From the Keyboard of Surly1
Originally published on the Doomstead Diner on May 12, 2013
Discuss this article here in the Diner Forum.
Plenty of doom and doom-related happenings on the domestic and international front this week, so let’s go right to the videotape:
Across the pond in Greece, where Question Mark and the Austerians are administering the same sort of save-the-rich economic policies that plutocrats like Pete Peterson so dearly wants to bring to the FSA, youth unemployment has reached a staggering 60 per cent.
While the overall unemployment rate rose to 27 percent, according to statistics service data released on Thursday, joblessness among those aged between 15 and 24 jumped to 64.2 percent in February from 59.3 percent in January. Youth unemployment was 54.1 percent in March 2012.
“It is by far the highest youth unemployment rate in the euro zone, highlighting the difficulties young people face in entering the labor market despite government incentives to create jobs,” said economist Nikos Magginas at National Bank.
Athens has lowered the minimum monthly wage for those under 25 years by 32 percent to about 500 euros to entice hiring.
Note that last succulent little datapoint, and keep it in your pocket when the solons in DC look up from Benghazi! BENGHAZI!! BENGHAZI!!!!!!!!! long enough to recommend a lowering of the minimum wage, or pass a bill to eliminate overtime wage payments.
As our friend Joe P. posted earlier in the week, researchers have once again discovered the glaringly obvious, a link between racism and stupidity. Whouda thunk it?
Findings taken from numerous research projects strongly indicate that prejudice, racism and intolerance are more likely to be present in individuals with greater cognitive rigidity, less cognitive flexibility and lower integrative complexity.Despite their important implications for interpersonal behaviors and relations, cognitive abilities have been largely ignored as explanations of prejudice.
We proposed and tested mediation models in which lower cognitive ability predicts greater prejudice, an effect mediated through the endorsement of right-wing ideologies (social conservatism, right-wing authoritarianism) and low levels of contact with out-groups. In an analysis of two large-scale, nationally representative United Kingdom data sets (N = 15,874), we found that lower general intelligence (g) in childhood predicts greater racism in adulthood, and this effect was largely mediated via conservative ideology.
A secondary analysis of a U.S. data set confirmed a predictive effect of poor abstract-reasoning skills on antihomosexual prejudice, a relation partially mediated by both authoritarianism and low levels of intergroup contact. All analyses controlled for education and socioeconomic status.
Original here. This is well known by those in power, who have thoughtfully provided these people their own reality-free 24-hour Cable News Network.
“If voting changed anything they would make it illegal”
Although I am a pretty political creature, I tend to eschew politics on the Diner blog. The reasons for that are that there is a time and place for everything, and secondly, I share the apparent presupposition of most Diners that electoral politics is a sham and dumb show conducted every four years to keep we muppets amused. With that in mind as background, I proudly ginned up the following segue, citing as additional evidence of mass stupidity the reelection of Terry Sanford in South Carolina this week. South Carolina has been the crazy uncle living in the attic of American politics ever since, oh, say 1859. But it never trotted out its stuff more aggressively than it did this week, and elevating the serial philanderer, trespasser, liar, adulterer, and misuser of state funds to noble office. Proof positive that debating cardboard cutouts of Nancy Pelosi in. the absence of having anything to say for yourself is really all you need to be elected in South Carolina. This person says it best, the unvarnished, unpolished, wholly unedited letter from a mad-as-shit South Carolinian:
Dear Fellow South Carolinians of the First District,
What the fuck are you people thinking? Mark Sanford, really? Way to keep us in the running, as the shitass craziest state of the nation. One more fuck-up like this and we’ll surpass even Florida — home of child killers, cannibals and roach eaters! The “Palmetto State”, my ass. I think the “Facepalm State” is becoming increasingly more accurate here.
I have to hand it to you though–go big or go home, right? On the same ballot where you elected Mark Sanford, that two-timing turd, you also voted–by a majority of 65%, no less–to protect the sanctity of marriage from scary gay people. Why shart quietly when you can shit the whole bed, am I right? The irony is intoxicating and it makes me puke.
We all know that South Carolina is a conservative bastion–no Democrat has won here in 30 years. Elizabeth Colbert Busch had the qualifications, ran a strong campaign and was leading Sanford in the polls late into the campaign. Realizing that Sanford couldn’t beat Colbert Busch, one-on-one, he had to invoke the name of that Satanist Minx, Nancy Pelosi as the straw man to gain traction. And with all of the cognitive skills of Pavlov’s dogs, you clownfuckers fell for it.
Where is the outrage of 1998, when the Clinton administration was nearly tanked over a blow job? And who was leading the charge in the furor against Clinton’s infidelity back then? None other than fucking white Grimace, himself, Newt Gingrich–you know, that other adulterous goat diddler that you elected as Republican presidential nominee last year.
So what gives, South Carolina? Is this insanity a cry for help or is it, more likely, a stunt for more attention? Were we paying too much attention to Mississippi again? You’re like the pretty blonde with the dazzling smile that boils the pet rabbit at the first hint of rejection.
And don’t pretend like this recent spate of cray-cray is a fluke, either. We also have you to thank for Joe “You lie!” Wilson, and racist hypocrite Strom Thurmond who fathered a child with his parents’ 16 year old black housekeeper. “There’s not enough troops in the army to force the Southern people to break down segregation and admit the Nigra race into our theaters, into our swimming pools, into our homes, and into our churches” But you’re totally down with porking them ain’t ya, eh, Strom?
There is much to love about South Carolina: the food, the gentility of its people, the mellifluous accent, and we can certainly appreciate colorful characters. We dig eccentricity! But hypocrisy is unbecoming, and so is stupidity in the face of facts.
Too bad Congressman-elect Sanford won’t be able to luxuriate in the after-glow of his win. He’ll be tied up in court defending the charge of trespassing onto his ex-wife’s property. I wonder if he’ll repay the state of South Carolina the money he used for his Argentinian booty call. Surely he will because he’s all about “family values” and responsible government spending.
I just snorted mint julep through my nose! You know what, First District? All y’all can kiss my motherfucking ass– that’s right, all y’all ignorant motherfuckers!!
A Formerly Proud South Carolinian
A truly well done rant. Wish I had said that.
As the journalists would say, “add stupidity.” We offer up this article on the overreach of law enforcement. Free Lilly-May Allen!!!
A girl aged ten was told by police that she could be arrested for causing criminal damage – over a game of hopscotch.
Lilly-May Allen was playing with a friend on a grid she had chalked on the pavement in front of her home when a marked police van pulled up.
An officer warned the girls that using chalk on the pavement was criminal damage and they could be arrested for it, before driving off.
But the girls did not understand what they had done wrong and Lilly-May is now reluctant to play outside, according to her father.
After Lilly-May told her parents about the incident, they called the police to clarify the law, but officers refused to confirm whether drawing a hopscotch grid in chalk on the pavement was an offence – even though it washes away in the rain.
The girl’s father, Bob Allen, 51, who runs his own karaoke business, said: ‘The policeman said to her that what she had done was criminal damage and she could be arrested. He then drove off.
‘She didn’t come into the house for a while and didn’t tell us straight away because she thought I was going to tell her off for being naughty.
‘She couldn’t even remember what the policeman had told her it was – only criminal something.’
He added: ‘She is only ten and didn’t know what she had done wrong.
‘I rang up the police and asked if chalking up a hopscotch grid was an offence and they wouldn’t say yes or no and said it was a grey area.
‘I’m angry and upset and if it was against the law then the policeman should have knocked on our door and said something.’
Mr Allen, who lives in a three-bedroom semi-detached home in Ramsgate, Kent, said the incident on Monday had knocked his daughter’s confidence about playing outside.
As as long as we’re piling on the gobshites in what is rapidly becoming the “stupidity” edition of The Week That Was in Doom, let us turn to that gift which keeps on giving, Sen. James Imhofe (R-Saturn):
“The Obama Administration’s cover up of Benghazi is the greatest conspiracy of all time, even greater than the Protocols of the Elders of Zion, which happens to be totally true by the way.”
All this in a week where the Heritage Foundation managed to put out a factually laughable report attributing trillions of dollars to the future costs of immigration. The fact that the report was a tissue of bad assumptions lashed together by a proven bigot seemed to be no impediment.
James DeMint resigned from the Senate (as a representative of South Carolina) some months ago — so he could get a big pay raise to be the head of the conservative Heritage Foundation.
What better place to be rewarded with seven-figures at a think tank, when this is your big thought:
DeMint said if someone is openly homosexual, they shouldn’t be teaching in the classroom and he holds the same position on an unmarried woman who’s sleeping with her boyfriend — she shouldn’t be in the classroom.
Naturally as head of the Heritage Foundation, DeMint used his first big project — critiquing immigration reform to keep those big “ideas” flowing.
One of the co-authors of the Heritage Study claming immigration reform would add $6.3 trillion to the deficit, Jason Richwine, advocated barring immigrants from entering the United States based on their IQ in 2009.
Really getting their Confederate Dollars’ worth the Heritage Foundation.
Yesterday I posted about how former Senator, freak, and current Heritage Foundation President Jim DeMint managed to put out a factually laughable immigrant bashing report put together in large part by a bigot.
But the bigot, Jason Redwine, is so much, so very much more:
The Heritage Foundation’s Jason Richwine, who co-authored the think tank’s study claiming immigration reform will cost trillions of dollars, contributed two articles to a “nationalist” website about Hispanic incarceration rates, Yahoo News reported Thursday. Richwine came under fire after the Washington Post reported Wednesday that his Harvard dissertation argued Hispanics have lower IQs than Caucasians and that the United States should screen immigrants based on their IQ scores.
Meanwhile in reality, which is NOT a whiter shade of pale:
A record seven-in-ten (69%) Hispanic high school graduates in the class of 2012 enrolled in college that fall, two percentage points higher than the rate (67%) among their white counterparts, according to a Pew Research Center analysis of new data from the U.S. Census Bureau.
Looks like it is time for resign again Jim DeMint.
South Carolina again. Caveat emptor.
In other doom-related news this week, the Center for Food Safety has caught the FDA admitting that chicken meat contains arsenic. Skip the chicken when taking mom to Sunday afternoon dinner for Mother’s Day today.
Attorneys at Center for Food Safety (CFS) filed a lawsuit on behalf of CFS, the Institute for Agriculture and Trade Policy (IATP) and seven other U.S. food safety, agriculture, public health and environmental groups to compel the Food and Drug Administration (FDA) to respond to the groups’ three year-old petition which calls for immediate withdrawal of FDA’s approval of arsenic-containing compounds as feed additives for food animals. Filed the same day Consumer Reports released an alarming study on antibiotic resistance in turkey, the lawsuit highlights yet another gaping hole in FDA oversight of animal feed additives.
Arsenic is commonly added to poultry feed for the FDA-approved purposes of inducing faster weight gain on less feed, and creating the perceived appearance of a healthy color in meat from chickens, turkeys and hogs. Yet new studies increasingly link these practices to serious human health problems.
. . .
