, Ward’s Automotive, European Automobile Manufacturers’ Association)
Autos and other capital-extinguishing goods are collateral for our money, they are the tangible ‘products’ for- and by which we devour our pitiful remnants of real capital … We can continue to destroy capital only if we lie to ourselves about its nature. Currently, we insist that capital is money instead of resources. This is false: money is loans and nothing more. When capital is loans, there are insignificant consequences to its destruction. Old loans are easily replaced with new ones. Only when capital is something that must be dug out of the ground with great effort … does its fleeting existence within our state of affairs become an economic embarrassment … then an indictment.
Meanwhile, finance is losing its ability to paint capital destruction as ‘productive-appearing’ and to thereby prop it up. Here is the greatest key-man failure! The more effort expended to keep the current regime of capital destruction ‘growing’ the faster the costs accumulate … capital is extinguished with one hand while greater claims against the same capital are made with the other.
Figure 2: What sort of un-balanced sheet is this? Here are diminished returns made graphic … the declining productivity of US debt, as $300+ billion borrowed dollars ‘buys’ a $5 billion dollar decline in GDP (by Zero Hedge). This decline can be ignored as long as … the stock market keeps rising! (click on the image to see it in its entirety)
Meanwhile, from the ‘Let The Eat King Cake’ department … in China, (Patrick Chovanek):
What Causes Revolutions? A surprising number of people in China have been writing and talking about “revolution”. First came word, in November, that China’s new leaders have been advising their colleagues to read Alexis de Tocqueville’s classic book on the French Revolution, L’Ancien Régime et la Révolution (The Old Regime and the Revolution), which subsequently has shot to the top of China’s best seller lists. Just this past week, Chinese scholar Zhao Dinxing, a sociology professor at the University of Chicago, felt the need to publish an article (in Chinese) laying out the reasons China won’t have a revolution (you can read an English summary here). Minxin Pei, on the other hand, thinks it will.
This is like the German high command during the Barbarossa winter of 1941 re-reading Armand De Caulaincourt’s classic account of Napoleon’s doomed 1812 Russian campaign. Sentries that have frozen to death tend to focus the mind: so do the endless rounds of Chinese outrages and miscalculations. Doubts about China’s enterprise are growing … in China, where such doubts matter most.
What would a China revolution look like? Pundits offer a political story about the Communist Party but the problems are economic: the failure of Chinese business ‘success’. Any revolution would certainly take some form of public rejection of automobiles … otherwise there would be no real revolution at all. Such a radical change is unlikely at the moment … The Chinese love their cars … the passage of time and the ongoing bankruptcy of China will do the heavy lifting. The Revolution will come after China becomes Greece.
What must be watched are the banks which are saddled with US$ trillions of bad loans, mostly for ‘capital investment’ which in this case means redundant factories, showy-but-useless public infrastructure and property developments. None of these things can or do pay for themselves, they require endless rounds of new loans … the result being pyramiding debts. Amazingly, it has taken the Chinese only 20 years to reach the profound level of insolvency that has taken the West 400 years to achieve. It is hard to see the Chinese expanding their particular form of capital investment Ponzi scheme … and the accompanying smog … for another 20 years.
The Chinese are not the only folks struggling with air quality: the smog is worse in India … for many of the same reasons as China. The smog is also bad in Athens … Greeks are putting heating oil into their cars and heating their houses with stolen wood.
Figure 3: The chart looks like the Yen has weakened in lockstep with both the Euro and the Dollar. But when you look at the scale, you see that the Yen has lost 22% against the Euro, while it has only given up 13% versus the dollar. From this you might conclude that the logical next step is for the USDYEN to “catch up” to to what has happened with the EURYEN. This thinking takes you in the direction of USDYEN 100. But … the FX markets don’t work like that. If USDYEN moved to 100 while the EURYEN remained “stable” around 122, then the EURUSD rate HAS to fall to 1.22 (-9%).
Sorry, that’s not in the cards.
Depreciation from ¥80 to the dollar to ¥100 means a ‘Great Leap Upward’ in Japanese fuel prices because the country has no native sources of petroleum or other fuels. Japan beggars itself instead of its neighbors: whatever the country hopes to earn by exports is offset by the increased cost of the fuel it must import. At the same time, dollar-fuel prices are increasing because of ‘growth’ propaganda, moral hazard for petroleum ‘investors’ as well as threats of war in petroleum producing regions. With depreciation and higher producer costs the Japanese driver can look forward to paying a deflationary 30% or greater premium for fuel compared to the rest of the world. Certainly, here is conservation by other means!
The foregoing omits systemic risk to Japanese banking and finance which cannot be easily measured. The smallest error can have shattering consequences. For example, the Bank of Japan central bank can be perceived by the marketplace to be making unsecured loans … that is, loans in excess of collateral that it takes on as security. If this is so, the central bank is instantly insolvent … as are other Japanese banks and for the same reason: bad loans and excess leverage! Keep in mind, the only reason why a central bank would think of offering unsecured loans is if the country’s commercial banks are insolvent and unable to lend. The outcome is no effective lender of last resort to guarantee bank liabilities: a run occurs as depositors hustle to remove funds from a defunct system. In this light the recent months’ acquisitions of overseas companies by Japanese businesses is ominous.
There is also the issue whether Middle Eastern suppliers will accept a strongly depreciated yen or if they will demand another form or payment (dollars). The Japanese are playing with fire, looking for an easy, conventional approach that cannot possibly work as intended. Whatever the country attempts there are unintended consequences … which often cannot be discerned until after the attempts are made and it is too late to change course.
What the establishment in Japan fails to understand is the effort to accelerate consumption — either within the country or by trading partners — offers sharply diminished returns. This is because irretrievable capital is consumed instead of rapidly multiplying ‘money’. Because of consumption over the course of decades real capital has become more costly relative to the amounts that can be lent against the consumption process. When returns become negative … the country in question instantly enjoys a Greek-like national bankruptcy.
The bankruptcy is permanent, by the way … the only way for a Greece to become prosperous again is for another country to become more bankrupt than Greece is now.
This net-negative process may indeed be underway in Japan as what it exports must be imported first then subjected to entropy-creating industrial-commercial processes. Every process exacts a thermodynamic levy or ‘tax’, certainly export goods cost Japan more in energy losses than what Japan imports.
A country can make water flow uphill by pushing costs onto unwitting trading partners by way of foreign exchange and leverage against that partner’s account. Japan’s trade surplus — which has subsidized Japan for decades — is nothing more than faulty bookkeeping and overseas loans. Japan has pushed its energy costs onto its customers: the attempt at depreciation is an effort to restart the pushing process.
Meanwhile, all the other consuming countries in the world desire to depreciate their own currencies as well! More of Japan’s customers are broke, they cannot afford to subsidize Japan’s waste any more … or their own.
Certainly, there must be intelligent, perceptive analysts in France, America, China and Japan … however the power of habit and wishful thinking is very strong and the current lesson of Greece being played out on the public stage in real time … is ignored.
While countries beggar their trading partners, many of the same countries are bent on outright theft. War intensifies in the Middle East, in Africa, it stirs off the coast of revolutionary China … every place there is oil or oil consumption that can be ‘exported’ to countries such as the United States. The outcome is increased war premium (Bloomberg):
|Crude Oil (WTI)||USD/bbl.||97.97||+0.48||+0.49%||Mar 13||11:45:10|
|Crude Oil (Brent)||USD/bbl.||116.96||+1.42||+1.23%||Mar 13||11:45:16|
|RBOB Gasoline||USd/gal.||302.58||+2.21||+0.73%||Mar 13||17:15:00|
King cake is a New Orleans tradition served on Fat Tuesday before Mardi Gras. King cake by Sara, who clearly knows how to bake a good one! Any recipe will do as long as it includes sugar. A small plastic doll stuck into the cake after removal from the oven. Note: there are no such things as ‘clashing colors’ in New Orleans …
The survivors of the current state of affairs are those small businesses that do not require credit and can obtain organic returns. As for the others, let them eat king cake.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on January 23, 2013
The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).
Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.
A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.
What’s there not to like?
Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!
A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:
– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.
– The gross amount of incremental credit available is the amount
that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.
– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.
A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.
Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.
Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.
There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!
There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …
The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.
From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!
Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.
– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.
– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.
A few more things to keep in mind as we descend into the net-energy rat hole:
– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.
– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):
The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.
The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.
– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.
– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.
– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.
– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.
– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.
– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.
EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).
Off the keyboard of Steve from Virginia
Published on Economic Undertow on January 14, 2013
How Hwee Young, EPA-Al Jazeera, what the end of the World looks like: midday pollution in Beijing … the Chinese accept this as an integral component of ‘progress’.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
On Sunday, the monitoring center released data showing particulate matter measuring less than 2.5 micrometers in diameter (PM 2.5), had reached more than 600 micrograms per square meter at some monitoring stations in Beijing and was as high as 900 on Saturday. According to the World Health Organisation, the recommended daily level for PM 2.5 is 20, and the high levels in Beijing has been identified as a major cause of asthma and respiratory diseases.Air quality in Beijing showed airborne particles with a diameter small enough to deeply penetrate the lungs at a reading of 456 micrograms per cubic meter, the warning center said.The quality is considered good when the figure stands at less than 100, but a reading shown on the website of the US embassy in the city was above 800.
Beijing only measures up to a maximum value of 500, with the US embassy tweeting that their own readings were “beyond index” (“Crazy bad!”).
Beijing is located within the Chinese rust belt. The districts surrounding the city are filled with coal-burning heavy industries … Citizens are placated by the infinitesimal likelihood that they themselves might become tycoons. To tend the tiny flame of possibility the citizens endure every abuse. A number the Chinese need to keep in mind is 12,000 … Londoners who perished as a result of a similar coal-driven smog event that occurred in the UK from December 4th onward, in 1952 (pdf alert).
No telling how bad Chinese pollution will become as managers frantically aim to increase output and boost precious GDP. As usual, nothing will be done until there are dogs gnawing corpses in the streets …
No telling the effect of more Chinese pollution on the world’s climate … the prospect of more pollution is not something to look forward to. It is likely the Chinese will endure more extreme weather … more GDP … more pollution … more floods and blizzards … more dogs, in a vicious cycle.
The Board on Population Health and Public Health Practice (PHP) and the Committee on Population (CPOP) has issued a lengthy report on the comparative fatality rates for different countries broken down by cause. Wolf Richter has filtered the report so as to bring forth information. From ‘Part One’ of his analysis:
How Americans Stack Up In Dying From Violence, War, Suicide, And Accidents … the first thing I did was check out the category “deaths from intentional injuries” and its three subcategories, “self-inflicted injuries,” “war,” and “violence.” Grisly statistics, all of them.As expected, the US has the most violence among the 17 “peer” countries in the study with 6.5 deaths per 100,000. Almost three times the rate of Finland, the next most violent country in the group with 2.2 deaths per 100,000 people, and over 15 times the rate of Japan with 0.43 deaths per 100,000 people. The third most violent country, Canada (1.6), is practically a bastion of safety for those Americans who make it across the border.The apparently permanent element of US foreign policy, “war,” killed 0.44 Americans per 100,000 in 2008. It killed a lot fewer people in the Netherlands, Norway, Portugal, and France, and none in the remaining peer countries.
Deaths from self-inflicted injuries are an immense cultural tragedy in Japan—and its literature is replete with it. But the Japanese rate of 19.8 suicides per 100,000 people is not that much worse than that of the Finns (17.7). Americans are in the middle of the pack (10.3). The least suicidal are the Italians (4.5).
Combine the deaths from all intentional injuries—violence, war, and suicide—and the leader of the pack is … drumroll … Japan! With 20.2 deaths per 100,000 it is a hair deadlier than Finland (19.9), somewhat deadlier than the US in third place (17.3), but 3.6 times deadlier than the country of the Mafia, Italy, where people are least likely to die of intentional injuries (5.6).
Humans are violent, machines make violence more efficient while denaturing it at the same time. Denature means altering fundamental characteristics, ordinarily to render unpalatable. Industry denatures violence into an anodyne ‘process’ that runs quietly in the background, outside of control. By this process violence becomes unremarkable, ordinary. Industry and its fetishes alter the style or ‘fashion’ of violence, giving it respectability then promoting its usefulness.