“FDA leadership is asleep at the switch, if not turning a blind eye to public health,” said David Wallinga, MD, a physician with the IATP. “Seven years ago, IATP blew the whistle on FDA’s indifference to arsenic being needlessly fed to chickens and turkeys. More than a decade ago, we sounded the alarm on how FDA let the routine feeding of drugs to chickens and turkeys help ensure that Americans would eat meat often contaminated with bacteria resistant to multiple antibiotics. We are filing suit because nothing much has changed.”
Some years ago I read a biography of Rasputin, who reportedly dosed himself with arsenic every day as a preventative against assassination. Rasputin was astute enough to realize that his proximity to the Czarina placed him in mortal danger from opportunists in the Czar’s court. In the fullness of time, they did indeed assassinate Rasputin, but he shrugged off the initial doses of poison like after dinner brandy. Disposing of Rasputin required the assassins to shoot him multiple times, wrap him in chains and throw his body into the river. I offer this anecdote in the hopes that regular dosings of arsenic will have a similar salutary effect for those of us who dine regularly at the Doomsday Diner. Bon appetit!
Elsewhere, in a thoughtful and detailed look at the excesses of the FSA Security State, Peter Van Buren writing for Tom dispatch describes appalling detail just how deep the Washington rabbit hole really goes with respect to whistleblowers. A truly Kafkaesque tale.
Robert MacLean is a former air marshal fired for an act of whistle-blowing. He has continued to fight over seven long years for what once would have passed as simple justice: getting his job back. His is an all-too-twenty-first-century story of the extraordinary lengths to which the U.S. government is willing to go to thwart whistle-blowers.
First, the government retroactively classified a previously unclassified text message to justify firing MacLean. Then it invoked arcane civil service procedures, including an “interlocutory appeal” to thwart him and, in the process, enjoyed the approval of various courts and bureaucratic boards apparently willing to stamp as “legal” anything the government could make up in its own interest.
And yet here’s the miracle at the heart of this tale: MacLean refused to quit, when ordinary mortals would have thrown in the towel. Now, with a recent semi-victory, he may not only have given himself a shot at getting his old job back, but also create a precedent for future federal whistle-blowers. In the post-9/11 world, people like Robert MacLean show us how deep the Washington rabbit hole really goes.
The Whistle Is Blown
MacLean joined the Federal Air Marshal Service (FAMS) in 2001 after stints with the Air Force and the Border Patrol. In July 2003, all marshals received a briefing about a possible hijacking plot. Soon after, the Transportation Safety Administration (TSA), which oversees FAMS, sent an unencrypted, open-air text message to the cell phones of the marshals cancelling several months of missions for cost-cutting reasons. MacLean became concerned that cancelling missions during a hijacking alert might create a dangerous situation for the flying public. He complained to his supervisor and to the Department of Homeland Security’s inspector general, but each responded that nothing could be done.
It was then that he decided to blow the whistle, hoping that public pressure might force the TSA to reinstate the marshals’ flights. So MacLean talked to a reporter, who broadcast a story criticizing the TSA’s decision and, after 11 members of Congress joined in the criticism, it reversed itself. At this point, MacLean had not been identified as the source of the leak and so carried on with his job.
A year later, he appeared on TV in disguise, criticizing the TSA dress code and its special boarding policies, which he believed allowed marshals to be easily identified by other passengers. This time, the TSA recognized his voice and began an investigation that revealed he had also released the 2003 text message. He was fired in April 2006. Although the agency had not labeled that message as “sensitive security information” (SSI) when it was sent in 2003, in August 2006, months after MacLean’s firing, it issued a retroactive order stating that the text’s content was indeed SSI.
A Whistleblower’s Catch-22
That disclosing the contents of an unclassified message could get someone fired for disclosing classified information is the sort of topsy-turvy situation which could only exist in the post-9/11 world of the American national security state.
The full story will reward the reader. Suffice it to say that at the same time Guantanamo now holds “86 prisoners who have been carefully vetted by the U.S. military, the FBI, the CIA, and so on, and found to have done nothing for which they could be charged or should be imprisoned and who have been cleared for release– there is no place to release them to, especially since the majority of them are Yemenis and President Obama has imposed a moratorium on transferring any prisoner to Yemen.”
Thus indefinite detention, which is constitutionally prohibited, and which should properly be anathema to the American justice system, is the legal legacy we are leaving our children and grandchildren. That relatively few Americans are aware of or care about this should be startling. “No charges, no trials, but never getting out of prison: that would once have been associated with the practices of a totalitarian state.”
“At the same time no one, not George W. Bush, Dick Cheney, Donald Rumsfeld, Condoleezza Rice, or other top officials involved in setting up such a global system of injustice, sweeping up the innocent with the guilty, and subjecting them to horrors without end (including now force-feeding) will ever be brought to justice in an American court, nor will anyone involved in the system of rendition, torture, or abuse.” The Obama legacy will be that of having institutionalized the worst anti-constitutional excesses of the Bush years, and having sold them with a charming, intelligent brown face. Had John McCain as President tried to do the same thing, liberals and fellow travelers would have stopped this country in its tracks. In 2008 people went to the ballot box to elect Obama as a repudiation of the Cheney-Bush regime. Upon leaving offoce Obama will not only have institutionalized the incursions of the Bill of Rights to which we most objected, but also having insured that no accountability will ever be visited upon the neocons who let us into a pointless, illegal, and immoral war.
And then Carl Herman, or whoever posts things up over at the estimable Washington’s Blog, wraps it all up in a ball for us in a post sure to appeal to doomers of all stripes with Why America Fell So Far … So Fast.
All Empires Crash Soon After They Reach Their Peak
Thomas Jefferson said, “Dissent is the highest form of patriotism.” And because I love my country, I frequently criticize America’s shortcomings in the hopes of making her better.
But the truth is that the United States is not unusual … it is just like all other empires which have hit their peak and then quickly crashed.
. . .
The indications are always the same:
- The financialization of the economy, moving from manufacturing to speculation;
- Very high levels of debt;
- Extreme economic inequality;
– And costly military overreaching.
. . .
PhD economist MarcFaber states:
How [am I] so sure about this final collapse?
Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.
[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world’s greatest civilizations has been 200 years progressing from “bondage to spiritual faith … to great courage … to liberty … to abundance … to selfishness … to complacency … to apathy … to dependence and … back into bondage”
[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical “society cycle.” … The U.S. is somewhere between the phase where it moves “from complacency to apathy” and “from apathy to dependence.”
In other words, America’s rapid fall is not really that novel after all.
This article also cites Jared Diamond’s excellent book “Collapse”, whose conclusions I will not discuss here, is that will be the subject of another post that I had been planning for quite some time. The article over on Washington’s blog is quite good. Don’t miss it.
Closer to home, Tamerlan Tsarniev has reportedly been interred at a burial site in a Muslim cemetery outside of Richmond Virginia. You might well think the dead are dead, let them rest in peace, whatever their transgressions in this life.
The Virginia woman whose actions led to Boston Marathon bombing suspect Tamerlan Tsarnaev being buried about 30 miles north of her Richmond home said the angry backlash from local officials, some cemetery neighbors and online critics has been unpleasant, but she has no regrets.
“I can’t pretend it’s not difficult to be reviled and maligned,” Martha Mullen told The Associated Press in a telephone interview Friday. “But any time you can reach across the divide and work with people that are not like you, that’s what God calls us to do.”
Some of my neighbors think otherwise. A so-called “friend” opened up a thread on his Facebook page in criticism that allowed the butt-picking-finger-sniffing contingent to reveal its howling id. Stunning. As HL Mencken once observed, “No one ever went broke underestimating the intelligence of the American public.” The reflexive hysteria even manifests itself on the local Craigslist site. I found myself yesterday shopping for an old beater truck, which I could use to haul mulch for Contrary. Under the “rants and raves” section I found these offerings from my esteemed fellow citizens:
- That piece of shit deserves to be dug up and tossed in a trash pile like every other man, woman, and child that worships islam
- Now that we know he’s buried so close to here (a 2 hour drive), I know what I will do. I’m gonna eat me a big slab of pork baby back ribs and a laxative. Then I’m gonna drive up there, drop my pants and shit my bowels on his grave.
- people they brought that pig shit that bombed Boston to Virginia and secretly buried him on OUR SOIL!!!!!!!!
I say we start a petition to have him and every other muslim UNBURIED and thrown in the trash dump of any state EXCEPT Virginia
Muslims are pissed cause he wasn’t buried in the place he died in? fuck islam, fuck muslims, I’m pissed cause that pig shit is buried here in Va.
- its our new slogan Welcome to Virginia where we will handle other states garbage
All above (sic).
In closing, I offer you this piece of wisdom: never think it can’t get worse. It can, and will. Your neighbors will insist.
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 Gail Tverberg
Published on Our Finite World on April 30, 2013
Discuss this article at the Epicurean Delights Table inside the Diner
I have written in recent posts that oil limits are more complex than what many have imagined. They aren’t just a lack of a liquid fuel; they are inability to compete in a global economy that is based on use of cheaper fuel (coal) and a lower standard of living. Oil prices that are too low for oil exporting nations are a problem, just as oil prices that are too high are a problem for oil importing nations.
Debt limits are also closely tied to oil supply limits. It is actually debt limits, such as those we seem to be reaching right now, that may bring the whole system to a screeching stop. (See my posts How Resource Limits Lead to Financial Collapse, How Oil Exporters Reach Financial Collapse, Peak Oil Demand is Already a Huge Problem, and Low Oil Prices Lead to Economic Peak Oil.)
We have many Main Street Media (MSM) paradigms that mischaracterize our current predicament. But we also have what I would call Green paradigms, that aren’t really right either, because they don’t recognize the true state of our predicament. What we need now is new set of paradigms. Let’s look at a few common beliefs.
Inadequate Oil Supply Paradigm
As I stated above, indications that oil supply is a problem are confusing. MSM seems to believe, “If the US can be oil independent, our oil supply problems are solved.” If a person believes the goofy models our economists have put together, this is perhaps true, but this is not true in the real world.
Without a huge, huge increase in US oil production (far more than is being proposed), being “oil independent” simply means that we are unable to compete in the world market for buying oil exports. US oil consumption ends up dropping, and we end up on the edge of recession, or actually in recession. Oil exports instead go to the countries that have lower manufacturing costs (that is, use oil more sparingly). See Figure 1 below. In fact, even some of the oil products that are created by US refineries end up going to users in other countries, because it is businesses in other countries that are making many of today’s goods, and it is these businesses and the workers they hire who can afford to buy products like gasoline for their cars or diesel for their irrigation pumps.
Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.
The Green version of this paradigm seems to be, “If world oil supply is rising, everything is fine.” This is related to the idea that our problem is “peak oil” production caused by geological depletion, and if we haven’t hit peak oil production, everything is more or less OK. In fact, the limit we are reaching is an economic limit, that comes far before world oil supply begins to decline for geological reasons. See my post, Low Oil Prices Lead to Economic Peak Oil.
The real paradigm is, “Limited oil supply leads to financial collapse.” This is true for both oil exporters and for oil importer. For oil importers, the problem occurs because they cannot import enough oil, and oil is needed for critical parts of the economy. The belief by economists that substitution will take place is not happening in the quantity and at the price level (very low) that it needs to happen at, to keep the economy expanding as it has in the past.