Managers strive to increase efficiencies … to inform company narratives so as to gain- or maintain credit flows … there are unintended consequences. Non-natural death can be considered a form of industrial pollution … Alternatively: accidents, disease, war and other forms of violence are all waste products of the industrial system. Violence-waste is a component of an efficiency-limiting negative feedback loop, a kind of cost. Waste increases along with efficiencies until the system modifies itself or is overwhelmed.
The managers demand others absorb the waste … or ‘adjust themselves’ to it. This is what happened after Chernobyl, is happening post-Fukushima, is happening now in Beijing, what has taken place after millions of car crashes and fatalities … what will happen after Newtown. The costs are agonizing … but not yet high enough to cause the system to modify itself or blow up.
Finance is subject to the same dynamic. Corruption and theft are the waste products of debt-money and finance speculation. The waste is denatured … in order to permit greater efficiencies and ‘finance innovation’. For the system to behave otherwise … to corral corrupt managers and reform the system … is more threatening than breakdown.
In this way, all of our human problems are larger or smaller versions of the same problem. As with fractals, our waste-cost dilemma scales. What this means is contriving strategies to cope with problems at one level would also produce workable strategies at other levels at the same time. This is something to think about when analysts insist that ‘this or that problem cannot be solved’ (except to give bankers more of the citizens’ money). Our problems aren’t irremediable predicaments. Rather, solutions are unpleasant to business tycoons who would be required to sacrifice for others than themselves.
Even if you’re white, insured, educated, or in upper-income groups and live a healthy lifestyle, you’re still getting the short end of the stick … Americans under fifty are paying the price. We don’t know exactly why. Even the panel of experts that authored the massive report, U.S. Health in International Perspective: Shorter Lives, Poorer Health, admits that it can’t entirely pinpoint the reasons. But we do know how Americans under fifty, particularly males, are paying the price: with their lives.The US health disadvantage, as the report calls it, is more prevalent among “socioeconomically disadvantaged groups.” But even if you’re “white, insured, college-educated, or in upper-income groups” and live a healthy lifestyle, you’re less likely to make it to 50 than your counterparts in the other 16 wealthy “peer” countries of the study …The report, based on mortality studies for the years through 2008, carves out three categories, “Deaths from Noncommunicable Diseases,” “Deaths from Communicable, Maternal, Perinatal, Nutritional Conditions,” and “Deaths from Injuries.”
“Deaths from Communicable, Maternal, Perinatal, Nutritional Conditions” is divided into dozens of categories and subcategories, and every country has its own nightmare. In Portugal for example, 7.4 people per 100,000 die of HIV/AIDS, more than double the rate of the country next in line, the US (3.4), and 246 times the rate of Japan (0.03).
“Something fundamental is going wrong,” lamented Dr. Steven Woolf, who chaired the panel. “This is not the product of a particular administration or political party. Something at the core is causing the U.S. to slip behind these other high-income countries. And it’s getting worse.”
The panel tried to nail down the culprits: a health-care system that leaves millions of people uninsured, the highest rate of poverty, education, eating habits, socioeconomic and behavioral differences, cities built for cars not pedestrians…. But it determined that these reasons cannot adequately explain the differences—because even wealthy, educated, insured whites with healthy lifestyles are getting the short end of the stick.
Numbers lie, so do reporting agencies, particularly if the numbers make bureaucrats look bad. Malnutrition will not appear in statistics from Greece, Spain and Portugal. The 1,000,000+ radiation deaths over the next 20 years are not going to show up in Japanese databases … If spent fuel pool in Fukushima Daiichi reactor number four collapses a large part of the country will receive lethal doses of radiation … any deaths that result will not be tallied. Keep in mind there are only 128 million Japanese so there is an upper limit to the body count.
Americans die like rats because we live like rats: the infernal car business has turned what was once a nice country into an ironic, Beelzebub-ish hell hole. To live in the US of A is to camp out in a cardboard McBox under a freeway overpass. To cope, a large segment of the population continually self-medicates: peeps abuse prescription drugs, over-consume alcohol, refine/manufacture street drugs like crack, crank, PCP and meth, import cocaine and heroin. Shifting to pot puts the medicant into prison. All this is ‘Life-enhancing’ … right?
Add to this is ordinary stress … the constant fear-mongering which has become the thump-and-drag of US advertising- and political business, the effects of pollution and radiation, the toxic chemicals in food and water, pharmaceutical misdeeds and medical incompetence … the breakdown of families and supportive communities … isolation and withdrawal into ‘self’ and entertainments. Humans are not adapted to this, modernity is ‘too new’ … there hasn’t been enough time for evolutionary process to work nor is there likely to be.
The Council report does not list ‘death by ignorance and greed’ … the two categories are all-inclusive.Our incredible consumer economy with all its various cogs … drives people insane. We’ve gained a lot of worthless diversions that have big costs that are shoved off onto those least able to bear them. Consumption is layered over with a fetishist obsession with images associated with militarism … not militarism itself. We’re cowards addicted to death porn.
We aren’t in the hands of evil men … we are the evil men and we cum all over ourselves in our ‘righteousness’ and ‘progress’.
The unraveling is underway, the proposed solutions are cosmetic, (Center for American Progress):
Preventing Gun Violence in Our Nation Neera Tanden, Winnie Stachelberg, Arkadi Gerney, and Danielle BaussanAfter last month’s senseless shooting at Sandy Hook Elementary School in Newtown, Connecticut—in which 20 children and 6 adults were shot and killed—we need to immediately address the gaps in our current law that enable mass shootings, as well as the everyday shootings that on average claim the lives of 33 Americans each day.In this issue brief we recommend 13 legislative proposals and executive actions to prevent gun violence in our nation. These actions are targeted in the following three key areas:
– Better background checks
– Taking military-grade weapons off the streets and out of criminals’ hands
– Better data, better coordination, and better enforcement …
It’s most likely that the ‘modernized date (gathering) systems’ … would be used to snoop on Occupy Wall Street- and anti-nuclear activists, persecute organic farmers, harass and infiltrate climate groups … that is what ‘modernize’ means in the 21st century. Controlling firearm violence will be difficult and costly. There are no easy ‘user pays’ solutions. Keep in mind, firearm manufacturing is Big Business. The imperative is to sell products, it is the same for all industries at all levels. Selling firearms is a cycle: the first round of sales justifies successive sales of ‘better quality’ materiel so that the buyers can maintain a (illusory) qualitative advantage. This requires additional rounds of sales. The enterprise is self-perpetuating as long as it can be fed money. For example, sales of military goods are a way to direct funds sent to oil producers back to the United States.
Military sales are another ‘nothing for something’ trade. If the material is not used it is useless in a practical sense. If it is used it is likely damaged or destroyed and must be replaced.
The way to sell firearms is to sell fear first. The way to ‘un-sell’ firearms is to stifle the fear and make firearms unfashionable:
– End the war on drugs and de-fund crime organizations thereby. Prosecute high-level criminals such as Jon Corzine. The issue is lawlessness and the perceived (real) breakdown in the social order. Lawlessness starts at the top. Prominent figures in and out of government and business need to be held to account!
– Treat gun violence as a public health issue. Expand the concept to include all forms of mental illness and suicide prevention. If the current healthcare infrastructure cannot manage the task (it can’t (it is hopelessly corrupt) a parallel provider system needs to be installed …even if it is hated ‘single payer’.
If the government or lobbyists aren’t willing to extend themselves in this way they should simply shut up.
– Increase employment by creating non-industrial jobs … ! A 21st century Civilian Conservation Corps would cost little, employ many and money spent would flow into the economy rather than to banks’ reserve accounts or to offshore tax havens. Employment would reduce poverty and the incentive to commit crimes. Conservation is capital husbandry, an exotic concept that needs to be revisited in a period of runaway insolvency.
– Improve veteran mental health services including in-service care. How the govt treats its veterans is a national disgrace. Lurking in the background are the endless, pointless wars-for-profit. There is a connection between the wars and turmoil across the country: one is the cause of the other.
– Close Department of Homeland Security (DHS) and shift investigative services to FBI. End the ‘terror war’. Paranoia feeds violence, we are consumed by it.
– Crack down on private armies of all kinds: contractors, paramilitaries, ‘patriot’ and other neo-nazi & similar hate groups.
– Hold firearm manufacturers liable for damages.
– Further down the road, with less fear and more confidence steps can be taken such as to nationalize the entire defense industry complex and repeal the 2d Amendment … the same way the US repealed the 18th Amendment. By doing so the baleful consequences of these industries’ influence would be reduced.
Figure 1: How little time in one chart (click on for big), Brent crude amalgamated futures contracts (from TFC Charts). The top line represents the high price of crude oil beyond which the economy contracts. The bottom line represents the price required by the so-called ‘producer’ to bring each barrel of crude oil to the marketplace. This price relentlessly increases because crude oil becomes more difficult to extract with each day … and every 90 million barrels removed then wasted.
By the end of the year the price that triggers deflation will decline to less than $120 per barrel while the price that drillers will need to stay in business will exceed $100 per barrel. The endgame is when the price of crude cannot be met by wasting the fuel or borrowing against the wasting process. We’re almost there …
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 29, 2012
Discuss this article at the Epicurean Delights Table inside the Diner
The universe is a monstrous thing populated by demons, where nothing perishes but everything is perpetually diminished … virtues are deceptions … honesty is a paradox … nothing is what it seems: the human enterprise labors tirelessly at its own extinction in an ironic attempt to ‘improve’ itself. (All of) this is the manifestation of the universe’s malevolent design. Our endeavors are a part of the greater whole, most of which we cannot see or hope to understand. Individuals are blind and dumb … our wit would save us but it vanishes when we need it the most …
America is clinically depressed … the holidays make people crazy. The world is crazy and sad: it is afraid, the way for humans to manage fear has always been to lie to themselves … this is what courage is, a peculiar kind of lie.
The human race is confronted with gigantic resource imbalances and excess consumption: the public ignores the problem or denies it, preferring to watch television. We don’t know how to discuss it so we don’t try:
‘Fairytale of New York’ by Jeremy Finer and Shane MacGowan
It was Christmas eve babe
In the drunk tank
An old man said to me: won’t see another one
And then he sang a song
The rare Old Mountain Dew
Honesty is found in a song imagining two pieces of human wreckage wheezing through Christmas in a drunk tank …
I turned my face away and dreamed about you.
Got on a lucky one
Came in eighteen to one …
Nobody earns a living, everyone gambles, just like on Wall Street …
I´ve got a feeling
This year´s for me and you.
So happy Christmas,
I love you baby
I can see a better time
Where all our dreams come true.
Enter the ad men …
They got cars big as bars
They got rivers of gold …
Don’t they always? Here comes the truth …
But the wind goes right through you
It´s no place for the old …
… they end up in the tank!
When you first took my hand on a cold Christmas eve
You promised me Broadway was waiting for me
You were handsome — you were pretty –
Queen of New York City when the band finished playing they yelled out for more,
Sinatra was swinging all the drunks they were singing.
We kissed on a corner,
Then danced through the night. And the boys from the NYPD choir were singing Galway Bay
And the bells were ringing out for Christmas day.
So it goes, the improbable chemical-fueled combination of ecstasy and infatuation that lasts for an instant then vanishes forever … as rare in iron-bound Mordor as a diamond necklace in the sewer. Humans turn their entire lives for a chance at these instants, these unforeseen moments … gambling everything in the chase or in fruitless attempts to buy ecstasy in a store. By this process the world is destroyed.
You´re a bum you´re a punk,
– You´re an old slut on junk
Lying there almost dead on a drip in that bed …
– You scumbag you maggot
You cheap lousy faggot
Happy Christmas your arse I pray god it´s our last.
We can’t discuss our self-inflicted misery but we can write songs about it. How the message is delivered matters more than what it is. Shane MacGowan should write about the unraveling of the world, about climate change and Peak Oil, about financial collapse … the rest of us would sing along in bars on St. Patrick’s Day …
John Hussman discusses interest rates, debts and the insanity of it all:
Since 2009, both the stock market and the broad U.S. economy have been dependent on perpetual support from massive federal deficits and unprecedented money creation. Meanwhile, Wall Street is content to ignore the extent of this support, and looks on every movement of the economy as a sign of intrinsic health – which is a lot like admiring the graceful flight of a dead parrot swinging by a string from the ceiling fan.
Our economy is fundamentally string!
A quick look at how the deleveraging of the U.S. economy is going – total credit market debt has now reached $55 trillion, including government, corporate and household sectors, representing 3.5 times GDP (down only slightly from the 3.8 multiple observed at the recession trough of early 2009). To put this in perspective, every 100 basis point change in interest rates on maturing and refinanced debt now implies a redistribution of income between borrowers and lenders on the order of $500 billion annually. The Fed has worked tirelessly to ensure that borrowing is as cheap as possible – the risk being that any departure from that would give every interest rate change of one percent an annual economic effect the same size as the “fiscal cliff.”
Figure 1: total government and private sector debt in credit market @ $55 trillion — this amount does not include off-balance sheet credit, shadow banking or forex/currency claims which are an order of magnitude greater. The Fed offers a willingness to push down credit costs … to do so it must be prepared to lend indefinitely.
This is more madness, the Fed works against itself!
Optimally: the private sector offers unsecured loans to firms as a matter of faith. The expectation is for general increase in the amount of credit/economic growth and serviceable cash flow. Growth’s ‘utility’ is the ability of the firms to borrow over time and to use these loans to refinance prior loans as they become due. Unsecured loans exceed the worth of collateral by ten-times or (much) more. The central bank does little but manage the flows of currency and foreign exchange.
Currently: the private sector has lent stupendous amounts to firms, this represents most of the blue line in the chart. Collateral is worthless or worth very little. Leverage is now 100x or more. The borrowers are unable repay because they do not earn anything and never have. The lenders are over-leveraged/insolvent and borrowers are unable to borrow any longer. There is no more growth, it was all fake anyway.
Remedy: the central bank lends to private sector banks, taking their impaired collateral onto its own balance sheet at ‘face price’ which provides the banks a temporary reprieve from insolvency. The bank bailout is done with a straight face ‘to end unemployment’! There is no economic growth because there is no credit expansion … central banks cannot expand the credit base by offering unsecured loans. This remedy has been applied in Japan since 1990 and has failed. The more central bank credit is offered, the less private sector credit … the central banks’ actions are self-defeating. The Fed lends to push down rates: the lowering of rates reduces private sector profits as well as incentives to lend! As with the petroleum biz … rates that are profitable to the bankers are unaffordable to borrowers.
The ‘More Stupid’ remedy: the central bank targets nominal GDP (NGDP), lending in excess of collateral or accepting fraudulent collateral as security for loans in an attempt to create credit expansion by itself.
Outcome of the ‘More Stupid’ remedy: the offending central bank becomes instantly insolvent just like all the private sector lenders and for the same reason. There is a ‘run on the banks’ as depositors remove deposits: currency is the only real collateral for the Mount Everest of claims laid against it.
Insanity is contagious: watch all the central banks attempt nominal GDP targeting at the same time! No central banker wants to be blamed for a recession: all the bankers are easing as much as possible.
The Federal Reserve under Bernanke is like a bad doctor facing a patient with a broken femur. Being both unable and unwilling to restructure the broken bone, he announces that he will keep shoving aspirin down the patient’s throat until the bone heals. Despite virtually no relationship between the injury and the treatment, that femur might eventually heal enough on its own to allow the patient to hobble out of bed. But by then, the patient will need to be treated for liver failure. What’s even more bizarre is that everybody quietly knows this, but as he shoves another handful of aspirin down the patient’s throat, nobody proposes restructuring the broken bone, and they instead stand around helplessly saying “well, ya gotta do somethin’ don’t ya?” I continue to believe that most of the economic impact of policy changes in the past few years can be traced to a) the abandonment of accounting transparency by changing FASB rules, which allowed banks to suspend mark-to-market accounting and effectively relieved them of capital requirements, and; b) the U.S. guarantee of bad mortgage debt extended by Fannie and Freddie. Both of those policy changes will impose enormous costs over the long-term, but they did allow the financial system to abandon the immediate need to actually restructure bad debts.
He leaves out energy costs, but no matter. The central banks have to cease lending at some point … it’s pointless … the patient is dead … As Hussman suggests, the only workable remedy is for the private sector to delever/write off bad loans.
At the same time, perhaps the establishment can begin allow those at the bottom of the economic food chain to earn. This requires less credit not more. Credit allows those with access to it to pretend to outperform those without … who are consequently exposed to ruinous competition. By borrowing, the government competes with its own citizens: by doing so it gives cause to those who would purposefully become dependent upon the government and thereby destroy it …
Speaking of energy, from the New York Times, Alan Riley counts his natural gas chickens right now!
The shale energy revolution is likely to shift the tectonic plates of global power in ways that are largely beneficial to the West and reinforce U.S. power and influence during the first half of this century. Yet most public discussion of shale’s potential either focuses on the alleged environmental dangers of frakking or on how shale will affect the market price of natural gas. Both discussions blind policy makers to the true scale of the shale revolution. The real impact stems from its effect on the oil market. Shale gas offers the means to vastly increase the supply of fossil fuels for transportation, which will cut into the rising demand for oil — fueled in part by China’s economic growth — that has dominated energy policy making over the last decade.There are two major factors in play here. First, the same shale extraction technology of horizontal drilling and hydraulic fracturing can be employed whether the rocks are oil-bearing or gas-bearing. We have already seen over half a million barrels of oil a day flowing from the Bakken field in North Dakota. The recent Harvard-based Belfer Center report — “Oil: The Next Revolution” — suggests that shale oil could be providing America with as much as 6 million barrels a day by 2020. The United States imported only 11 million barrels of crude oil a day in 2011. Given the potential for offshore and conventional domestic oil production, this would suggest that by 2020 America could be near energy independence in oil.
Then again, perhaps not … Maugeri’s report and others- similar have been holed below the waterline in the NY Times and elsewhere. What isn’t discussed is how broke Americans are to pay for the extra billions of barrels of frakked crude. It sez here — declining real wages — they can’t.
Figure 2: Wages have fallen in real terms for over fifty years! More costly fuel against declining wages = unaffordable. Credit flows toward the fuel extraction- and finance industries away from workers, who cannot buy products … houses, automobiles, service ‘goods’ … or the fuel needed to run them. As business operating margins shrink and the bosses take more for themselves worker pay falls further, impacting sales in a vicious cycle.
As an expedient, the government borrows in the workers’ place. Because the workers are unproductive in the sense they cannot- and will not earn, the government must borrow exponentially greater amounts, and do so indefinitely … None of the energy promoters are able to explain how energy ‘production’ without customers is supposed to work.
The second factor is the potential to use natural gas for transportation. Some analysts suggest that this will only be a realistic prospect for fleet and long-haul road transportation. But they are overlooking the immense advantage that natural gas has as a transportation fuel in America and Europe, which have both developed a natural gas infrastructure in urban areas that takes piped natural gas into homes, offices and supermarkets. Once gas is cheap and widely available, it is possible to consider dealing with the “last mile” problem of providing home refueling kits so consumers can fill up natural-gas powered cars in their own garages.
Riley is a professor of energy law at The City Law School at City University London. Riley sees gas fueling the cars in the immediate future … despite uncertainties about the gas supply. Meanwhile, there is no sign of a generalized shift by the auto industry toward producing natural gas powered vehicles or the means to adapt the current fleet to natural gas use. With more than 270 million vehicles in US service alone, such a switch-over would be very costly and time consuming.
Meanwhile, there are questions about how much gas will be available over time. If fuel is affordable, there are insufficient returns for drillers. A recent New York Times article calls the natural gas frakking enterprise a “Ponzi Scheme”. Drillers cannot earn by selling fuel, they must borrow from Wall Street.
China has even greater incentives to develop its shale gas resources. According to the U.S. Energy Department’s Energy Information Administration, the country’s recoverable resources are larger than those of the United States at 36 trillion cubic meters. The main geostrategic reason for Beijing to develop shale gas for transportation is that the U.S. Navy controls the Pacific and most Chinese oil arrives by tanker. Large scale use of natural gas for transportation would protect China from much of the effect of a U.S. blockade.
It is good to learn from the Times the US is planning to blockade China … The only remedy that will actually work is to get cars off the road. They cost too much. One way or the other the cars are gone, so are the roads. Once gone we will discover we really didn’t need them, that they ruined our lives, instead.
Figure 3, from BP’s 2010 World Energy Outlook with data from the International Energy Agency: the ‘Blue Triangle of Death’, oil fields — presumably large, conventional deposits — that have not been discovered that are needed to make up for declines elsewhere. The shortfall indicated here is about 30 million barrels per day by 2035.
Figure 4, here is the Mother of All Oil Shortfall Graphs by EIA’s Glen Sweetnam (2009) by way of Kurt Cobb. He points out that any gains from tight oil formations will be overtaken by ongoing declines in conventional fields. Sweetnam calls for 40+ million barrel shortfall by 2030.
Figure 5: Petrobras in 2010 calculated a man-sized shortfall in production of sixty to seventy million barrels per day — or more — by 2030! The marginal increases from frakking and even Iraq will not change the outcome significantly. Says Cobb:
… many people will say that we already have a large new resource of tight oil (often mistakenly referred to as shale oil) which can be extracted through hydraulic fracturing or fracking. But even if the optimists are correct — and there can be no guarantee that they will be — this source of oil will only add 3 to 4 million barrels of daily production. What Sweetnam’s chart tells us is that we must find and bring into production the equivalent of five new Saudi Arabias between now and 2030 in order to meet expected demand even if the volume of tight oil reaches its maximum projected output.
Maybe Shane MacGowan can write a song …
“Kelly’s Last Stand” … about delusional central bankers, government officials and fracking shills looking for a miracle.
I could have been someone
– Well so could anyone
You took my dreams from me
When I first found you.
– I kept them with me babe
I put them with my own.
Can´t make it out alone
I´ve built my dreams around you … And the boys of the NYPD choir’s still singing Galway Bay
And the bells are ringing out
For Christmas day.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 15, 2012
Unknown Photographer, Jacob Farrand house on Woodward Avenue between Sloat and Trinity streets in Detroit (1881). Burton Historical Collection @ University of Michigan Library.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
People say California is a good model for the rest of the country, it is “The Place Where The Future Happens First!”
Detroit is a much better model than California: it is the place where the future happened a long time ago. Persons seeking that ‘Mad Max’ dystopia — where law and order is very much a sometimes thing, where the house next door is a burnout and the neighbors down the street are dope-addled zombies — need look no further than the ex-Motor City.
How it got this bad in Detroit has become a point of national discussion. Violent crime settled into the city’s bones decades ago, but recently, as the numbers of police officers have plummeted and police response times have remained distressingly high, citizens have taken to dealing with things themselves. In this city of about 700,000 people, the number of cops has steadily fallen, from about 5,000 a decade ago to fewer than 3,000 today. Detroit homicides — the second-highest per capita in the country last year, according to the FBI — rose by 10 percent in 2011 to 344 people.
…Average police response time for priority calls in the city, according to the latest data available, is 24 minutes. In comparable cities across the country, it is well under 10 minutes.The number of justifiable homicides, in which residents use deadly force in self-defense, jumped from 19 in 2010 to 34 last year — a 79 percent rise — according to newly released city data.
The city with the highest murder rate in the US is New Orleans, another post-future model. More information about world homicide rates can be found in the UN Global Study on Homicide in 2011. Places with highest homicide rates are third-world hell-holes such as Venezuela, Jamaica, Honduras and El Salvador, districts of northern Mexico adjacent to the US border and south-central Africa. These futures are a step or two down the ladder from Detroit into the energy abyss.
A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy. Everyone in Washington is starting to “get religion” about wanting to fix the deficit, with serious thinkers on all sides acknowledging that there must be reform and a path to a balanced budget. Burgeoning healthcare and Social Security costs are rightly pointed to as the problem, and entitlement reform will soon be front and center. But the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. And dealing with the trade deficit in the US means working with our energy policy.The trade imbalances among the partners in the eurozone are at the heart of the problems there as well. And while we will get back to Europe in a few weeks (remember when we seemed to be focused on Europe and Greece for months on end?), today we will explore the trade problem from a US perspective. Happily, this problem, while serious, does have a workable solution. And it might even happen in spite of government policy, though if a proactive energy policy were developed, it could ignite a true economic renaissance.