Limited oil supply first leads to high oil prices, as it did in the 2004 to 2008 period; then it leads to government financial distress, as governments try to deal with less employment and lower tax revenue. By the time oil prices start falling because of the poor condition of oil importers, we are well on our way down the slippery slope to financial collapse.
The MSM version of this paradigm is, “Growth can be expected to continue forever.” A corollary to this is, “The economy can be expected to return to robust growth, soon.”
In a finite world, this paradigm is obviously untrue. At some point, we start reaching limits of various kinds, such as fresh water limits and the inability to extract an adequate supply of oil cheaply.
Economists base their models on the assumption that the economy only needs labor and capital; it doesn’t need specific resources such as fresh water and energy of the proper type. Unfortunately, substitutability among resources is not very good, and price is all-important. In the real world, growth slows as resources become more expensive to extract.
The Green version of the growth paradigm seems to be, “We can have a steady state economy forever.” Unfortunately, this is just as untrue as the “Growth can be expected to continue to forever.” Even to maintain a steady state economy requires far more cheap-to-extract oil resources than the earth really has. (US shale oil resources, which are the new hope for oil growth, can only grow if oil prices are sufficiently high.)
We are very dependent on fossil fuels for making our food supply possible and for our ability to make metals in reasonable quantity. Fossil fuels are also necessary for making concrete and glass in reasonable quantities, and for making modern renewable energy, such as hydroelectric dams, wind turbines, and PV panels. We cannot keep 7 billion people alive without fossil fuels. Perhaps the quantity of fossil fuels consumed can be temporarily reduced from current levels, but with continued population growth, any savings will be quickly offset by additional mouths to feed and by the desire of the poorest segment of the population to have the living standards of the richest.
Unfortunately, the correct version of the paradigm seems to be, “Overshoot and collapse is to be expected.” This is what happens in nature, whenever any species discovers a way to way to increase its energy (food) supply. Yeast, when added to grape juice will multiply, until the yeast have consumed the available sugars and turned them to alcohol. They then die.
The same pattern has happened over and over with historical civilizations. They learned to use a new approach that allowed them to increase food supply (such as clearing land of trees and farming the land, or adding irrigation to an area), but eventually population caught up. Research shows that before collapse, they reached financial limits much as we are reaching now. The symptoms, both then and now, were increasingly great wage disparity between the rich and the working class, and governments that needed ever-higher taxes to fund their operations.
Eventually a Crisis period hit these historical civilizations, typically lasting 20 to 50 years. Workers rebelled against the higher taxes, and more government changes took place. Governments fought wars to get more resources, with many killed in battle. Epidemics became more of a problem, because of the weakened condition of workers who could no longer afford an adequate diet. Eventually the population was greatly reduced, sometimes to zero. A new civilization did not rise again for many years.
Figure 2. One possible future path of future real (that is, inflation-adjusted) GDP, under an overshoot and collapse scenario.
It seems to me that unfortunately overshoot and collapse is the model to expect. It is not a model anyone would like to have happen, so there is great opposition when the idea is suggested. Overshoot and collapse is very similar to the model described in the 1972 book Limits to Growth by Donella Meadows and others.
Role of Economics, Science, and Technology Paradigm
The MSM paradigm seems to be, “Economics and the businesses that make up the economy can solve all problems.” Growth will continue. New technology will solve all problems. We don’t need religion any more, because we now understand what makes people happy: More stuff! As long as the economy can give people more stuff, people will be satisfied and happy. Economics even can allow us to find “green” solutions that will solve environmental problems with win-win solutions (assuming you believe MSM).
The Green version of the paradigm seems to be, “Science and technology can solve all problems, and can properly alert us to future problems.” Again, we don’t need religion, because here we can put our faith in science to solve all of our problems.
I am not sure the Green version of the paradigm is any more accurate than the MSM media version. Science is not good at figuring out turning points. It is very easy to miss interactions that are outside the realm of science, and more in the realm of economics–for example, the fact high-priced oil is not an adequate substitute for cheap-to-extract oil, and it is the lack of cheap oil that is causing a major portion of today’s problem.
It is also very easy to put together climate change models that are based on far too high assumptions of the amount of fossil fuels that will be burned in the future, because economic interactions are missed. If debt collapse brings down the economy, it will bring down all fossil fuels at once, meaning that the vast majority of what we think of as reserves today will stay in the ground forever. A debt collapse will also affect renewables, by cutting off production of new renewables, and by making maintenance of existing systems more difficult.
The real paradigm should be, “Neither science and technology, nor economics can solve the problems of humans. We have instincts similar to those of other species to reproduce in far greater numbers than needed for survival, and to utilize all resources available to us. This leads us toward overshoot and collapse scenarios, even though we have great knowledge.“
Because of our propensity toward overshoot and collapse scenarios, humans have a real need for a “moral compass” to tell us what is right and wrong. If there is no longer enough food to go around, how do we decide which family members should get it? Is it OK to start a civil war, if there are not enough resources to go around? There is also a need to deal with our many personal disappointments, such as finding that the advanced degrees we worked so hard on will have little use in the future, and that life expectancies are much lower. Perhaps there is still a need for religion, even though many have abandoned the idea. The “story line” of religions may not sound exactly reasonable, but if a particular religion can provide reasonable guidance on how to handle today’s problems, it may still be helpful.
Climate Change Paradigm
The MSM view of climate change seems to vary with the country. In the US, the view seems to be that it is not too important, and that it can be adapted to. Perhaps the models are not right. In Europe, there is more belief that the models are right, and that local cutbacks in fossil fuel consumption will reduce world CO2 production.
The Green view of climate change seems to be, “Of course climate change models are 100% right. We should rationally be able to solve the problem.” There is only the minor detail that humans (like other species) have a basic instinct to use energy resources at their disposal to allow more of their offspring to live and to allow themselves personally to live longer.
Unfortunately, a more realistic view is that climate change may indeed be happening, and may indeed by caused by human actions, but (1) we are already on the edge of collapse. Moving collapse ahead by a few months will not solve the climate change problem, and (2) collapse itself is an even worse problem than climate change to deal with. By the time rising ocean levels become a problem, population is likely to be low enough that the remaining population can move to higher ground, and agriculture can move to where the climate is more hospitable.
Climate change may indeed cause population to drop even more than it would if our only problem were overshoot and collapse. But because the cause is related to human instincts (having more offspring than needed to replace oneself and the drive to use energy supplies that are available), changing the underlying behavior is extremely difficult.
Over the eons, the earth has been cycling from one climate state to another, with one species after another being the dominant species. Perhaps natural balances are such that the time has now come that humans’ turn as the dominant species is over. The earth is now ready to cycle to a state where some other species is dominant, perhaps a type of plant that can use high carbon dioxide levels. If this is the case, this is another disappointment that we will need to deal with.
Nature of Our Problem Paradigm
The MSM’s paradigm seems to be, “Our problem is getting the economy back to growth.” Or, perhaps, “Our problem is preventing climate change.“
In a way, the MSM paradigm of “Our problem is getting the economy back to growth,” has some truth to it. We are slipping into financial collapse, and in a sense, getting the economy back to growth would be a solution to the problem.
The underlying problem, however, is that oil supply is getting more and more expensive to extract. This means that an increasing share of resources must be devoted to oil extraction, and to other necessary activities (such as desalinating water because we are reaching fresh water limits as well). As a result, the rest of the world’s economy is getting squeezed back. See my post Our Investment Sinkhole Problem. Squeezing the world’s economy creates great problems for all of the debt outstanding. The likely outcome is widespread debt defaults, and collapse of the world economy as we know it.
The Green paradigm seems to be, “We have a liquid fuel supply problem.“ If we can solve this with other liquid fuels, or with electricity, we will be fine. Many Greens also emphasize the climate change problem, so their big issue is finding electric solutions for the liquid fuel supply problems. There is also an emphasis on local food production, especially with respect to perishable foods.
Unfortunately, the real problem seems to be, “We are facing a financial collapse scenario that is likely to wreak havoc on all energy sources at once.” Using less oil products may be helpful for a while, but in the long term, we are dealing with an issue of major system collapses. Using less of a particular product “works” as long as the supply chain for that product is still intact, including the existence of all of the factories needed to make the product, and the existence of trained workers to operate the factories. Banks also need to remain open. World trade needs to continue as well, if we are to keep our supply chains operating. The real danger is that supply chains for many essential services, including fresh water, sewage disposal, medicines, grain production, road repair, and electricity transmission repair will be interrupted. As a result, we will need to find local solutions for all of them.
The situation we are facing is not at all good. While we can do a little, it will be very challenging to build a new system that does not use fossil fuels. In the past, when the world did not use fossil fuels, the population was much lower than today–one billion or less.
Also, in the past, we started simple, and gradually added complexity to solve the problems that arose. This time around, we need to do the reverse. We already have very complex systems, that are too difficult to maintain for the long term. What we need instead is simpler systems that can be maintained with local materials. This is not a direction in which science and technology is used to working.
Creating new systems that require only local resources (and a few other resources, if transport can be arranged) will be a real challenge. Areas of the world that have never adopted modern technology would seem to have the bast chance of making such a change.
Importance of Tomorrow Paradigm
MSM seems to assume that we can save and plan for tomorrow. Greens have a similar view.
Perhaps, given the changes that are happening, we need to change our focus more toward to day, and less toward tomorrow. How can we make today the best day possible? What are the good things we can appreciate about today? Are there simple things we can enjoy today, like sunshine, and fresh air, and our children?
We have come to believe that we can and will fix all of the problems of tomorrow. Perhaps we can; but perhaps we cannot. Maybe we need to simply take each day as it comes, and solve that day’s problems as best as we can. That may be all we can reasonably accomplish.
Off the keyboard of RE
Published on Reverse Engineering June 2009
Discuss this article at the Money Table inside the Diner
Note from RE: Monsta and I have both been engaged lately in taking a deeper look at how Money works, particularly in the aftermath of the Gold Smackdown that went down in the paper/digital markets a short while back.
This is not a new topic of course, it’s an old one in the collapse blogosphere, particularly as it relates to the effects of Deflation & Hyperinflation, and I’ve hit on the topic numerous times in the past. In the course of putting together the most recent series on Money, Monsta turned up the following articles originally published on Reverse Engineering. Since they relate to my last Future of Money article, I’m republishing them now here on the Doomstead Diner.
We all love to hate Fiat Money. I certainly write plenty of metaphors about “Printing” and “Burning Up the paper we use for currency (though less these days than the Digibits in your account, accessed with your Plastic Card and Password). As the digibits and the paper dissolve and burn up here however, recidivists of the PM variety pine longingly for the days of a Precious Metal Standard. Gold Sovereigns, the Pound Sterling, that sort of thing. I think many fantasize about their own little cask of Louis d’Or Gold coins buried in their backyard, and some may even have the equivalent of that in Gold Eagles or Kruggerands.
What I would like to discuss here is the limitations of PM Coins as a Currency, and why they in fact are much easier to counterfeit and debase than the paper stuff is.