Mauldin carries on telling readers how friendly tycoons are going to save us all with huge reservoirs of crude oil:
I have been wanting to explore the implications of the shale oil revolution. Old oil fields are wearing out, as peak oil advocates point out. Where can we find the huge and cheap-to-exploit oil fields to replace them? Hasn’t all the easy oil already been found?
Because language is infinitely malleable, words can mean or imply anything the utterer wishes them to mean. Hasn’t all the easy oil already been found? What is ‘easy oil’? What does ‘easy’ mean: “Easy for me, hard for you?” Mauldin does not use the word affordable, nor does he mention costs. Over the course of five-thousand two hundred words the consumption side of the energy equation is never discussed … this is surprising/misleading because our crisis is the direct product of consumption. Decades of industrialized, highly-efficient guzzling of the cheapest, easiest fuels have bankrupted us! Because of our incredible ‘success’ we must now deploy unorthodox extraction techniques that might indeed be ‘easy’ but are unaffordably costly. Can anyone see anything wrong with that?
If cheap and easy have bankrupted us … what will expensive and difficult do?
Mauldin invests many words on the US trade imbalance, noting:
Not Everyone Can Run a Surplus … we are spending more for energy even as we use less of it, and that drives up our trade deficit. Let’s see why this matters. As long-time readers know, I have often written about how you cannot balance private and government deficits without a positive trade balance. Let me quickly review.It is the desire of every country to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself.
No country has ever ‘grown’ itself out of debt or a debt crisis. Debts have been repudiated or restructured. Countries have abused foreign exchange, waged war and conquered or have been destroyed. Governments have bankrupted creditors or sent them to the gibbet. They have stalled for time until able to take on orders-of-magnitude greater debts from new- or the same creditors … thereby refinancing existing obligations.
In a global economy all the creditors have been tapped. There is no new source of credit except Bankers from Mars.
The increase of debt masquerades as growth. The US appears to grow which allows more debt to be taken on to create the appearance of still more growth which in turn enables additional debt. Right now the Establishment lies about growth in order to take on more debt. This scam of ‘growth-to debt-to growth-to debt’ is all there is to industrial prosperity … along with fuel-wasting garbage that breaks down and is thrown out in a few years. Unlike real output of goods and services which is constrained by thermodynamics, debt has no limits as long as the increases can be supported with good ‘progress’ stories.
Frakking and ‘shale oil’ are part of the narrative that serves to generate loans for energy tycoons. ‘Energy Independence’ is the empty abstraction that is offered as the narrative’s objective. Business customers and ordinary citizens are required to repay the debts … and their children and grandchildren.
But let’s look at an equation that shows why that might not be possible this time. We have here another case of people wanting to believe six impossible things before breakfast.
Good grief … the narrative is complete with Mauldin ‘folksy-isms’.
Let’s divide a country’s economy into three sectors: private, government, and exports. If you play with the variables a little bit, you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong. Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0.
This is correct but not particularly relevant. America’s current account is not a problem. America creates its own dollars as needed, the oil sheiks recycle their imported US dollars back into the US economy. The imbalance that really matters is at home, at the end of Americans’ driveways:
These machines are not farm tractors or delivery vehicles, they are not used for work, they are luxuries, a drug, a form of crack cocaine. What they earn is zero, their cost must be met with debt, the cost of the fuel they consume is also met with debt, so is the cost of the infrastructure that these machines require. If the individual users are unable to obtain the needed credit then the economy as a whole- and the state must obtain it in the individual’s place. Otherwise, the consumption components of the string economy are deprived of funds. This credit starving process is underway, even as the cost of debt has become unmanageable. While frakking costs are extraordinary, the consumption side debts are galactic! Realistically, nobody/nothing can hope to repay them.
The consumption side is a money-loser. Sez Mauldin: “Play with the variables a little bit, you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong:”
The Cost of Fuel + The Cost of Credit Needed to Pay for Both Fuel and Fuel Use/Waste Infrastructure – Returns on the Use of the Fuel = 0
Right now, returns are juiced with credit otherwise the process would have failed a long time ago. The means to set a price is also the means to meet that price. If a price is bid by access to credit, the consumers must have access to the same credit to meet that price. In model cities such as Detroit where the consumption side started losing purchasing power in 1929 the consequences of rationed credit are obvious: welcome to the death spiral, where costs race ability to meet them into the basement!
The banality of future world: the Woodward Avenue location in 2009. The towers at the rear of the photo are abandoned as are other structures in the area.
The best way to look at the peak oil dilemma is to ignore physical production — which has little to do with anything — and to consider the City of Detroit as the model customer for all of John Mauldin’s newly frakked crude oil. The shattered city filled desperately impoverished people is somehow supposed to afford more costly fuel when it can barely afford what it has now.
Energy products can be obtained but only if someone’s grandmother is gunned down inside her house by a gang of dope-crazed teenaged hoodlums. The reason for the hoodlums has been the success of industries in pauperizing the city. Either consumers must become richer or costs of fuel-plus-credit must decline. Since the trend — as seen in the model city — is for consumers to become impoverished the outcome is for costs to be unmet and the production/credit side to be de-funded …
When customers cannot afford fuel it remains in the ground. Right now, Detroit — that model for America’s future in today’s present — cannot afford cops. It cannot afford firefighters, it cannot afford basic services. It has been bankrupted by the short-term success of its own consumption tycoons … hard to see how it can pay for high cost petroleum!
“We got to have a little Old West up here in Detroit. That’s what it’s gonna take,” Detroit resident Julia Brown told The Daily. The last time Brown, 73, called the Detroit police, they didn’t show up until the next day. So she applied for a permit to carry a handgun and says she’s prepared to use it against the young thugs who have taken over her neighborhood, burglarizing entire blocks, opening fire at will and terrorizing the elderly with impunity.“I don’t intend to be one of their victims,” said Brown, who has lived in Detroit since the late 1950s. “I’m planning on taking one out.”
The Detroit model of house-bursting brigands is scalable: for the country to afford energy products Congress must rob grandmothers in their own houses by absconding with their retirements.
Fuel Costs + Credit Costs – Returns on Fuel Use = 0.
The implications of this little formula are profound. As with current accounts, the sum of costs and real ability to pay are always zero. As returns on fuel use are negligible, fuel and credit costs must decline … and they are. Underway right now is the desperate, last stand pillaging of what remains of the world’s wealth to obtain fuel and credit, every bit wealth is up for grabs. The real cost of fuel and credit must fall to what the fuel and credit users can afford. Looking at Detroit, the affordable amount is very small indeed.
The question is whether there will be any fuel available and the affordable price? Time will tell.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 9, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
After five years of ‘The Great Financial Crisis’ there is a sense of relief as Christmas approaches. There is nervous talk by central bankers and economists, but also hope of ‘recovery’and a following new period of prosperity … tomorrow.
It’s always tomorrow: where this recovery is going to come from or what will drive it nobody really knows, It is just taken on faith that a recovery is certain to arrive because recoveries have always arrived in the past. “Why not?” the economists ask, “It’s never different this time!”
The sense of security is misleading and unsettling. We are like a person wearing a sweater with a thread caught on something, we are walking away … Pulling the string does not blow up the sweater or cause it to crash. The sweater diminishes without our being too much aware of it. There is little drama, only a Great Unraveling. Instead of a strong economy, we have a string economy, the pulling of which is invisible to economists.
(Unknown photographer) Fairy-tale palaces for the well-to-do in the Paris of the Midwest, on Alfred Street in Brush Park in Detroit in 1881. It was all a fantastic dream, a stage-set for Victorian manners and unimaginable prosperity without end, a gilded age, the product of the settlement of the far West, of the overreaching railroads and steamships … and of millions of highly skilled immigrants from Europe.
Brush Park was a psychedelic dream-scape of hundreds of extravagant, gilded mansions, with hundreds more throughout the city: not so much an idea but an escape from the necessity of having to think about anything at all. It was as if the prosperity wasn’t real but needed physical manifestations, each more outlandish than the next … to reassure those with the most that most was indeed what they had.
What the most have today is an irksome and uncertain non-crisis, a fake. Relief resides entirely in the form of central bank credit. These banks offer trillions in low-cost loans to both governments and the finance industry so that these establishments might dodge the consequences of the gigantic debts they have already taken on. There is no gilded palace on Alfred Street for this debt for it must squirreled away out of sight. Managers hope that ordinary citizens will ignore the creaking colossus until it is safe to set it loose again, debt giving rise to still more debt against a renewed backdrop of ‘growth’.
The only gain from the central bank lending/hiding strategy is a reduction of the interest cost and an escape from accountability. Both the reduction and the escape are temporary: the banking sector receives the benefits of interest reduction while the costs are shifted to the citizens. Escape keeps finance scoundrels out of jail until the statute of limitation expires. Nothing is done to reduce the overall debt burden, indeed nothing can be done! Modernity and industry both require a constant increase of debt and cannot tolerate any decrease. ‘Growth’ is a measure of the increase in debt and therefor a measure of wealth! Without the general increase of wealth it is impossible for tycoons to gain more beyond what they already have. In a debt-constrained world, one tycoon can only gain when other tycoons lose. It is a pitiless world indeed that sets one tycoon against the others.
Any increase in debt must take place in the private sector because wealth cannot exist unless it can be extracted at great pain from the citizens. This is because money, wealth and debt are all interchangeable claims against the non-tycoons’ vanishingly small allotment of time. A tycoon can always obtain more money but no human can gain more time: for wealth to have meaning it must be worth what is dear to everyone, not just tycoons! To be a tycoon is to have a great surplus of others’ time.
Debt repayments must therefor be extracted from the public, the higher the cost to the public the more useful/satisfying wealth is for the tycoon … being a sadistic libertine is a characteristic which enables an individual to become a tycoon in the first place.
Sadly, the private sector is unable to increase its supply of debt as there is already too much debt for ordinary economic activity to manage properly. Enter the central banks, which lend in the place of the private sector. Inflationists cry that this is horrible, like beating a dog with a curtain rod … Having the central banks or the government write checks to tycoons simply will not do, it’s bad manners, the payments do not represent wealth, in fact do not represent anything. The certainly do not represent anyone’s time.
This concern is misplaced for two reasons. One is because lending to tycoons is what central banks do constantly: lending-plus-sadism is how tycoons get to be that way. Second, because the absence of real money is considered to be temporary. With the loans offered by the central banks, there is certain to be more private sector credit made available … tomorrow.
There is no inflation because the central banks do not really replace the private sector, they only fake it. Whatever amounts of credit the central bank offers is less than what is retired or destroyed by private sector deleveraging. Even as the central banks’ expand their balance sheets, the private sectors’ balance sheets contract … without the efforts of the central banks there is no credit to be had with dire consequences all around!
The governments could issue currency without borrowing and use it to retire some of the debt. This would not add to the supply of money because retiring the debt would extinguish newly-issued currency at the same time. The governments so far have refused to do this. Bankers would object … as would the tycoons who desire to extract wealth from the workers’ bloodstreams, not from the government. The government could issue sufficient currency so that the supply of money expands enough for the tycoons to gain more of it. Having the government write checks to tycoons simply will not do, it’s bad manners, etcetera …
Meanwhile, the Establishment attempts to prop up key men everywhere around the world by any means necessary. Any institution that is deemed to be ‘systemically important’ is supported with the ordinary citizens’ credit … except for those things the same Establishment deems worthy of being blown up by drones or commandos. Non-key institutions such as Detroit and other American cities are abandoned to molder then collapse.
The citizens mutter, they are under a cloud that grows longer and darker with each pull of the string. Unemployment relentlessly increases, there are rumors of ‘austerity’ to be added onto the thermodynamic variety that emerges from diminished energy availability. The establishment has only one tactic: to add more debt, which has typically increased since the beginning of the industrial revolution. Debt has become non-productive, we have the unraveling sweater economy as a consequence … there needs to be another approach.
We are caught between what we want and what we need. We want it all, we feel entitled: we are like children. We cannot help ourselves. The yarn is pulled and the sweater becomes very small, the bottom is now at our armpits. We know there are steps that we must take … we must stop pulling the string … but we refuse to take them.
Alfred street in 1993 (Unknown photographer for City of Detroit). The house behind the car is the third house from the left in the top photo. Modern Detroit, a first-world slum:
Slums are a product of modernity just the same as automobiles and jet airplanes. They are economically segregated areas, places where society’s losers are swept. Modernity washes its hands of the slum-dwellers then moves onto other business … the creation of more slum dwellers. Slums are the end product of social Darwinism, the necessary ‘yin’ to business success ‘yang’.
More success = more slums. Failure of the process also = more slums. Modernity asserts that it eliminates poverty. Slums stand as evidence that modernity creates poverty. More modernity = more poverty.
As with Mumbai and Nairobi, so goes Detroit and other slum-cities, the product of- as well as destination for industrial prosperity.
Detroit was undone by the extraction of time from tens-of-millions of Americans by Detroit’s auto- and other business tycoons. At the end of the day, America had no time for Detroit. The stock market crash of 1929 and the following Depression ruined many of the old Detroit families. The manors were sold or divided into apartments or configured as rooming houses for auto workers. Others were demolished and replaced with cheaply built stores, shabby institutional buildings or parking lots. In 1935, the immense Brewster-Douglass public housing project for the ‘working poor’ was built at the far end of Alfred Street, just out of range of this photograph. War production saw the city filled with hundreds of thousands of job-seekers and factory workers who required housing. Many of these job-seekers were Negroes from the American south. Blacks were undesirables in nearly every Detroit neighborhood. As a consequence, housing was very expensive in neighborhoods where they were allowed to settle, much more so than for whites who could live anywhere in the city. Housing for blacks was also in far more advanced states of decay. Tension between races exploded in 1943 with a city-wide race riot that killed 34, with thousands arrested and soldiers patrolling the streets.
After the war, whites who could fled the city for the ballooning suburbs, a period of migration that lasted for decades. Cities are made and broken by flows of capital and human beings. Detroit originally grew and took form from the incoming tide of European immigrants who built in the manner and with the materials they were familiar. The craftsmen who built the fairy castles were replaced with unskilled agricultural workers looking to toil in the expanding automobile factories, these workers had no background or interest in city-building. They needed a paycheck, the city would take care of itself.
Instead, big business ‘took care’ of the city. Beginning in 1908 came the machines: the city was steadily made over as an auto habitat. It didn’t take much: Detroit’s street plan was laid out before the automobile — the width of the streets and boulevards and vast spaces anticipated it. The distances were too great for walking, often there was no ‘place’ to walk to. Starting in the 1950s and 60s, the city was divided by superhighways. the Chrysler and Edsel Ford freeways were built north and east of Brush Park, flattening the commercial districts and cutting off neighborhood from the rest of the city … by 1970, after another race riot, the Brush Park neighborhood was abandoned to street criminals and drug addicts. The fairy palaces grew furry and gray with rot, they collapsed or were demolished one at a time, the housing projects were also abandoned then stripped. Today there are a couple of dozen occupied houses in this neighborhood, the rest is weed-covered vacant space dotted with gaping ruins and some low-quality replacement housing and commercial buildings.
Not just Detroit: the machines overran neighborhoods and commercial districts in cities all over the country, this happens to be Buffalo, New York (Atlantic) James Howard Kunstler calls this the suicide of Midwest American cities, instead it is inadvertent suburbanization. The post-auto density and the form of building within the cities is identical to that of the surrounding suburbs. Replacement construction in places like Brush Park is identical to that of the suburb: quickly constructed low-rise apartment complexes or ‘pods’ of identical, cheaply designed and built vinyl-sided shacks.
Brush Park- Alfred Street by way of Google. It is only a matter of time before these ‘new’ buildings go the way of their predecessors. There is no reason for anyone to care about them, any more than they did for the housing projects or the fairy palaces.
Nothing in the Brush Park neighborhood or the rest of the city was made to withstand the test of time, the appeal of the place was narrowly immediate and instant. There was no ‘greater place’ that the original neighborhood could be an indispensable part of. Detroit was a collection of unrelated buildings and occupation districts. The Park was created as a ghetto, a place of confinement for rich people who had no choice but to look at each others’ wealth every day and become bored with it. The vast endeavor could never be re-purposed into anything other than a self-referential institution, the same as an insane asylum or a water tower. There was nothing transcendent, every building was a single-function enterprise, created to mandate/channel behavior.
No doubt there are many who could rebuild the entirety of Brush Park as it was … as a museum piece. The Federal government could certainly do it for the cost of one mile of urban freeway. The fashion impulse that made the place possible 140 years ago no longer exists. Americans have nothing in the way of tools that would give such a project form other than nostalgia and wonder over building and design skills that were common in the late-nineteenth century but no longer exist. We don’t know how to create engaging urban spaces and we don’t know how to inhabit them. We have forgotten how to be Victorian merchants. We know how to get in our cars and drive.
Which is why we cling to the immediate present so desperately, we really don’t know how to do anything else. For us to learn is too dangerous because we don’t have the luxury of time, it has been stolen by the tycoons! By the time … we find out what danger we are in it will be to late to do anything about it.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 2, 2012
Discuss this article at the Waste Based Society Table inside the Diner
Building the 1955 Oldsmobile and other GM car bodies at a ‘Body By Fisher’ factory in Detroit. Fisher started building horse-drawn wagons before the turn of the 19th century then turned to the horseless carriages. From 1908 though the 1920s, the company built bodies for many manufacturers including Ford Motor. Eventually Fisher became an semi-independent unit within General Motors. During the 1950s and 60s auto heyday, Fisher employed more than a 100,000 unionized workers in dozens of facilities across the country, building car bodies for GM.
This promotional film suggests the timeless quality of General Motors products even thought the products were designed to be obsolete within short periods. Americans were expected to ‘keep up with the Joneses’ and buy new cars whenever the manufacturers introduced new models, every three years. Extremely durable vehicles such as Henry Ford’s ‘Model T’ were undesirable as the makers had ever-increasing amounts of production to absorb. Makers needed their affluent customers to buy frequently, to ‘move up’ from basic models such as those made by Chevrolet to more expensive models made under the Oldsmobile, Buick and Cadillac nameplates. Older models would be traded in and resold to those who were less affluent. What made the process work was car loans, anyone could qualify as the car itself was security for the loan.
Along with the loans came insurance as a burgeoning industry. Lenders did not wish to lose the worth of their security in crashes. If a car was damaged, the insurance would pay for repairs. If the car was totaled the survivor would obtain a replacement. With insurance, car crashes were good for business.
Cars made during the immediate postwar period had infinitesimal warranties, it was ‘buyer beware’ at all times. Components failed spectacularly including transmissions, brakes and steering gear. Fisher’s highly-engineered craftsman-like bodies could not withstand corrosion. Few examples of GM’s ‘permanent quality’ from 1955 remain, most are rusted away and recycled, others were destroyed in collisions.
The emphasis on safety is ironic because American cars of this period onward were death-traps, among the most dangerous vehicles ever built.
Cars were top-heavy and bulky, overpowered with large cast-iron block engines. Pre-war models had large engines because smaller versions did not produce enough power or were noisy, vibrated excessively or were difficult to operate. Large engines were smoother and more powerful at lower RPMs. Engines improved after the war due to better material and higher craft standards, yet the large engine did not give way. Makers simply advertised their models’ increased horsepower and driving performance.
The heavy engine in the front of the car powered the rear wheels by way of the transmission and drive shaft. Consequently, cars tended to understeer. That is, the driver would turn the steering wheel to go around a curve and the car would tend to continue straight because of the arrow-head like weight in the front. The driver would compensate by turning the wheel more. At the same time, auto suspensions were primitive affairs little changed from the horse-and-wagon era. The solid rear axles were carried on leaf springs with little play, coil spring front suspensions tended to have much more travel … for a more-comfortable ride on poor quality roads. The result was a suspension that could not keep all four wheels on the road under all circumstances. The heavy vehicle weight and poor suspension had cars leaning away from turns. Body lean would unload the ‘inside’ wheels: the cheap, polyester cord bias-ply tires would lose grip. Even slow turns of 35mph under certain conditions would have the car sliding straight off the road into an obstacle or rolling over.
Brakes were also poor. The drum brakes found on most American cars faded with repeat applications. Brake linings would overheat and the hydraulic brake fluid would boil. Fittings and hoses would leak leaving drivers with nothing to stop the car but a hand brake with little more stopping power than the failed foot brakes.
If there was a wreck there was little protection for car occupants. With few exceptions, manufacturers did not offer seat belts, even as an option. The rotary door latch seen in the film was not strong enough to keep the door closed in the event of a collision. Under stress, the door would pop open, the occupants would be pitched out of the open door with the car rolling over on top of them. The steering column was a solid steel shaft that extended from the steering box forward upward and back toward the driver’s heart. In a collision the car body would detach from the frame and slide forward or the steering box would be driven backwards. The column would impale the drivers’ seat penetrating through the driver on the way. Alternatively, the heavy seat would break loose from the floor and ram the driver forward against the steering column.
One of the tasks of emergency workers was to saw through steering columns in order to remove drivers from car crashes with the columns pierced through their bodies.
The cheap door latches and lack of restraints left passengers ejected in all directions in serious crashes. The thumb-push door latch shown in the film was a killer as even modest collision force and inertia would ‘push’ the button and open the door.
Car wrecks during this period were gruesome affairs. Front seat passengers in a forward collision were simply ejected through windshields, leaving their faces, scalps, breasts, testicles and other body parts hanging from shattered glass. Paralyzing neck injuries from both front and rear collisions were common, so were multiple amputations. Quality auto bodies by Fisher would crumple in collisions trapping victims inside to bleed to death. An overturned car would have its roof collapse with the weight of the car crushing occupants inside.
Starting in the 1950s almost every US car was capable of speeds over 80 mph. Passenger restraints were limited to simple lap straps as in airplane seats: in crashes, belted occupants would be hurled forward to slam faces and heads against steel dash panels, against unpadded front seats or against control knobs that would penetrate their skulls. Door releases, window cranks and interior accessories became lacerating or impaling weapons in crashes. Gas tanks and fuel systems were unprotected and poorly mounted: collisions resulted in car fires with occupants trapped inside burning coffins. The same doors that were self-opening during modest collisions tended to become unopenable if the car was underwater or burning, particularly if the car was upside down. Injured passengers needed to maintain some presence of mind to drag themselves out of windows and away from flaming or sinking vehicles.
The fins, wheel hub spinners and chrome sheet-metal bumpers so favored by auto fashion designers became sword blades that maimed and killed all within reach. The manufacturers didn’t care, highway deaths were simply the cost of doing business.
Figure 1: the US highway death rate-per-10,000, (Wikipedia, click on for big). Here we can see the twin heydays of the US auto industry: from 1908 through the 1920s and the 1950s and early 60s. The chance of death around every curve during a high-speed run down a lonely highway was — and is — part of the glamor of auto ownership. Risk, danger and fear: car death was a component of F. Scott Fitzgerald’s Great Gatsby as it was to James Dean’s ‘Rebel Without a Cause’. ‘Easy Rider’ offered vacuous rage and murder on the highway as a metaphor for the meaningless Vietnam war and the consequent culture divide. Car chases and crashes became a boring/predictable element of motion pictures and television shows. Automobiles, anomie and hormones were — and still are — the ingredients of American rock-and-roll … all of these things were — and are — good for car sales.
Making and selling automobiles is a bloody business: designs in the 1920s and 30s periods were intended to ease/standardize manufacture rather than provide passenger protection. Car bodies were made with wooden components which could not withstand the forces of higher-speed impacts. At the same time, roads were poorly engineered, almost all were narrow and unmarked. Off the road was the ravine or unyielding obstacle. Cars off the road with injured occupants might not be found for days. Except in cities or developed areas there was little enforcement of traffic laws … if there were traffic laws. Most roads even city streets were unlit, some were paved with cobblestones, others with irregular concrete slabs. The first high-speed, limited access road in the US did not appear until 1940, in Pennsylvania.
The public furor over seat belts during the 1960s was remarkable. Manufacturers resisted belts because of the implication that both cars and drivers were unsafe. Belts also cost money which the cheap manufacturers were loathe to spend. Throughout the fifties and early sixties, drivers wanting belts had to order them from aftermarket manufacturers and have them installed privately. Eventually seat belts were offered as options on luxury models.