First off, as you hopefully know, the total amount of gold and silver available for coinage is pretty limited. For Gold, it amounts to about .7 oz for each person on the earth. So, even if you made tiny gold goins of .1 oz each, distributing them out across the world each person could only have an average of 7 coins. One a day, that actually works out nice Small though that number is, you still could imagine such a system working if in addition to the 7 Gold Coins you might earn each week, you also could exchange them for say 70 silver coins to use in actual commerce. You give say 20 Pieces of Eight to your landlord for rent, 30 pieces of eight to buy groceries, 10 pieces of eight to buy fuel to heat your house and cook your food, 5 pieces of eight to save for a Rainy Day and 5 pieces of eight paid in TAXES.
Seems like a fair system right? Now, I am not even going to get into how easy it is to counterfeit and debase PM coinage, but I am nevertheless going to demonstrate to you why even fairly applied; this currency system fails over time.
You always have some people who save, and some who spend. In a situation where nobody is ALLOWED to borrow or lend, nobody can spend more than they actually earn, and similarly nobody who earns more than they spend can make any money in interest payments. However, even in the absence of THAT, the system still fails, and the reason is the Savers or Hoarders if you prefer.
Say you start out your system with 100 people, 7 Gold coins to a person for 700 total Gold Coins in your community. To augment that, you have 7000 Pieces of Eight you use for daily commerce. Your entire economy is defined by 7000 POEs and 700 GCs.
Start out, Week 1. J6P Saver gets through the week saving his 5 POEs. So does another J6P Saver. Joe Spender cannot spend more than he earns, because he isn’t allowed to borrow. What happens in Week 2? Well, in Week 2, if you assume half the J6Ps are savers and half spenders, 50 of them will be hoarding 250 POEs. That means after that week, 3 POEs are out of circulation and in the Piggy Banks. In said scenario, with half the people saving about 8% of earnings and half spending and no borrowing or lending, it would only take about 28 weeks before ALL the POEs were out of circulation and sitting in Piggy Banks! You could exchange them all for the 70 GCs you have and get another 28 weeks out of it, but at the end all the money left is in the hands of the 50% of Savers, the other half of your Tribe has NOTHING. What do you DO with that half of the Tribe? Put them in Prison? They didn’t even go into DEBT! They just did not save while others did.
Well, we added on to this idea with interest and lending, and even more exotic financial instruments like CDS contracts, but the principle remained the same over the ages, and more and more of the money got centralized over time. The ONLY thing that ever really redistributed wealth of the monetary kind was war or revolution; Savers generally are not predisposed to GIVE their money away to spenders.
It’s not just Borrowing and Lending that wreak havoc on a monetary system; it’s the whole concept of SAVING. As soon as you have some Squirrels in a society who harbor a fixed amount of nuts, eventually the nuts run out for all the other squirrels. It doesn’t even matter if they did it fairly or by insidious theft (the latter being the leading cause since about 1600AD), you STILL get the effect of half your society as Haves and half as Have Not’s. Even THAT isn’t the real problem though, you could always just Exile the Have Not’s. The real problem is you dried up the liquidity in the money supply, which is fixed because it’s based on PMs. It gradually comes out of circulation as people save, or in more common circumstances as Goobermints tax it all away from you. Like a Vacuum Cleaner, eventually all the money ends up in ONE bank. Long as you accept what is IN that bank as money, there can be no more commerce past barter. That is the Restart that has happened over and over again through history. Monetary system crashes, Barter replaces it, monetary system reintroduced by hoarders of Gold.
Gold Bugs actually are the BIGGEST cause of Fiat Money. Because they accept Gold as Wealth, they lay the seeds for a Fiat Money system to follow it. What I am trying to drive home here is that a monetary system based on Precious Metals CANNOT work. It’s just a precursor to the Fiat system, which ALSO cannot work. The whole CONCEPT of Money is wrong. That is what is so hard to make people understand.
Far as a sustainable Banking System, I have written about this a few times, and its my hypothesis we need a system based on Food Energy, the Calorie of the food kind which is related to the kilocalorie of the Joule kind which represents thermodynamic energy.
The closest historical model I am aware of is from Feudal Japan, where a “Koku” of Rice represented Wealth. However, as with all the other monetary systems this one also was open to abuse, as more Koku Notes were issued than rice actually existed, especially in times of famine.
The BIG problem you always have in a monetary system, whether it is Paper Money or PM Coins is making the Money Supply MATCH the absolute output of the society in terms of its food supply. Fossil Fuels THOROUGHLY disguised this problem with the Green Revolution, food became EXCEEDINGLY cheap, to the point it had to be GIVEN away in the form of Food Aid, which of course just exacerbated the Overshoot Problem we face now.
Retreating here now, REVERSE ENGINEERING our way back off this problem requires to things primarily. First it requires tying the currency we use to the ABSOLUTE amount of food produced in any year worldwide. Then it requires honest accounting to withdraw or add currency to circulation as the total amount of food calories rise or fall in a given year. ALMOST impossible to do of course, but not completely IMPOSSIBLE either.
Essentially, you have to issue NEW Currency each year based on the total Harvest, and this also prevents you from SAVING any “money” from year to year. The only thing you could actually save is the REAL commodity it’s based on, if it was Koku its RICE. If in ADDITION to the Harvest, you ALSO had 5 Bushels of Rice in your Doomstead Larder, Koku Currency could be issued on that as well.
Max SAVINGS for any individual with such a system? Perhaps around 7 Years, the max you might keep bushels of rice stored in your grain cellar without it going bad or eaten by mice. Do I hear JOSEPH here? Do I hear the BIBLE? Hello, that shit was written with 5000 years of human experience gone before it, all that stuff about “Never a Borrower or Lender Be” and 7 years of Famine were written for a REASON. Why do you think they wrote all that shit about the Golden Calf? The Gold thing left them impoverished OVER AND OVER again! So eventually a bunch of them said to HELL with that, and made a new set of rules, which of course nobody really followed.
Economic systems and savings is all about consolidation of POWER. They became increasingly complex with time, but the fundamentals remain true. Because some peoples save and others spend, wealth consolidates over time as long as you define some object as the repository of wealth. That object historically was PMs, lately it has be US Treasuries, but in NEITHER case did these objects represent REAL wealth in absolute terms, they only represent it for so long as a particular monetary system holds up, which traditionally is no more than around 50 years. Thus the reason for that other tradition in Judaism, the Jubilee Year, were all debts are Forgiven.
I am not in favor of Jubilee Monetary system. I advocate for a yearly system based on the absolute number of food calories produced in that year. Clear Accounting of the production, and then a clear issuance of currency to match what was produced plus what was saved from prior years. That is correct accounting of the wealth, and trade can proceed from there in a Mark to Market fashion, NOT mark to Make Believe. There still will be winners and losers, there still will be savers and spenders. However, outrageous accumulations of wealth will not be possible, not past the 7 year lifespan of most food. I am OK with somebody being 7 times wealthier than me because they are a good saver. I am NOT OK with somebody being 7000 times wealthier than me because their ancestors took control of our monetary system. That is patently unfair, and needs to end here. End it will, by default in both senses of the word. A contracting economy can’t support a monetary system based on growth, and in the absence of copious amounts of Energy, our economy is destined for contraction for the forseeable future.
Off the keyboard of Michael Snyder
Published on Economic Collapse on April 25, 2013
Discuss this article at the Gold Table inside the Diner
All over the United States we are witnessing unprecedented shortages of ammunition, physical gold and physical silver. Recent events have helped fuel a “buying frenzy” that threatens to spiral out of control. Gun shops all over the nation are reporting that they have never seen it this bad, and in many cases any ammo that they are able to get is being sold even before it hits the shelves. The ammo shortage has already become so severe that police departments all over America are saying that they are being told that it is going to take six months to a year to get their orders. In fact, many police departments have begun to trade and barter with one another to get the ammo that they need. Meanwhile, the takedown of paper gold and paper silverhas unleashed an avalanche of “panic buying” of physical gold and physical silver all over the planet. In the United States, some dealers are charging
premiums of more than 25 percent over the spot price for gold and silver and they are getting it. People are paying these prices even though they are being told that delivery will not happen for a month or two in many cases. Some dealers are feverishly taking as many orders as they can, and they are just hoping that they will be able to get the physical gold and silver to eventually fill those orders. Personally, I have never seen anything like this. If things are this tight now, what is going to happen when the next major financial crisis strikes and people really begin to panic?
The shortages and rationing of ammunition at gun shops all over America just seem to keep getting worse. The following is from an article by a gun owner down in Texas named Brad Meyer…
If you’d like to see a normally sullen sales clerk chortle with derisive pleasure, just walk into just about any gun range, sporting goods store or mass merchandiser and try and buy a couple boxes of .22 ammunition.
Gun enthusiasts are up in arms about a nationwide shortage of ammunition. Handgun ammo in general is particularly difficult to find – and when you do find it, there are restrictions on the amount you can buy and how much you’re going to be paying for it.
While the list of hard to find ammo is long, .22 long rifle and 9mm handgun ammunition are particularly difficult to find in quantity. And the few places that have it are charging a premium rate and usually limiting purchases to one box, per person, per day.
Many gun owners try to find ammunition by going on the Internet, but things have gotten so tight that now any ammo that becomes available online is often gone within seconds…
There are websites where people across the country post links to where ammunition is available – and it sells out within seconds. Not minutes or hours – seconds.
Unfortunately, all of this demand is also driving up prices. Just check out what Meyer says is happening to the price of standard .22 ammo…
The demand is driving up the cost of ammunition. Six months ago, standard .22 ammo – the most common type of bullet produced in the world – could be had in bulk for around five cents apiece. It is now going for 50 cents or more on some websites – and people are paying it.
But this shortage is not just affecting private citizens. According to Newmax, police departments all over the nation are dealing with ammo shortages unlike anything that they have ever seen before…
Sheriff Anthony DeMeo of Nye County, Nev., was told his department’s regular order of 50,000 rounds could take up to a year to arrive.
“This is the first time ever I’ve heard that there’s a problem with a law-enforcement agency getting ammo for their agency,” DeMeo told The Las Vegas Sun.
These departments are not alone. Law enforcement agencies in Oklahoma, Wisconsin, Arizona, and Georgia are among many that are having to limit how much they give their officers due to the shortage.
Could you imagine waiting for “up to a year” to get more ammunition?
A recent article posted on CNSNews.com had some more examples of police departments that are reporting that there is a massive wait to get more ammo…
Chief Pryor of Rollingwood, Texas says of the shortage:
“We started making phone calls and realized there is a waiting list up to a year. We have to limit the amount of times we go and train because we want to keep an adequate stock.”
“Nobody can get us ammunition at this point,” says Sgt. Jason LaCross of the Bozeman, Montana police department.
LaCross says that manufacturers are so far behind that they won’t even give him a quote for an order.
“We have no estimated time on when it will even be available,” LaCross says.
This is insane.
What in the world could be causing such an ammo crunch?
Well, certainly the demand for guns and ammo has been trending up in recent years – especially since Barack Obama was elected.
But that doesn’t fully account for the shortages that we are witnessing at the moment.
So what is going on?