During the 1960s, manufacturers started putting largest V-8 engines from luxury sedans and station wagons into smaller commuter-cars. The higher power combined with lower vehicle weigh increased potential vehicle speed. Buyers looking for the larger engines could also buy four-speed manual transmissions, stiffer front suspensions and wider ‘performance’ tires. The US ‘muscle cars’ were still primitive compared to European performance sedans, they were nevertheless able to kill thousands of American teenagers ‘looking for a thrill’ on public highways.
The US industry was complacent. A feature of US automobiles was poor fuel economy. Starting in the 1920s most American vehicles would travel about 15 miles or less on a gallon of gasoline. Following the gas shortages of the 1970s, the public demanded more economical vehicles which Detroit found itself unable to produce.
The casual disregard for human life on the highways continued until the mid-1960s when German and Japanese imports started appearing in US markets with safer, more economical designs. Ralph Nader published his ‘Unsafe at Any Speed’, which lambasted the industry … General Motors in particular. Foreign manufacturers offered standard models with seat belts and collapsible steering columns, strong unit-bodies that protected the passengers, disc brakes, four-wheel independent suspension, radial tires, smaller engines and better attention to vehicle assembly. Insurance companies and legislatures began mandating these and other common sense safety features in all cars.
Cars gained redundant brake systems so the failure of one system would not leave the car without brakes. Fuel systems were isolated from crash areas. Manufacturers designed and installed energy-absorbing crumple zones, air bags, lap-and-shoulder belts for all passengers as standard equipment, padded dashboards, stronger door latches, recessed dash controls and better steering. Starting in 1973, cars in California were required to have pollution controls to recycle unburned fuel back into the fuel system … this led to computerized engine controls and catalytic converters. Detroit management knew of these ‘innovations’ and had in fact invented some of them, manufacturers knew how to build safer, economical cars immediately after the war, they simply refused to do so, focusing instead on restyling conventional models and advertising.
During the 1970s, highways were re-engineered, surfaces were widened with pull-off areas and force-dissipating Armco- and Jersey barriers installed along right-of-ways to keep careening vehicles on the highway. Bridge abutments, culverts, poles and sign-posts were removed to the side away from the travel lanes, exit- and turn areas were made more gradual. Stop signs, lighting, ‘traffic calming’ devices were installed including medians, curbs, speed bumps and rumble-strips were installed to deter traffic and annoy drivers into slowing down. Law enforcement campaigns against impaired drivers has also made the roads safer. Enter the speed camera.
Since the 1950s use of cars has mushroomed. Benefits gained by safer designs were overcome by the massive increase in car numbers, the wear on infrastructure, the numbers of older, mechanically defective vehicles, the increase in elderly, impaired or unschooled drivers along with the disparity in vehicle sizes. Small economy sedans and motorcycles share crowded roads with heavy transport trucks and bloated ‘light vehicles’ such as SUVs.
Grant Wood, “Death on the Ridge Road”.
Auto manufacture has spread around the world and Detroit has been passed by. A deadly industry currently faces its own demise. The auto industry narrative its entirety can be seen in Detroit for those with the wit to look for it: birth, an adolescent ‘heyday’ of public enthusiasm and industrial expansion, a long maturity leading to senescence and final ruin. With the unraveling of the auto industry comes the unraveling of everything that is dependent upon it. Just as Detroit has fallen, so too will fall Japan and Germany, Korea and the other auto-manufacturing centers. They must fall because fuel is too valuable to waste in non-productive gadgets and because the debt needed to build and buy the gadgets has become too costly.
In an industry’s infancy, debt is taken on to buy the tools of production and for customers to pay for the industry’s products. With the passage of time, the debt an industry takes on buys increased competition. Debt also flows to the owners away from tools. At the end, debt taken on by the industry services the debts taken on previously, nothing remains for any other purpose. The auto industry helped win the Second World War by making a vast inventory of war goods with public financing. After the war, the US government assisted the reconstruction of overseas’ competitors who devastated the industries in Detroit, then the city itself.
The Fisher factory today is a shell used by the City of Detroit to store impounded automobiles. In place of the thousands of workers who labored in Fisher Body’s plants, there are now computers to design and build the tooling, robots to assemble the parts into finished cars. One of the intended products of industry was plentiful jobs: industrialization is a complete failure with regard to jobs.
In 2009, both General Motors and Chrysler faced liquidation but were bailed out instead. Ford Motor avoided the others’ fate by borrowing from the Treasury and the Federal Reserve discount window. Auto industry overproduces because too much credit has been directed toward it. Cars in their making and operation are extraordinarily costly, in particular the petroleum needed to run the cars and all that has to do with them. Although pollution costs have not been accounted for, they do exist and they are significant. As it was with safety belts, the industry steadfastly ignores these costs as if ignorance can make them disappear.
Cars have killed 3 million Americans in the past 100 years, more than all American wars put together. According to the World Health Organization, cars have killed 1.2 millions persons world-wide per year since 2007. Each death is someone who will never buy another car. Car making is a bloody business, but one that has wormed its way into public affection. The car business’ time is passing, in the end the heyday of the car will be no different from the heyday of the clipper ship. The cost of doing business is the demise of the car business itself.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on November 22,2012
Discuss this article at the Epicurean Delights Smorgasboard inside the Diner
When you wish upon
a star … the auto industry … you don’t get a pony you get Detroit. This is the lesson the world is in the process of learning right this minute.
Kyle Bass speaking about debt. Like most analysts, Bass blames Japan’s fix on excessive debt …
“Thematically, the bottom line is … the total credit-market debt to GDP globally is 350%, it’s $200 trillion dollars worth of debt … against global GDP of roughly $62 trillion … “
Nobody bothers to ask why there is so much debt in the first place. The question is a finance analyst taboo … something not discussed, like underwear with dollar-signs printed on it.
The reason for the silence is that industrialization is unable to retire its debts. If machines could pay for themselves and ‘earn’ a profit they would be doing so already and there would be no debts at all. That machines cannot pay their own way is self-evident.
The debts taken on to make the ‘machine idea’ work are impossible to retire because they are too large. @ $200 trillion and 350% — plus additional hundreds of trillions in non-tendered liabilities — even if the world’s industries were to function
magically ‘properly’ the debt burden is out of reach. What is available to service and retire debt is the modest marginal increase in GDP year-over-year: this increase itself is borrowed!
Debts cannot be serviced — much less retired — with the economies at death’s door: future GDP growth is theoretical.
Repayment is a fairy tale … it is also the cudgel of creditor repression. If there was the merest prospect of growth, economies would not bother with debt repayment but would take on even more … Not only does industry require debt but the waste-based industrial economy will always and under every circumstance increase its debts until it is physically incapable of doing so.
More Kyle Bass:
“So … this is a debt super-cycle that is coming to an end. It’s coming to an end at different end-points for different countries … A lot has happened in Japan in the last 12 months, in fact, in the last two months we believe they crossed that proverbial Rubicon … we think that you’ve seen 20 years … of conjecture regarding Japan’s eventual demise and now we see a point where in the last couple of months what you see a continued deterioration in their balance of trade. It’s actually running at about negative- $100 billion on-the-dollar … a hundred-billion dollars, or close to ten-trillion yen … and we think given this resurgence of Chinese nationalism over the Senkaku crisis … you are going to see that (trade imbalance) move another … one-and-a-half or two percentage of GDP … or another $100 billion dollars. To put that into perspective, what that means is we could see full current-account negativity in Japan in October (actually, November)… that’s something nobody is ready for … We think about it: we have a secular decline in the population happening, you have a balance of trade literally being re-written and falling off a cliff … and their GDP is tracking negative 3.5, negative 4 percent.
In other words, Detroit.
Japan has reached the point where it cannot borrow any more because it has already borrowed as much as it possibly can. As long as Japan borrows the (borrowing) cost is manageable. Debt is a treadmill, once on you can never step off or slow down. Japan will learn that as the borrowing slows the real cost ramps. Repayment does not work because doing so increases the worth of the money used to repay. Returns on Japan’s industries are not an issue: they never did matter because they never existed. What matters is the narrative of ‘progress’ and ‘innovation’ which for Japan has soured: the narrative is collateral. The country has become hopelessly old-fashioned … passé and unworthy of credit. Japan tries on new narratives but the only ‘innovation’ in the cupboard is more quantitative easing (QE).
Like the Motor City, Japan hitched its fortunes to the automobile industry. The car business has succeeded by more efficiently devouring its own capital basis. Since the ‘peak oil’ low in 1998, the incredible basis has been repriced, there is a scarcity premium added. It does not matter whether capital is officially recognized as scarce or not! What matters is the market price of capital relative to other goods. Resource capital is now too pricey to waste. The waste-based enterprise is stranded by its capital costs and there is nothing the establishment can do about it!
In Japan and elsewhere, the strategy to ‘manage’ debt has been to always add more of it until the cost becomes
prohibitive ridiculous. Instead of debt, labor costs are cut by eliminating jobs … even though labor costs have little to do with the debt and are not the cause of it. Businesses borrow to pay executives and business owners, not labor which is expendable.
Michael Hudson suggests that the burden of taxation has been swapped for interest payments/economic rents to financiers. Instead of flowing toward governments- then cycling back toward the public, funds flow toward banks and to tycoons. The consequence is not taxation without representation, there is taxation without the means to pay the taxes: a strategy of pauperization that leaves the labor force dependent on meager handouts and indebted to both business and government.
– Detroit is a ‘company town’ dependent upon a single industry. It gained net cash flow from outside the city/the rest of the world. Japan is a ‘company country’ dependent upon manufacturing of so-called ‘high value’ goods including automobiles.
– Japan requires export trade income — net cash flow from the rest of the world — in order to service debts and subsidize their industries. The government can borrow from the central bank but for only a short time. Then it must either stop borrowing or pay higher prices on international credit markets and subject itself to credit embargo. Detroit obviously cannot borrow from its central bank because it does not have one. It is already subject to credit embargo.
– Detroit and Japan ‘play the resource spread’: buying resources then repackaging a portion of these into costlier forms so as to subsidize their own consumption. The increase in input costs has made spread(s) impossible to finance as the needed debt is too costly.
– Detroit is almost 90% African-American, Japan is 90% Japanese. Both cultures are rigidly resistant to changes in the status-quo. In Detroit, difficulties are blamed on Negroes rather than automobiles. Time will tell whom the Japanese will blame their difficulties on … certainly not the automobiles, which are the real culprit.
– Aging Detroit’s population is entering retirement, workers have few assets outside of real estate (personal homes). Japan’s population is nearing retirement, workers are converting non-monetary assets into currency by selling Japanese bonds, that is, they are not lending as much.
– Both Detroit and Japan have little in the way of native resources, both seek to exhaust the resources of others. Detroit has exhausted available resources and Japan is on the way to doing so.
– Both economies feature smokestack-manufacturing industries that have migrated to China and other low-wage countries … associated wage arbitrage has reduced discretionary incomes of both Detroit- and Japanese workers.
– Managements of both places are inept and cruel, beset with cronyism and corruption … leading to catastrophic consequences. It is hard to say which place is more ruined. Neither ‘systems’ allow imagination or risk, any persons exhibiting imaginative tendencies are excluded. Conventional managers are allowed to fail conventionally until they are unable to do so by the extent of their failures.
– Legacy obligations are carried forward with increasing amounts of new debt required to service and retire (roll-over) the older maturing debts. Japan’s lending capacity is entirely consumed meeting the burdens of existing debt. Detroit has almost no capacity to borrow at all and is dependent upon begging.
– Japan’s so-called ‘Bubble Economy’ was a hedge against rising energy costs … a hedge that was unraveled by increased energy costs. Hedge versus expedient: Detroit’s success was the reason for Japan’s economic strategy in the first place. The auto industry’s destroys the capital the industry requires over the longer term. It has also foreclosed the future, destroying capital that was-and is needed for actual productive enterprises … that have not be imagined yet! Motown’s strategy has been to deploy successive expedients .. good for the moment and costly afterward.
– Monetary policy — in the form of multiple rounds of bond-buying/quantitative easing and super-low interest rates — has failed/is irrelevant. The desire has been to create monetary/currency inflation: Japan is mired in deflation! The end-game for Japan is identical to the end-game in deflationary Detroit: ruin.
Figure 1: Japan’s crude oil consumption: the failure at Fukushima and the resulting shutdown of the country’s nuclear park left an expensive energy deficit that the country must close by importing petroleum and liquified natural gas. Every yen diverted to the petroleum suppliers is a yen extracted from other sectors of the Japanese economy … including debt service.