Well, some people believe that the federal government is responsible. It has been reported that they have signed contracts to purchase “up to” 1.6 billion rounds of ammunition. According to Forbes, this amount of ammunition would be enough to fight a “hot war” in America for 20 years…
The Denver Post, on February 15th, ran an Associated Press article entitled Homeland Security aims to buy 1.6b rounds of ammo, so far to little notice. It confirmed that the Department of Homeland Security has issued an open purchase order for 1.6 billion rounds of ammunition. As reported elsewhere, some of this purchase order is for hollow-point rounds, forbidden by international law for use in war, along with a frightening amount specialized for snipers. Also reported elsewhere, at the height of the Iraq War the Army was expending less than 6 million rounds a month. Therefore 1.6 billion rounds would be enough to sustain a hot war for 20+ years. In America.
Could this be a way that the Obama administration is trying to restrict the amount of ammo that gets into the hands of private citizens?
That is what some people are suggesting.
According to talk radio show host Michael Savage, the ammo contracts that the federal government has signed give them priority over all other purchasers…
What Homeland Security is doing here is they’re issuing a contract to buy up to that amount of ammo if they want it…
It’s a way to control the amount of market that’s available on the commercial market at any time.
If they go to the ammo manufacturers and say give me 50 million rounds, give me another 30 million rounds… if they periodically do this in increments, they’re going to control how much ammo is available on the commercial market.
As part of their contract it stipulates in there that when the government calls and says give us another quantity, that everything they make has to go to the government priority one before any of it goes to the commercial market.
So, if they get nervous, all they have to do is use that contract that they have in place… and they just say ‘give us some more.’
So whenever the government wants to tighten the supply of ammunition, all they have to do is invoke their contracts and order more for themselves.
Meanwhile, Obama appears to be doing other things to restrict the amount of ammo that gets into the hands of private gun owners.
For example, there are reports that the Obama administration plans to use executive orders to greatly restrict the importation of ammo from overseas.
So if anything, the shortage of ammunition is only going to get worse, not better.
Meanwhile, the “panic buying” of physical gold and physical silver that we have seen lately has really run down inventories.
According to Reuters, demand has become so intense that the U.S. Mint has suspended sales of gold coins for the first time since 2009…
The U.S. Mint said it has suspended sales of its one-tenth ounce American Eagle gold bullion coins as surging demand after bullion’s plunge to two-year lows depleted the government’s inventory. This marks the first time it has stopped selling gold product since November 2009, dealers said.
At the same time, precious metals dealers all over the country are scrambling to meet the voracious demand that they have been seeing this month. The following is an excerpt from a letter that the CEO of Texas Precious Metals recently sent out to his customers…
The physical silver market is, in a word, ugly. There is no telling at this point when mint inventories will return to normal, but you can be sure it will not happen within the next 8 weeks. Most dealers, at this point, are selling their current customer demand forward, meaning they are selling product they do not presently have, expecting to pull from future mint allocations. Consequently, future allocations will face pressure from today’s demand. It is not my intent here to comment on the business practices of other companies, but I will say that no one can possibly predict future allocations at the time. The US mint, for example, releases its allocations weekly, and until then, dealers have no insight into allocation levels. Last week, we turned away business in excess of 100,000 ozs of silver because of stock depletion. However, we stand by the notion that it is better to lose a sale than lose a customer by delaying delivery two months (or more).
A similar thing is happening over in Asia. According to the Financial Times, soaring demand has caused a shortage of gold at the Hong Kong Gold & Silver Exchange Society…
Haywood Cheung, president of the Hong Kong Gold & Silver Exchange Society, said the exchange had effectively run out of most of its holdings as members looked to meet a shortfall in supply amid rampant retail demand for gold products.
“In terms of volume, I haven’t seen this gold rush for over 20 years,” he told the Financial Times on Monday, adding that the exchange only had around twenty 1kg bars, and 100 five-tael bars left in its inventory. “Older members who have been in the business for 50 years haven’t seen such a thing.”
But most disturbing of all is what Jim Sinclair told King World News recently. Apparently his friend went to get his gold out of a Swiss bank the other day and they refused to give it to him…
A person that I know with significant deposits in one of the primary Swiss banks, in allocated gold, wanted to take out his gold and was just refused on the basis of directives from the central bank….
They told him the amount was in excess of 200,000 Swiss francs and the central bank had instructed them not to do it because it has to do with anti-terrorism and anti-money laundering precautions.
I really wonder whether those are precautions or whether the gold simply isn’t there. Now you tell me that a London delivery has basically failed. It has to raise our suspicions that the lack of physical gold behind the paper gold is literally so severe that we are coming to understand that it is in fact not there.
The gold that people think is stored is not stored, and the inventory of the warehouses for exchanges may not be holding deliverable gold. There has always been speculation about whether or not the physical gold the US claims to store is in fact in those vaults.
The greatest train robbery in history might be all of the gold, and it would only be something like we have described above that would happen right before gold makes historic highs.
There simply is no gold behind the paper. One example is AMRO, a second is your example with Maguire, and a third is my dear friend who was refused his gold on the basis that its value was too high. Remember this friend of mine had his gold in an allocated account in storage at a major Swiss bank. I repeat, there is no gold.
So are we going to see more of this?
Will it soon become evident that there is simply not enough physical gold to cover all of the promises that the banks have made?
Jim Sinclair sure seems to think so.
In another interview, John Embry expressed similar sentiments to King World News…
This gets back to the tip of the iceberg when the Dutch Bank ABN AMRO came out and literally said that if you have allocated gold with us, you can’t have it.
That, to me, is a default, and it gets back to what Jim Sinclair related when one of his friends went to a Swiss bank and couldn’t get his allocated gold. I mean that’s preposterous. If it’s allocated it should be there, but it’s clearly not there. I think this is the beginning of the end of the massive Ponzi scheme in paper gold. I have been talking about this for some time, and it will have an enormous impact on future gold and silver prices.
When it becomes widely known that all of the people who think they own gold in fact don’t own gold, that it’s been hypothecated and re-hypothecated so many times that there are 100 claims for every single ounce of physical gold, that is when the prices of gold and silver will really go berserk to the upside, and at that point the shorts will have serious problems.”
If those that helped engineer the recent takedown of paper gold and silver were hoping to scare people away from physical gold and silver, then they failed miserably. For even more on this, please see my recent article entitled “10 Signs The Takedown Of Paper Gold Has Unleashed An Unprecedented Global Run On Physical Gold And Silver“.
All of this is just another example why I encourage people to get prepared while times are still relatively good.
Once disaster strikes, it may be too late to get the things that you need.
Right now there are a whole lot of people out there wishing that they had stocked up on ammo when it was much cheaper and much more readily available.
We are moving into a time when everything that can be shaken will be shaken. Use the stability provided by the false bubble of economic hope that we are experiencing right now as an opportunity to get prepared. The next major wave of the economic collapse is rapidly approaching and time is running out.
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 Monsta666
Discuss this article at the Money Table inside the Diner
The terms below should prove useful in understanding the content of this article:
|Anchor/Reserve Currency – Is the currency that is most commonly held by foreign central banks as reserves and is most commonly used to settle accounts when trading for vital commodities such as food/oil etc.|
|Fixed Exchange Rate – Sometimes referred to as a pegged exchange rate. A fixed exchange rate means a currency is priced at fixed range to another currency most commonly the reserve currency. Fixed exchange rates offer price stability to exporters but this comes at the expense of the country being unable to alter its competitiveness, in terms of exports, on the world market. A fixed exchange rate also leaves the country open to speculative attack meaning the country’s central bank must defend its exchange rate using foreign reserves. Notable examples of a country failing to defend its exchange rate occurred in 1992 when the UK failed to defend its rate in what was to be later dubbed “Black Wednesday”.|
|Floating Exchange Rate – Is when a currency is openly allowed to be traded in the foreign exchange market. A floating exchange rate allows the currencies to become more or less competitive depending on market forces but comes at the expense of greater volatility in currency prices. This issue of volatility is problematic for less developed countries and it is this reason why they tend to favour fixed exchange rate policies.|
In part 2 and part 3 we established not only the basic mechanics of the monetary system but also that all major currencies are debt based. Moreover due to the component of interest the total level of debt will always exceed the money supply of an economy. It is this property that means that long-term stability can only be assured if there is continued growth in the money supply and for this growth to remain viable it requires that the growth in the overall economy i.e. wealth increases in lockstep. Since resources and ultimately wealth in the planet is finite it follows that the balance between money and wealth will eventually fall out of sync and we will be faced with a situation of too much money (hyperinflation) or too little money (deflation). This part of the money/wealth series will attempt to answer the question of what scenario is more likely.
It is perhaps logical to think that if the rate of wealth extraction (GDP) declines and money supply increases then the obvious conclusion would be that hyperinflation would be the inevitable end-point as the number of claims on wealth (money) would vastly exceed the amount of actual wealth available in the economy. While such a conclusion sounds plausible it is important to consider that hyperinflation is only a relative measurement. That is the value of the currency can only diminish relative to something else so when making such statements it should be made explicit what the currency is hyperinflating against. In light of this it is best to make a small detour by explaining the International Monetary System and the one remaining function of money that has been neglected up to this point which is:
Relative valuation mechanism: Money acts a means of putting a numeric value to every good or service in the economy.
While this function may seem patently obvious the act of adding numeric value to each good or service greatly facilitates trade. To understand why this is the case it is best to consider a situation where no money exists. In a less developed community with no money the main means of exchange would likely be barter. The issue with barter is exchange rates for each item must be made so if we had carrots, tuna and milk we would need to devise an exchange rate for each combination of item i.e. 5 carrots = 1 tuna, 1 tuna = 3 litres of milk, 1 litre of milk = 1 carrot. While this system of barter maybe possible with a low number of items once the number of goods or services on offer increases then it becomes exceedingly difficult to maintain valuations for all items as all the possible combinations for trade become staggering high even with a modest number of items to trade for.
This issue becomes especially problematic if the availability of some items is very volatile (say some items go in and out of season). Moreover if there is a large degree of trade taking place it will become necessary to keep a number of goods in reserve as some goods such as tuna would be more easily bartered for certain goods while in other circumstances carrots maybe needed to barter for other items.
As we can already see the system of barter is quite cumbersome and the costs of storing all those reserves and maintaining exchange rates for dozens maybe even hundreds of items for future trade create addition costs than can quickly become prohibitive. It is this reason why most communities – once reaching a sufficient size – develop a monetary system as money serves to add numerical value to all items in question eliminating the need for constant reserves and constant revaluation of exchange rates.
As it happens this system is not only useful on a national scale but is especially important when it comes to the matter of international trade where the reserve or anchor currency serves the same function of “money” as it does with a small community described above. For the same reasons mentioned above, it would be impractical for every exporting nation to trade their domestic currency in exchange for each nation it happened to import into. If this method of trade occurred then every nation would need large amounts of reserves of every currency it happened to trade with and this dynamic would suffer the same inefficiencies as highlighted earlier. To avoid this issue a reserve currency has been established and all nations settle the vast majority of international accounts using that reserve currency. As a result all major central banks hold this currency in their reserve (hence the name). If we look at the chart below we find that there has always been a reserve currency and this dynamic has occurred for hundreds of years:
Bretton Woods System
In 1944 when the US officially became the world’s reserve currency with the establishment of the Bretton Woods system as it was clearly the most creditworthy and powerful nation in the world as all its former rivals literally lay in ruin.
In this particular incarnation the reserve all other foreign nations had their currencies pegged to the dollar at a fixed exchange rate. The dollar could then be redeemed for gold and $35 was enough to acquire one troy ounce of gold. This dynamic would continue until August 1971 when Richard Nixon closed the gold window making the dollar a fiat currency.
So how do countries decide on which currency becomes the reserve currency of the world? Generally a currency gains reserve status if it is the currency that belongs to the largest and most creditworthy country in the planet.
While there are definite benefits to having a reserve currency there are clear weaknesses with this system. This weaknesses stems from the fact that if a reserve currency is decided upon then the demand for that currency rises significantly as not only is the currency used for domestic purposes but foreign nations will demand enormous quantities of this currency to settle international accounts. In fact in many cases these international settlements will not even directly involve the country that holds the reserve currency. This large demand creates a strong incentive for the nation holding the reserve currency to overspend and run large deficits so it can supply other nations with the necessary reserves (and liquidity) to allow them to trade. Indeed after only 15 years of the Bretton Woods system being established Robert Triffin made the following observation:
“If you choose a currency because it’s a strong credit, and then give the issuing nation a financial incentive to borrow and print money recklessly without penalty, eventually that currency won’t be the strongest credit anymore!” – Robert Triffin, 1959
This statement would later become known as Triffin’s dilemma. It was this overconsumption and the subsequent over-indebtedness caused by this consumption that ultimately led to the demise of the Bretton Woods system. Despite this demise however the dollar retained its status as the reserve currency of the world. So why did this happen? As stated earlier the chief reason for this system being implemented in the first place was it facilitated international trade by making it far more efficient so despite its obvious flaws, weaknesses and privileges it bestows to the nation holding the reserve currency the system was maintained for this reason. The other major reason for the dollar maintaining its reserve status was the simple fact that there were no viable alternatives that could supplant the dollar and this fact remains largely true even today.
As time went on another problem became apparent and it centred on large exporting nations such as Germany, Japan the OPEC nations and more recently China. The most obvious and perhaps logical action is to think that foreign nations who received dollars for their exported products would sell the dollars they received from their exports in exchange for local currency via their central banks. However if this actually happened then it would have terrible consequences for the export nations future competitiveness. This is because the act of selling dollars would not only cause the value of the dollar to decline; it would also cause their own local currency to appreciate in value relative to the dollar. If this continued then over the time the value of the exported goods would become more expensive and reduce the nation’s ability to export further products.
The solution to this problem was for the central banks of the exporting nations to hold onto the dollars it received from the exporting company and then issue those companies with newly printed money in their domestic currency. Over time however the amount of dollars these central banks held became substantial and so they invested those dollars back into the US economy with the most obvious target for this investment being US treasury bonds. By doing this the exporting nation avoided the problem of an appreciating currency. This dynamic however had the side-effect that an artificial demand for US bonds was created resulting in the rates the US pays for its debts being kept artificially low. This then encouraged the US to spend beyond its means even further as their lack of financial discipline was not punished with higher interest rates as would occur with other nations. This ability to go into debt without incurring any cost became known as exorbitant privilege and is an advantage that no other nation enjoys.
So why did the export nations such accept this dynamic for decades even though they knew the US was becoming increasingly over-indebted, less creditworthy and generally less financially stable? There are several reasons why this dynamic has persisted but one of the reasons could be the simple fact there was no real challenge to the US dollar. Other reasons would be the strength of the US military and influence in international diplomacy meant that many countries were frightened to not challenge the status quo.
Perhaps the most significant reason for the US retaining its reserve status however may lie in the fact the US insured that all oil is traded in dollars. The US clearly understood the benefits of this exorbitant privilege and wished to maintain it even after the demise of the Bretton Wood system. To achieve this they had to ensure that people had to use the dollars to obtain some vital resource and that resource was oil therefore by linking the dollar to oil the dollar gained petrodollar status. To insure petrodollar status however the US had to make an agreement with various Arab nations that if they kept trading their oil exports in dollars they would receive their “protection” from attack. The Arab states agreed to this agreement and have traded their exports in US dollars ever since. This agreement to trade in oil can offer a possible reason why the US waged a war against Iraq as it was said that Saddam Hussein wanted to trade Iraq’s oil exports in Euros and if successful this would have posed a clear threat to the US’s exorbitant privilege and general hegemony of the US dollar.
How is this related to the deflation/hyperinflation story?
So the question maybe asked why this detour was necessary in the first place. The reason it is important to understand the international monetary system is because by realising how the system operates we can begin to appreciate that the reserve or perhaps the more appropriate term: anchor currency is the currency which all other currencies base their value on.
Considering the anchor currency is the dollar then this means all other currencies gain most of their value by how they are valued relative to the dollar as the dollar acts as the lynch pin to the entire international monetary system. In other words, if the dollar were to hyperinflate then the international monetary system would have no benchmark for other currencies to base their value on and so it would be likely that other currencies would have to hyperinflate themselves to maintain relative valuations to the dollar or more likely global trade would collapse. To understand this phenomenon more easily it is best to offer a hypothetical example.
If we consider the dollar to hyperinflate then it must hyperinflate relative to something else. This would most likely be the Euro the Yen or a currency held by an OPEC member. It can be either one; it does not matter. If the dollar hyperinflated against the Euro then the competitiveness of the Eurozone exports would decline to roughly zero as anyone trading in dollars could not afford to buy them. This lack of competiveness may be obvious to see in terms of US customers being unable to afford Euros as the dollar would be worthless but why would it be bad news for trading with other countries? This is because a considerable amount of international trade is settled in dollars and if the dollars themselves are worthless why would the vast majority of exporters continue to accept payment? It is likely they would refuse payment and so trade would drop dramatically (it can be noted that such an event would be highly deflationary as a collapse of global trade would render many companies insolvent). Now the only way trade could continue to remain viable is if the Euro reduced the value of its own currency rapidly to maintain some parity to the hyperinflating dollar. By doing so its exports could remain competitive and exporters can gain some value from their dollar denominated exports although the rapidly changes are likely to bring about its own issues.
It is this property in the international monetary system that almost guarantees the dollar can only hyperinflate once all other major currencies have already done so. The only scenario that can prevent this from happening is if another currency replaces the dollar as the anchor currency. However this seems rather unlikely because most currencies have generally moved from a fixed exchange to a floating exchange rate. This movement is significant because in the past when more currencies had a fixed exchange rate they held more foreign currencies in case they needed to “defend” their currency to keep it within its fixed exchange rate. By not having a fixed rate then there is no such need to hold these reserves which results in the currency fluctuating over a wider range. This however makes it harder for currencies to move towards a new reserve currency as they need to build more reserves of the new future currency.
On this topic of reserves it is instructive to look at the distribution of currencies held in reserve to see what the most viable alternatives for a reserve currency are:
Foreign reserve figures obtained from the International Monetary Fund.
As we see the only other currency that could realistically supplant the US dollar is the Euro and as off 2011 just under 24% of all foreign reserves is held in Euros. It remains questionable however if the Euro will actually take over the dollar considering the on-going Euro crisis that is making foreign investors question the future stability of the Euro. Indeed many of the developing countries are shedding their reserves of Euro at a tune of $90 billion since 2011. If this trend continues, and it seems likely that it will, then it means the chances of the Euro gaining sufficient worldwide confidence to become the next reserve currencies are slim. If the Euro cannot displace the dollar and become the new reserve currency then it is unlikely any other currency will in the foreseeable future seeing as the next largest reserve currency is the Pound sterling which only makes up around 4% of the world’s reserve currency.
The other popular suggestion for a successor to the dollar is the Chinese Renminbi (RMB) however there are several issues China would need to address in making the RMB a viable contender to replacing the dollar. First it must allow the RMB to be fully convertible so investors can move money in and out of the country easily, second there needs to be greater access to its domestic stock/bond markets which foreigners are largely barred from taking part in. Once these barriers are removed then it can be viewed as a more serious contender but even then the Chinese would need to address the issue of a lack of RMB in the world market. To increase the amount of RMB outside of China it would need to run a trade and capital deficit (as the US did) which is a complete reverse of what policies China is currently undertaking. Due to these reasons it seems unlikely China could become the reserve currency in the foreseeable future. For more information on this matter it is recommended to read Patrick Chovanec’s article which summarises the issue quite nicely.
This all leads back to the situation that the most likely scenario is the dollar will maintain its hegemony over the world market and so because of this the chances of it hyperinflating will be low until the other major currencies collapse first. It is possible however that another major currency such as the Euro could hyperinflate and this collapse could cause the dollar to hyperinflate as the breakdown in the European banking system may trigger a collapse in the global trade rendering the dollar useless outside its domestic market.
Before drawing such conclusions however we must consider the inflationary and deflationary currently at work. On the one hand we have various central banks such as the Federal Reserve with their open ended $85 billion a month QE program and more recently the Bank of Japan following suit with their own $43 billion a month program. These programs have created some inflation but only in the assets market and have had a minimal impact on the general economy; this particular issue was addressed in part 2 of this series. The other possible inflationary forces would be in the case of underlying wealth in the economy declining while the overall money supply would increase thus creating a large inflationary force. This inflationary force has been the main driver of inflation in the general economy and as energy prices have risen so has the cost of producing goods/services.
Speaking of energy it is useful to note that in the build-up to the 2008 financial crisis the price of oil shot up to $147 a barrel and these high prices likely played a significant role in triggering the financial crisis that was highly deflationary. These deflationary forces occurred because a large number of bankruptcies meant that a large amount of the money supply was destroyed as debt had to be removed from the balance sheets of various banks. Mass layoffs reduced spending and these combination of factors caused not only the price of oil to collapse to $35 but it also caused large scale declines in various assets prices from real estate to stock and even bond valuations.
It seems likely that another run up in prices in food, energy and oil prices will likely trigger similar events in the future and unless the inflationary forces are stronger than this then the most likely scenario is for a deflationary end-point. This scenario does assume however that the various central banks will not resort to “naked printing” i.e. giving money directly to consumers to spend. Which is a big assumption to make and it is very possible that if a country’s sovereignty faces an existential crisis then it is very possible they may resort to measures such as naked printing or money printing directed towards large government projects that will prove highly inflationary. Moreover it is very possible for currencies other than the dollar to face imminent hyperinflation once the world markets lose confidence in the currencies viability.
In the story of hyperinflation/deflation it is important to note these terms are all relative. If a currency hyperinflates or deflates it always does so against some other currency. Moreover for an event such as hyperinflation to take place it requires that people can take their currency and transfer this money into something of perceived value; which will be some other stable currency. This explains why governments always add capital controls during periods of high to hyperinflation as it makes peoples’ job of moving their money that much harder thus reducing the rate of inflation.