The world is not in danger of becoming Japanese with its 20-year deflation. Instead, the danger is Japan becoming Detroit, (James Howard Kunstler):
Finally, I have one flat-out prediction, one I have made before but deserves repeating: Japan will be the first society to consciously opt out of being an advanced industrial economy. They have no other apparent choice really, having next-to-zero oil, gas, or coal reserves of their own, and having lost faith in nuclear power. They will be the first country to enter a world made by hand. They were very good at it before about 1850 and had a pre-industrial culture of high artistry and grace – though, granted, all the defects of human psychology.
Japan is trapped. It must maintain enough of a functioning industrial economy to support its fleet of crumbling nuclear reactors for an indeterminable period of time, perhaps centuries. Imagine Detroit with reactors.
Industrialization is supposed to bring more goods at lower costs to customers who have to work less in order to enjoy more. From cradle to grave, modernity promises more of everything for everyone.
Goods are not enjoyable or useful. For example: the promised mobility has degenerated in a set of unremarkable yet rigid rules. It is the traveling in drainage canals from noplace to noplace, from one slum to another slum in pursuit of … low quality, unsatisfactory goods!
The systemic costs of ‘goods’ are unaffordable to the system. The customers discover they cannot work because they are unemployed or they find the work is too hateful to bear. There is no enjoyment utility: the ever-multiplying poor struggle to survive while the rich increasingly and for good reason fear the poor.
Meanwhile, waste — which is the real product of modernity — overwhelms the natural life-support system for rich and poor alike. Modernity cannibalizes the capital the system needs to run. The waste products and the loss of capital — and their associated increase in costs — is why modernity is failing. The problems discussed by Kyle Bass and other analysts are all symptoms of extinguished capital.
The managers desperately seek solutions that don’t change anything because of the perceived costs of change. What they miss right under their noses is to resist change is to become Detroit … or worse. Changes are inevitable, they will occur as a result of intent or as a result of system breakdown … which in turn forecloses the possibilities of creative alternatives. It is best to seize the day … to assign costs where they belong and start making the hard choices about what we need to give up … so what remains can be made available to ourselves and our offspring. What is needed isn’t anything extraordinary, only restraint.
The establishment has nothing left, they are scraping the bottom of the ‘solution’ barrel. Everything is offered but energy conservation and doing with less. This is total nonsense … the end of it is at hand. There isn’t enough room on Planet Earth for unlimited humans + cars + associated ‘other goods’. Something has to go, otherwise, the world = Detroit.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on November 15, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
The tide turns for US energy flows! Energy developments in the United States are profound and their effect will be felt well beyond North America – and the energy sector. The recent rebound in US oil and gas production, driven by upstream technologies that are unlocking light tight oil and shale gas resources, is spurring economic activity – with less expensive gas and electricity prices giving industry a competitive edge – and steadily changing the role of North America …
The world is in the middle of three intertwined crises right now: a finance crisis, a petroleum energy crisis and a climate crisis. A characteristic these three crises share is that all of them are denied … or the truth is massaged by the establishment or those who claim to speak for it. Promoters of finance recovery regularly assure continued growth regardless of circumstances, climate cheerleaders downplay the effects of fossil fuel waste gases in the atmosphere while fuel supply experts find lakes of crude oil wherever they choose to look.
Figure 1: Economic reality = structural unemployment. The purchasing power of workers declines: this graphs the duration of unemployment. Happily, as people reach the end of unemployment benefits they drop off the list of available workers, unemployment looks better than it really is!
Without income from gainful employment, there are diminished earnings for industries both in the US and elsewhere. Happily, industrial firms can earn by speculating in finance markets: making and selling real goods is unnecessary.
Behind the curtain, actions are more eloquent than (soothing) words. There are ongoing monetary easing programs in the US and elsewhere, elsewhere and elsewhere. If conditions are as pleasant as the cheerleaders insist, there is no need for stimulus. Right?
Meanwhile, the climate crisis is denied:
There is an entire cadre of shills — subsidized by the energy industry — who regularly appear across the breadth of the media-sphere as well as before Congressional committees where they are ‘warmly’ received. There is little strategic space between the climate denial creatures and the extinct smoking-tobacco-is-good-for-you versions. The idea is to sow uncertainty among the public so that the businesses tycoons can continue to make money. ‘Success’ for the one-percenters comes first … everything else is secondary.
Comes now the petroleum shortage deniers, who like the others, are ‘experts’ with impressive-appearing credentials fronting similarly-situated organizations. The international media — dependent as it is on car advertising — eagerly grasps the good news with both hands and runs with it. The public is happy to be reassured that there is nothing really wrong with fuel supply.
If there fuel supply conditions are as favorable as the experts insist, reassurance is unnecessary … right? Here is more from the New York Times:
The United States will overtake Saudi Arabia as the world’s leading oil producer by about 2017 and will become a net oil exporter by 2030, the International Energy Agency said Monday. (Gasp!) That increased oil production, combined with new American policies to improve energy efficiency, means that the United States will become “all but self-sufficient” …
Etc … Here is more Birol from the Financial Times:
Fatih Birol, chief economist at the International Energy Agency, the western countries’ oil watchdog, says Europe spent €32bn to import oil in March. This month, the bill is on track to be €27bn. In the US, oil imports cost $33.5bn in March, and will be $27.5bn in June, he says. Emerging economies, particularly China, Indonesia and India, should see fiscal burdens fall as lower subsidies are required.
Oil: The Next Revolution THE UNPRECEDENTED UPSURGE OF OIL PRODUCTION CAPACITY AND WHAT IT MEANS FOR THE WORLD
Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.
Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production …
“Will overtake Saudi Arabia” … “will become a net oil exporter” … “might outpace consumption” … all these weasel words: “could lead to a glut”, perhaps tomorrow … and perhaps not! With industrialists the utopia is always set to arrive tomorrow provided access to capital is “unrestricted”! Keep in mind, if what Maugeri and Birol were saying was true, the effect would be obvious and there would be no need for anyone to say anything! Fuel prices would decline alongside economic expansion. Fleets of new machines would be deployed to waste the newly extracted fuel. This is not happening, the shills are simply lying.
Public relations campaigns have no effect on real outcomes. The countries suffering financial distress continue to falter, despite the
best worst efforts of the European establishment. The finance crisis has continually deepened since it appeared in 2007. More countries are afflicted with the passage of time. There are no signs that any conventional economic policy efforts will solve anything: it says here that they won’t.
Climate conditions have also deteriorated. What has undermined the climate deniers hasn’t been picky arguments of scientists, rather it is repeat bouts of severe weather and the burdensome costs to the insurance industry. The scientists are now in the happy position of being able to say, “I told you so!” … even as their houses are washed away by floods and hurricanes.
Petroleum extraction and consumption are bounded by costs. The shills never mention the current cost of fuel relative to the years’ past cost … or to what customers can afford. It is the change in price relative to what customers can support over the past ten years that is ‘wracking’ the world’s economies! This ‘real’ price has changed because the supply rate has not kept pace with demand. What is underway is fuel rationing by price and access to credit.
The shills assume – and some non-shills as well – the world’s economies will continue to function as-per-normal in the background with the customers simply stumping up out of spare change whatever amounts the petroleum industry demands. The shills fail to acknowledge that high fuel prices — as well as high credit costs — bankrupt firms and press upon individuals. Fuel rationing by price and access to credit isn’t just a collection of meaningless sounds, it is a dynamic which has smashing effect. Without the bankruptcies … the rationing process would not work! There would rise in its place some other baleful process to ration fuel … as indeed there will be when the credit system finally breaks down. When credit ceases to meter access to markets, there will be permanent physical shortages, allocation will be made by police means.
The effects of aggregated costs aren’t restricted to the lowest rungs of the economic ladder: national governments and large finance entities such as multinational banks are impacted. Costs matter.
Whatever the Europeans pay for fuel right now is too much. Every bit of that €27bn mentioned in the Financial Times article is borrowed … and each month’s €27bn thereafter … month after month, year after year. This is the reason Europe is broke! High cost per-barrel crude oil has destroyed the European economies. There is no organic return on the use of the oil, most transportation usage is simply waste for ‘convenience’. Filling the ‘Waste Gap’ between what crude costs and the zero it returns requires a modest debt-subsidy at €20 per barrel. The lower price is destructive over long periods, the current higher price destroys that much faster.
America’s $27 billion for its monthly fuel is also borrowed: like the Europeans, the claims these loans represent are added to the tens of trillions of outstanding claims. These obligations cannot be repaid by the use of the petroleum or they would have been paid already! Rather than organic earnings the wasting process is offered as collateral for endless rounds of new loans.
Up until a decade- or so ago the ‘waste-collateral-loan’ cycle has been virtuous. Credit extended against the wasting process was sufficient to bring large volumes of fuel to consumers. Both fuel costs and real credit costs were affordably low. When the higher real cost of credit is added to the current cost of fuel the economies’ fuel waste infrastructure is stranded. Suburbs, toll-roads, autos, airports, vacation ‘villas’ … banks and government benefits … are unaffordable luxuries. Even when the customers can afford to buy fuel … they cannot buy a new house or a new car. The industries that provide these goods are worn down then broken: this is the effect of fuel rationing by limiting access to affordable credit.
Adding more high-cost fuels is pointless because the low-return, credit-dependent economy can only pay for it if cuts are made elsewhere … this is why there is an economic crisis in the first place! Fuel and credit inputs cost too much for an economy whose wasteful infrastructure provides minuscule organic returns.
Figure 2: Despite the hoopla there is no sign of any net increase in world petroleum extraction. Maybe cost has something to do with this (Stuart Staniford). Add to the hard numbers the periodic appearance of shortages here and there in the country indicates a breakdown.
Here is something else the ‘smart people’ don’t talk about (from an article in May), the credit demands of consumption versus the credit demands of the petroleum industry.
Figure 3: Compare the bolt in demand in this chart to the missing output on the Staniford chart. Every day in this world millions more people want a car:
(Net export guru) Jeffrey Brown does not include demand on his chart because it cannot be measured with certainty, however it exists everywhere in the world there is a TV set and paper money. Prior to 2002, extraction was able to remain comfortably ahead of demand (for the most part). Excess became spare capacity or was shipped into inventories. The outcome was the plunge in fuel prices to $12 per barrel and less in 1998. Since 2005, the rate of extraction world-wide has stalled while demand in China, India and elsewhere has exploded. High-cost technology and new oilfields have not been able to push supply even as depletion from existing fields accelerates with the drillers falling farther behind.
Consumption is a matter of infrastructure: oil drilling infrastructure cannot lift crude as fast as auto factories, house builders and banks can create consumption … or demand that is impossible to satisfy. Debt-dependent drillers with high-cost plays must compete with consumption for a shrinking pool of lendable funds. Consumption must borrow otherwise it cannot service its debts. By doing so consumption crowds out the drillers. When consumption is unable to borrow, the effects cripple drillers as well as the rest of the economy. Right now drillers can fund themselves … what happens tomorrow?
The petro-shills have gotten ahead of themselves. It is too early to determine how much crude oil- and crude-like substances will be made available in the future in a margin-challenged enterprise. Success depends upon costs and what the customers are able to pay. So far, the best-efforts of the drillers work against the drillers themselves! The flood of product depresses prices at the wellhead where the market price of the product is uncomfortably close to the cost of extracting it. A reason for this is the rapid decline in the rate of flow for individual wells. A sequence of repeat wells is needed to maintain the flow rate.
Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”? Rune LikvernIn this post I present the results from an in-depth time series analysis from wells producing crude oil (and small volumes of natural gas) from the Bakken – Bakken, Sanish, Three Forks and Bakken/Three Forks Pools – formation in North Dakota. The analysis uses actual production data from the North Dakota Industrial Commission as of July 2012 from what was found to be a representative selection of wells from operating companies and areas.
MAJOR FINDINGS FROM THE STUDY
Findings from this in-depth study of time series for production from some individual wells:
– Presently the estimated breakeven price for the “average” well in the Bakken formation in North Dakota is $80 – $90/Bbl In plain language this means that presently the commercial profitability for new wells is barely positive.