To demonstrate this last point let us consider a recent case of a currency collapse. In the case of Zimbabwe in 2009 the people of Zimbabwe could transfer their wealth to an object of perceived value, in this case the dollar. In the event of a dollar collapse however it is difficult to envision such an option being available as the value of wealth held in dollars is not only much higher but the amount of currency (say Euros, gold etc) is unlikely to be available in sufficient quantities to hold all this perceived value. If people cannot transfer these dollars into any other asset then hyperinflation cannot take place. Seeing as a collapse of the dollar would also cause global trade to decline massively it becomes even harder to see how hyperinflation would take off as assets and currencies across the board would be affected. In other words there would be no place where wealth could be reliably stored and maintained (which was not the case in Zimbabwe). It should also be noted that if global trade were to collapse then there would be many bankruptcies and most significant bankruptcies of major international banks. As was hinted on in part 2 of this series many of these banking institutions hold derivatives that are worth hundreds of trillions of dollars. If these contracts were not honoured it will lead to a significant perhaps catastrophic deflationary event. In any case though even if the dollar hyperinflated then the value of the other currencies would quickly diminish as their profits from exports would quickly plunge to zero due to massive currency appreciation against the dollar.
The other possible “run” on the dollar could be into precious metals such as gold but even this is unlikely to create hyperinflation either as there is not enough gold to absorb all the lost value from the dollar. This issue becomes even more problematic if we consider that gold ownership is more concentrated than ownership over actual dollars. Moreover such runs are likely to be prevented either through high taxation of gold related transactions or outright confiscation of gold as happened during the Great Depression. In addition to all this if there is a collapse in global trade the amount of goods/services in circulation would greatly diminish so the amount of real wealth in the economy would drop while the amount of gold in circulation would remain the same. If the money supply (in this possible case gold) remains stable while real wealth drops then this will create inflation as the claims are not following the rates of shrinkage in the underlying economy.
With all that said a great deal of caution must be exercised. These matters are far from certain and it should be recognised that at best everything said is informed speculation. We also need to acknowledge there is a good probability that the government can bring in some monetary policy that is highly inflationary particularly if their very existence is under threat. Then there is always the possibility of a black swan event that can change the outcome of the world economy quite markedly.
A war between Iran and Israel or a war between North and South Korea are possible examples of black swan events. In the case of an Iran-Israel war oil pipelines could be destroyed creating such havoc in the oil markets that would likely cease to function making international trade very difficult. A lack of confidence in receiving goods/services could see large exporters dumping their dollar reserves in mass leading to the dollar hyperinflating.
Black Swan Event: A low probability high impact event. Such events often take people by surprise however it is actually quite rare for a true “black swan” event to occur as often the event can be accurately predicted years in advance if people scrutinise data thoroughly in an unbiased manner. The last commonly stated black swan event would be the 2008 financial crisis as claimed by various neoclassic economists.
Assuming such events do not transpire however it seems inconceivable that the dollar could hyperinflate unless the government decided to hand people open checks to consumers to spend as these please or started some major government project using printed money (as was the case in the American Civil War). Also while the fate of the dollar is not likely to result in immediate hyperinflation within the foreseeable future the same cannot be said of other currencies. This I suppose could be included as part of the exorbitant privilege that the US enjoys. However even here there is an important fact to take note and that is in recent years some other currencies have enjoyed this privilege albeit to lesser degree. The UK and Japan have enjoyed low interest payments (which are actually negative in real terms) in their bonds despite both economies experiencing high debt, high fiscal deficits, trade deficits AND low growth prospects. The reason this happens is because both these economies enjoy “safe haven” status due to the on-going Euro crisis. Once the crisis in the Euro is resolved then it remains to be seen how the pound or yen will fair. In the event of a major currency collapse (such as that of the Euro) then it is likely we see appreciation in the Yen, Sterling and most significantly the US dollar in the immediate after mass which is the opposite of a hyperinflation end-point.
 = Black Wednesday: The day that Britain went over the edge (The Telegraph)
 = Currency Composition of Official Foreign Exchange Reserves – COFER (IMF: PDF document)
 = Developing World: Euro Loses Attraction as Reserve Currency (SPIEGEL)
 = Zimbabwe abandons its currency (BBC)
 = Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument (Bank of International Settlements – pdf file)
 = Roosevelt’s gold confiscation: could it happen again? (The Telegraph)
 = QE4 Is Here: Bernanke Delivers $85B-A-Month Until Unemployment Falls Below 6.5% (Forbes)
 = Bank of Japan’s Haruhiko Kuroda in aggressive growth move (BBC)
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 21, 2013
Discuss this article at the Energy Table inside the Diner
We have all heard the story about oil supply supposedly rising and falling for geological reasons. But what if the story is a little different from this–oil production rises and falls for economic reasons? If this is the issue, it doesn’t really matter how much oil is in the ground. What matters is if economic conditions are “right” for continued and rising extraction. I have shown in previous posts that oil prices that are too high are a problem for oil importers while oil prices that are too low are a problem for oil exporters. As a result, oil prices need to be in a Goldilocks zone, or we have serious problems, of one sort or another.
As long as the price of oil keeps rising, there is at least some chance the amount of oil extracted each year will keep rising, because more oil resources will become economic to extract. The real problem arises when oil price falls back from a price level it has held, as it has done recently, and as it did back in July 2008. Then there is a real chance that investment will become non-economic, and because of this, oil production will fall.
Oil prices play multiple roles:
- High oil prices encourage extraction from more difficult locations, because the higher cost covers the additional extraction costs.
- High oil prices allow exporters to have adequate money to pacify their populations, even if their oil exports have been declining, as they have been for many exporters.
- High oil prices allow funds for investment in new oil fields, as old ones deplete.
- High oil prices tend to put oil importing countries into recession, because it raises the costs of goods and services produced, without raising the salaries of the workers. In fact, there is evidence that high oil prices lower wages (both directly and through lower workforce participation).
- High oil prices make countries that use large amounts of oil less competitive with countries that use less fuel in general, and less oil in particular.
When oil prices decline, it is evidence that Items 4 and 5 above are outweighing Items 1, 2, and 3. This tips the scale in the direction of a fall in oil production.
Debt also affects oil prices. As long as investors have faith that businesses can make money, despite high oil prices, they will continue to borrow to expand their businesses. This additional debt helps drive up demand for goods and services of all kinds, including oil, so oil prices rise. Also, if consumers are able to borrow increasing amounts of money, this also drives up demand for goods that use oil, such as cars. But once the debt bubble bursts, it is easy for oil prices fall very far, very fast, as they did in 2008.
If we look at the 2008 situation, oil limits were very much behind the overall problem, even though most people do not recognize this connection. It was the fact that oil limits eventually led to credit limits that caused the system (including oil prices) to crash as it did. High oil prices led to debt defaults and bank write offs, and eventually led to a huge credit contraction in economies of the developed world. This credit contraction affected not just oil demand, but demand for other energy products as well.
The problems of the 2008 period were never really solved: the lack of growth in world oil supply remains, and this lack of growth in world oil supply continues to hold back world economic growth, particularly in developed countries. We recently have not been feeling the effects as much, because with deficit spending, the problems have largely moved from the private sector to the government sector.
The situation remains a tinderbox, however. The financial situation is propped up by ultra-low interest rates, continued government deficit spending, and Quantitative Easing. In a finite world, debt growth cannot continue indefinitely. But if debt growth permanently stops, and switches to contraction, we would end up in an even worse financial mess than in 2008. In fact, such a change would very likely to would lead to a contraction of “Limits to Growth” proportions.
In this post, I will explain some of these issues further.
The Rise and Fall of Oil Prices in 2008
If we look at world oil production and price between January 1998 and July 2008 on an X-Y graph, we see that as long as oil demand stayed below 71 million barrels a day, oil price stayed low (Figure 3, below). But once demand started to push above that level, oil price started to rise rapidly, with little increase in production. It was as if a brick wall on oil supply had been hit. No matter how much the oil price rose, virtually no more production was available.
If we look at an X-Y graph of the non-OPEC portion of oil supply, we see that the situation was even worse for the non-OPEC portion (Figure 4, below). The amount of oil that could be produced at a given price had actually begun to fall back. While in 2003 and 2004, non-OPEC had been able to produce 42 million barrels a day for only $30 barrel, by 2008, non-OPEC could not reach 42 million barrels a day, no matter how high the price. It looked as though non-OPEC had hit “peak oil” production. Geological limits appeared to have the upper hand.
Fortunately, during this period OPEC was able to raise its production somewhat, in response to higher prices, as illustrated in Figure 5, below. Between July 2007 and July 2008, it was able to raise oil production by 2.1 million barrels a day, in response to a $56 dollar a barrel increase in price in a one-year time-period. (The small increase in response to a huge price rise suggests that OPEC’s spare capacity was not nearly as great as claimed, however.)
What brought about the collapse in oil prices in July 2008? I believe it was ultimately a financial limit that was reached that eventually worked its way to the credit markets. Once the credit markets were affected, individuals and businesses were not able to borrow as much, and it was this lack of credit that cut back demand for many types of products, including oil.
The way this cutback in credit came about was as follows: Oil prices had been rising for a very long time–since about 2003, affecting the inflation rate in food and fuel prices. The Federal Reserve Open Market Committee tried (unsuccessfully) to get oil prices down by raising target interest rates. I describe this in an article published in the journal Energy called, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here. The combination of high oil prices and higher interest rates led to falling housing prices starting in 2006 (big oops for the Federal Reserve), and debt defaults, particularly among the most vulnerable (those with sub-price mortgages). As early as 2007, large banks had large debt write-offs, lowering their appetite for more debt of questionable quality. Total US household mortgage debt reached its maximum point on June 30, 2008, and began to fall the following quarter.
By July 2008, the financial problems of consumers in response to high oil prices and falling housing prices had transferred to other credit markets as well. Revolving credit outstanding (mostly credit card debt), hit a maximum in July 2008, and has not recovered (Figure 7 below). (July 2008 is exactly the same month as oil prices began to fall!) Non-revolving credit, such as auto loans, hit a maximum in the same month.
Credit issues kept getting worse. The Federal takeover of Fannie Mae and Freddie Mac took place in September 2008, as did the bankruptcy of Lehman Brothers. By late 2008, cutbacks in credit had spread to businesses including all sectors of the energy industry. I wrote an article on December 1, 2008, documenting that credit issues led to lower prices not only for oil, but for coal, natural gas, nuclear, and renewables as well.
The reason why a cutback in credit availability is a problem is because it is very difficult to buy a new car or home, or to finance a new business operation, if credit isn’t available. In fact, the amount a business or family can spend depends on the sum of their income during a period, plus the amount of additional debt they take on during that period. If the amount of debt outstanding is going down, then, for example, old credit card debt is being paid down faster than new credit card is being added, and the amount currently spent is lower.
The Federal Government tried to fix the situation by running larger deficits (Figure 8), starting the very next quarter after oil prices hit a peak and started declining.
Oil prices rose again starting in 2009 as demand outside the US, Europe, and Japan continued to grow. By 2011, high oil prices were back. The economies of US, Europe and Japan did not bounce back to the kind of economic growth most expected, because at high oil prices, their products were not competitive in a world marketplace that relied on an energy mix that was slanted more toward coal (which is cheaper), and also offered lower wages.
In 2013, world oil supply is still constrained.
It is easy to get the idea from news reports that everything is rosy, but the story presented to us is painted to look much better than it really is. Production from existing sites is constantly depleting. In order to replace declining production, huge investment must be made in new productive capacity. It is as if oil producers must keep running, just to stay in place.