– The “average” well now yields around 85 000 Bbls during the first 12 months of production and then experiences a year over year decline of 40% (+/-) 2%
– The recent trend for newer “average” wells is one of a perceptible decline in well productivity (lower yields)
– As of 2007 and also as of recent months, the total production of shale oil from Bakken, has shown exceptional growth and the (relatively high) specific average productivity (expressed as Bbls/day/well) has been sustained by starting up flow from an accelerating number of new wells
– Now and based upon present observed trends for principally well productivity and crude oil futures (WTI), it is challenging to find support for the idea that total production of shale oil from the Bakken formation will move much above present levels of 0.6 – 0.7 Mb/d on an annual basis.
Of course, like other industrial enterprises the drillers can borrow — against fictional collateral represented by their ‘reserves’ — but not forever.
Meanwhile, high costs and modest returns, rapid decline rates and the absence of distribution infrastructure are adversely effecting the shale gas efforts. See Chris Nelder for a detailed critique of the shale gas industry. According to Art Berman the enterprise is another credit-driven speculative bubble.
“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”
There is nothing new about the establishment’s self-deluding nonsense. On October 15, 1929 …. exactly nine days prior to the great stock market crash on ‘Black Thursday’, National City Bank (Citibank) boss Charles Mitchell remarked:
… the ‘industrial condition of the United States is absolutely sound,” that too much attention was being paid to brokers’ loans, and that “nothing can arrest the upward movement.” … he enlarged on the point: “The markets generally are now in a healthy condition … values have a sound basis in the general prosperity of our country.” That same evening Professor Irving Fisher made his historic announcement about the permanently high plateau andadded, “I expect to see the stock market a good deal higher than it is today within a few months.” 
In 1929 much of the world’s business was invested to some degree in the stock market, certainly Mitchell and Fisher were both very wealthy men by way of stock investments. Today, moderns are equally-invested in the waste-based economy. There is a herd, there are few that will run against it … to do so is unprofitable.
When the stock market collapsed much of the world’s finance capital was destroyed because it was used to support prices as ‘call money’, to leverage stock holdings. Right now, the world’s finance capital is used to leverage fuel waste activities. Birol, Monckton and others are doing now what Fisher and Mitchell were doing in 1929.
There was a sense of panic in the air starting in 1928, increasingly so during the last surging runup to the October crash. The upward movements in the tape were fabulous, hard to believe. Market participants understood they “had a wolf by the ears and dared not let him go”. The establishment was cornered: any effort to relieve the speculative pressures — by constraining call money or cracking down on speculators — would trigger the market collapse that the establishment was desperate to avoid. No one wanted the blame: as it was, the inevitable consequence of the speculation was the crash occurring anyway.
The same dynamic is in effect now. Any official pronouncement of petroleum shortage would cause the finance markets across the world to implode. The ‘Planet Earth Inc.’ business experiment teeters at the edge of economic abyss. In Greece, Portugal, Ireland and other previously-prosperous states, depression is a real fact on the ground. Both ordinary and extraordinary monetary and fiscal remedies have been applied repeatedly to no effect. Credit, banking and money are blamed but the disaster continues to unwind as if credit, banking and money are peripheral to it.
Modernity has made an economic virtue of waste, while the hegemonic tendency of modern ‘culture’ disallows the consideration of any alternatives: we moderns are constrained by fashion sense run amok. Meanwhile, our destiny is bound to be determined by circumstances that our waste has set in motion. One way or the other our fossil fuel consumption is to be brought to an end, whether this ending is profitable to us or not. Only that part is under question: are we humans clever and disciplined enough to CHOOSE … to earn the return on conservation. The overall outcome is not in doubt, we will conserve regardless of consequences or as result of them.
– ‘The Great Crash’ John Kenneth Galbraith pp.99 (Houghtin-Mifflin)
Off the keyboard of Steve from Virginia
Published on Economic Undertow on November 7, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
President Obama easily won re-election yesterday: Where do we go from here?
– look for ‘Brand X’ opponent Romney to retreat into what Edward Gibbon called, ‘a well-deserved obscurity’. Smarmy Romney lacks the kooky charisma and media horsepower of a Sarah Palin or Paul Ryan, his TV days are done. He has nothing to say and says it with less conviction than just about anyone in public life. There is little left for Mr. Romney to do but to go back to Wall Street where he can reassure his own customers he is not stealing their money … while he steals their money.
– The Tea Party has unraveled as a political phenomenon. The ultra-libertarian/Austrian/liquidationist faction within GOP politic has discredited itself: the public won’t buy social Darwinism no matter how much religion and patriotic moralizing are spackled over it.
– The GOP has no one to blame for the election outcome but themselves. Their primary process — dominated by petroleum industry stooges and ‘missionary evangelists’ — prevented the Republicans from fielding a candidate able to challenge the vulnerable Obama. Who could have beaten him? An ordinary human being … that is, a non-radical Republican automatically excluded from the candidacy … by the extremist-filtering primary process and funding structure.
– From the ‘Welcome to the ironic universe’ department: this is the end of Ron Paul and his son, while there is no end in sight for Ben Bernanke. Gone: Palin, Santorum, Allen (in Virginia), Akin, Mourdock, Perry, Mack. Lost in influence: Bachmann, Ryan, Cantor, Gingrich.
– Libertarian economics do not appeal to Americans who do not want to be thrown to the ‘free-market’ wolves any more than they already have been. Americans want a level playing field with big business. Disappointment with Obama is that he is unwilling to hold powerful interests accountable, not that they are too accountable. The intrusive, overbearing government doesn’t do its job or it does so in ways that protect private interests at the expense of the public.
– A big winner of the election is Occupy movement. They won by not embarrassing themselves and by helping out in New York City with the hurricane relief … where the reactionaries were notably absent. The crumbling Tea Party has left a political vacuum … if the Occupy group has the wit to seize the moment.
– The clock is ticking on the tycoons. They couldn’t buy this election and won’t get a better chance in any conceivable future. The shift is underway … from tycoons being admired and emulated to being loathed. The step after is for tycoons to be hunted down like rats. Credit the timely hurricane Sandy and a rising public awareness of tycoon-driven climate change.
- If I wuz a tycoon I would make like French and get the hell out of Dodge …
– Having fixed his footnote in history at the cost of a billion-plus US dollars look for the president to retreat with some dispatch from the public stage. ‘Hope and Change’ have morphed into hopelessness on one hand and an establishment death-grip on the status quo with the other. The establishment has few choices that allow it to remain the establishment! Conventional economics have run aground. The austerity camp and the stimulus factions both insist their policies will propel the USA waste-monetizing economic machine forward. None of the factions acknowledge that the operation of the machine itself … is what undermines it. The present devours the future faster and faster: the cost of each fill-up becomes more crushing as the machine annihilates with constantly greater scope and efficiency what it needs to run. The only returns are ‘money’ for the despised tycoons while the rest must be satisfied with the thin gruel of ‘We’re Number One’ and other inconsequential generalities. Meanwhile, the life support on our space ship is fed into the furnace.
– Obama is clever enough to know there is nothing conventional policies can do to remedy our current situation: he has access to the ‘input’ of at least a dozen intelligence services. At the same time, he never has to pay for a round of golf for the rest of his life. He can loiter with tycoons which clearly pleases him, he can start writing the obligatory post-presidential memoirs, he can secure places in corporate boardrooms/in places of tycoon exile. When the time comes in 1,515 days he can become a petit-tycoon himself. The office of Lincoln and Roosevelt has devolved into a running-board or ramp to commercial success. Obama is now a ‘Brand’: one day after the election the president has one foot out-the-door, he is a lame duck.
– Obama the Ironic: no doubt airports across the country will be renamed for the president just as the airline industry collapses due to fuel shortages … that are denied by Obama.
– Obama the Ironic part two: sometime within the next four-plus years the president is going to have to tell the American public the truth about energy supplies: we’ve run out and cannot afford to burn any more for endeavors that don’t pay for themselves — which means fuel for agriculture and some basic services and nothing else! Here is something to live for … and watch on live TV.
Goofiness is not confined to America, the Europeans have similar problems facing reality:
Worst of the Eurozone Crisis Is Not Over Yet Megan Greene (Economonitor)Greece released its 2013 budget last week, indicating that public debt will surge to 189 per cent of GDP by the end of next year. If Greece’s debt burden cannot be deemed to be on a sustainable path, the IMF cannot release more money.
The only way to reduce Greece’s debt burden effectively and sufficiently is to write down some of its debt. So far, Germany, the ECB and the IMF have all indicated they would refuse to take a hit on their Greek government bond holdings.
… even if Germany wants to give Greece more time and money to achieve a swingeing fiscal adjustment, Greece might not have any interest in doing so, particularly not after five years of economic recession.
A model student
In contrast to Greece, Ireland has been identified by creditor countries as a shining example of how Europe will emerge from the crisis.
It is true that Ireland has stood apart from the other bailout countries in a few important ways. For starters, Ireland has dipped a toe back in the bond markets, despite being in a bailout programme. Investors also seem relatively confident that Ireland will not default, as exhibited by lower, long-term Irish bond yields than its Greek, Portuguese, Spanish and Italian counterparts.
According to the Purchasing Manager’s Index (PMI), Ireland has seen its manufacturing activity expand over the past eight months. This is in sharp contrast with the eurozone, which has, on average, seen manufacturing activity contract for 15 consecutive months.
Ireland’s PMI data is encouraging, with new foreign orders particularly buoyant in recent months. This is a positive indicator for Ireland’s export sector, which should keep expanding.
But here’s the big problem in Ireland: there is no economic growth.
It’s hard not to come away from articles like this perplexed. What are the Irish or the Greeks supposed to do over the longer term … like 1000 years or so? How about 100 years? How about 10 years? Where is the ‘reality plan’?
There is the usual ‘growth’ mantra but what is supposed to grow? More auto sales? More vacation ‘villas’ around more miles of Mediterranean coast? More McDonald’s and Tescos? Right now the European auto industry is collapsing. Real estate is a bust. Retail margins are narrowing or gone. The European fuel consumption is almost 15 million barrels per day … most of this is imported from Africa and the Middle East. It is paid for with massive and unaffordable borrowing. The waste-based machine has been backfiring since 2008, the complete breakdown is heaving into view.
From whom are the Europeans borrowing? Ireland and the rest cannot borrow against their own accounts — they are shackled to the euro — they must borrow from financiers in City of London and Wall Street. Currently, credit terms are onerous … what comes next? If Europe cannot pay its bills its fuel consumption is exportable to the United States which can borrow against its own account at all levels. There is a reason why the US president is claiming the country is ‘energy independent’.
How is Ireland supposed to cope with the current state of affairs for more than a few months? Ireland has no domestic fuel production to speak of. It MUST borrow or go onto a severe — and permanent — energy diet. Can Ireland borrow for another year? It must, obviously. How deep a the hole will creditors allow Ireland to dig? How can the country repay- or service its debts when it cannot borrow more fuel? The Irish corporate tax shelter is not very useful to corporations that aren’t earning much. Eire can be the gateway for flight capital to exit Europe but that lasts only until the euro is done away with. At that point Ireland descends toward failed-state status like Serbia … or Yemen.
Figure 1: Irish oil consumption plummets because Ireland cannot afford to borrow. As it wastes more it falls further into debt. Even if the Irish gain new credit today, they certainly cannot do so forever.
This is the debt-energy trap that has enmeshed all the world’s modern nations. The idea is that something magical will turn up in the next decade or so and ‘solve all the problems’ in the meantime, the entire European Enterprise hinges on whether the ECB can keep offering rear-guard actions: making loans … that are more dubious every month! At some point, organic returns are needed … these never arrive. Sadly, there are no returns on consumption … simple waste for its own sake. The West has nothing in the way of real goods or services to offer in exchange for the petroleum they burn up … except for petroleum burning gadgets! Here is the most vicious of all vicious circles.
One outcome of this dynamic is fuel poverty … something that occurring right now across the euro-zone and in the UK. What the Europeans need to do pronto is to rethink the ‘business as usual’ concept and ditch growth. Cheap natural resource capital does not exist any more. What remains is worth too much to waste. The economy built around monetizing waste is a loser. Europe needs to power down and figure out how to provide decent lives for citizens without consumption. Unfortunately, there is little time remaining to figure out how to do this. The ongoing Euro-calm is an eye in the hurricane, the next phase will see Europe cut off from fuel supplies and structural shortages that cannot be dealt with.
Conservation by other means …