Cash flow has historically financed much investment. Now we read, Energy Industry Struggling to Generate Free Cash Flow.
Many naive people believe Saudi Arabia’s stories about their “productive capacity” of 12.5 million barrels a day, but their maximum crude and condensate production in recent years has been only been 10,040,000, according to the EIA. Their recent production has been only a little over 9 million barrels a day in recent months, according to OPEC Monthly Oil Market Report.
Iraq is supposed to be the great hope for future oil production, yet it increasingly seems to be stumbling toward civil war.
Russia is now the largest oil producer in the world, with a little over 10.0 million barrels a day of crude and condensate production. According to a Russian analyst,”Gas condensate production is the real driver behind the [recent] growth. Crude oil output is falling and organic growth currently is impossible.”
Admittedly, tight oil production has ramped up quickly. But it is an expensive technology, that requires a high oil price, and lots upfront investment. There is evidence that such oil is concentrated in “sweet spots” and these get tapped out quickly. In North Dakota, the earliest area for US tight oil extraction, rig count is down from 203 at the beginning of June, 2012, to 176 at April 19, 2013, according to Baker Hughes. Lynn Helms, Director of the North Dakota Department of Mineral Services gave this explanation, “Rapidly escalating costs have consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on hydraulic fracturing is impacting capital investment decisions.” Meanwhile, North Dakota oil production has recently been flat–perhaps because of weather; perhaps because of other issues as well.
The ramp-up in US crude oil production amounted to 812,000 barrels a day in 2012–very small in comparison to world crude oil needs. World oil production, shown in Figures 1 and 2, is barely affected. In a world with 7 billion people, most of whom would like vehicles, the amount of oil supply being added is tiny.
In 2013, the financial problems of the United States, the Euro-zone, and Japan haven’t gone away.
Current high oil prices make the big oil-importing countries less competitive. It is hard to compete with countries with lower average fuel costs, thanks a mix that it much heavier on coal, and lighter on oil. A graph of oil consumption shows that oil is increasingly going to the Rest of the World, rather than the US, EU, and Japan (Figure 10).
The countries that see little growth in oil consumption are the same ones struggling with low economic growth. Low economic growth makes debt very difficult to repay. Governments are tempted to add more debt, to try to fix their problems.
Tackling government debt problems in 2013 tends to bring recession back.
The big problem when oil prices rise is that workers’ discretionary income is squeezed, because their wages don’t rise at the same time. This problem can somewhat be offset by deficit spending of governments for programs to help the unemployed, and for stimulus.
Once taxes are raised, or benefits are cut, the old problem of lower discretionary income for workers reappears. Thus, the recession that governments so cleverly found a way around previously, re-emerges.
In 2005, there was a very sharp impact to oil prices when high oil prices indirectly affected the credit system. This time, a big issue is rising government taxes and lower benefits. These are staggered in their implementation, so the effect feeds in more slowly. Greece and Spain started their cut-backs early. The US raised Social Security taxes by 2% of wages, as of January 1, 2013. Later it added sequester cuts. All of these effects feed in slowly, and add up.
With respect to debt, in 2013 we are rapidly approaching the time when this time truly is different.
There has been a great deal in the press about a mistake Rienhart and Rogoff recently made in their book, This Time Is Different. I think Rienhart and Rogoff, as well as economists in general, have missed an issue that is much more basic: In a finite world, debt, like anything else, cannot keep growing. The economy (whether economists realize it or not) depends on physical resources, and these are in limited supply. One piece of evidence with respect to the limited supply of oil is the fact that the cost of its extraction keeps rising. This means that fewer resources are available to be used for making other goods and services.
I show in my paper, Oil Supply Limits and the Continuing Financial Crisis, that lower economic growth rates make debt harder to repay. Reinhart and Rogoff seem to confirm this relationship works in practice. In their NBER paper, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” they make the observation, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”(They did not seem to understand why, though!)
The 2007-2009 recession partially brought the level of debt down, outside the government sector. Government debt has been ramping up rapidly because tax revenues are down and benefits are up (Figure 8).
Government debt helps take the place of “missing” debt from other sectors (at least in theory). Now government debt is above acceptable levels. US debt is around 100% of GDP, and growing each quarter.
Without rapid economic growth, only a small portion of the debt that remains can be repaid. If increases in taxes/cutback in benefits leave more without work, a new round of debt defaults can be expected. Student loans are particularly at risk. Business loans maybe a problem as well, especially in discretionary industries. Government debt is likely to be a problem, especially for states and municipalities. Banks may again have financial problems, especially if they have exposure to debt from other countries, or student loans.
I am not certain what will happen to the huge amount of US government debt, if Quantitative Easing ever stops. The same might be said of the debt of all of the other countries doing quantitative easing. Who will buy the debt? And at what interest rate? If the interest rate rises, there will be a huge problem, because suddenly loans of all types will have higher interest rates. Governments will need higher taxes yet, to pay their debts. It will be hard to sell cars with higher interest rates on debt. Home prices will likely drop, because fewer people can afford to buy homes with higher interest rates.
I showed in Reaching Debt Limits what a big difference increases in household debt can make to per capita income (Figure 12).
If debt starts long-term contraction, we will truly have a mess on our hands. Businesses will have a hard time investing. Individuals will have a hard time buying big-ticket items, like cars, furniture, and houses. Demand for all types of goods and services will fall. I showed in my post Why Malthus Got His Forecast Wrong that increasing debt was what allowed rapid growth in fossil fuel use. If debt stops growing and starts shrinking, we will get to see the reverse of this phenomenon.
What is Ahead?
Lower oil prices indicate that demand is declining. (The cost of extraction is not lower!) Lower oil demand seems to be related to poorer earnings reports for the first quarter of 2013, which in turn is at least partly related to the increase in US Social Security taxes withheld, starting January 1, 2013. Nothing will necessarily happen quickly, but by next quarter’s earnings reports, some of the “sequester” cuts will be added to the cuts. Businesses with poor earnings are likely to lay off workers, and those workers will file for unemployment benefits. Gradually, we will see increasing evidence of recession.
It is not clear that this time will necessarily lead to the “all time” switch to long-term debt contraction, but it will bring us one step closer, at least in US, and probably in Europe and Japan as well. Oil supply may not drop very much, very quickly. If we are lucky, demand will bounce back and bring prices back up, as in 2009-2010. But with all of the debt problems around the world, it is possible that a contagion will begin, and defaults in one country will spread to other countries. This is what is truly frightening.
Off the keyboard of RE
Published April-May, 2010 on Reverse Engineering
Discuss this article at the Economics Table inside the Diner
Note from RE: File this article under “the more things change, the more they remain the same”. What follows is an exchange I had with Toby Russell, a quite brilliant Brit 3 years ago on Reverse Engineering, pondering on the Economic Issues of the day and the Future of Money. We rehearse these questions now on the pages of the Doomstead Diner for a somewhat larger audience, but in all honesty in 3 FUCKING YEARS, not a whole lot has changed here as of yet and the same questions remain to ponder on until they do.
Toby and I had many a great chat on the subject of money, and inside the Diner I will paste a few more of them. With luck, Toby will find his way to the Diner as well, and we can renew, refresh and update the $64,000 Question on the Future of Money in the post-Industrial Economy.
To begin, from my keyboard:
Who ARE the Bond Vigilantes?
Exactly how the monetary system will come apart remains an open question, but more and more each day you see a structure developing for the collapse. It comes in the form of the internal battle between Nation States and those who have “invested” in Nation States in the Bond Market, which in Europe is currently in a Death Spiral that can only be slowed if the Sovereigns “guarantee” the bonds currently being repudiated by whoever it is who buys those bonds. The so-called “Bond Vigilantes”
So who really ARE the Bond Vigilantes, and WHO is the “market”? Its not J6P for the most part, I mean who buys Greek Bonds with their spare change? In aggregate J6P who actually HAS 401K might be buying some of this trash as part of his portfolio, but inr reality most of this trash is bought by the Big Banks as proxies for the Iluminati. Once it starts to go BAD, they want to offload it all onto the balance sheet of J6P the taxpayer, that is what Bailouts amount to.
There is a BIG confusion in using the term “market” when it comes to the dealings of Big Capital. Most people think of the market as the aggregate of what all the people in society are buying and selling, but that is not true at all with respect to sovereign debt. The massive TRILLIONS in debt that are being issued these days by Sovereigns all over the globe cannot be absorbed by the savings of J6P, because the money didn’t exist before to buy it. It really can only be bought by the Big Banks who can Borrow money from the Central Banks at close to Zero Interest. The CB then writes the money into existence and loans it to them.
It’s all a big Circle Jerk, and the end result is it loads up all the bad debts on the balance sheet of the Taxpayer, which the taxpayer cannot actually pay because he is Unemployed and no longer pays taxes, so the Bond Vigilantes/Big Banks drive the interest rate up still higher for borrowing.
The problem is coming to a head now, and it pits varying Pigmen and various arms of Da Goobermint against each other. Neil Barofsky has a plethora of litigation ready to undertake here that will make the little SEC lawsuit against the Squid look like child’s play. T will be undertaken also, because the Political Survival of most of the apparatchiks depend on finding Scapegoats. Besides that, you have lawsuits that will be filed on behalf of States that got fucked by the Banksters along the road as well. Pigman vs.Pigman, the battle begins.
Greece is and remains Small Potatoes in this battle, but what is done here to Bail them out only sets up bigger bailouts for the other Hostages to the Banksters, the rest of the PIIGS. Because their debt is “risky” now, the “Bond Vigilantes” are driving up the debt costs for the other nations also. Which means they also must seek a Bailout. Some pundits think when this hits Spain the market will choke on it, maybe so maybe not. However, its also going to eventually hit the FSofA market after all the weaker chickens have been slaughtered here. Nobody is out there to Bailout the FSofA sovereign, not even the Chinese, because they hold the debt already, into the Trillions. That is their “savings”. No reason to buy MORE worthless toilet paper for the Chinese.
So, the only “out” here is for the FSofA to buy its own debt in perpetuity, issuing more and more paper. Hyperinflation of the money supply, but not necessarily hyperinflation of prices until and unless those newly created dollars start filtering out of the system into the hands of J6P, which is nowhere on the horizon.
The reality here? Goldman Sachs, JP Morgan Chase et al are now engaged in a circle jerk trading with themselves, they ARE the “market”. They can keep propping it up so long as the CBs keep issuing them Interest Free Money to speculate with. Problem is of course, that is just driving the sovereigns into ever deeper bankruptcy.
Eventually one of these sovereigns will crash, and nobody will bail them out. The CDS will trip, and then the House of Cards will crash here. Still has a coupel of layers to go though. They will print the money to Bailout Greece, and probably Portugal and Spain also. When the Debt Tsunami hits the ISSUER of the Debt, the Federal Reserve Bank, then it will come to an end. How long will that take? Based on progress since Bear Stearns of upward Cascade Failure, my guess is 2 years. In the meantime, Volatility is going to be WILD. Very hard to pinpoint what asset class or what Sovereign will be the next target of the Bond Vigilates. However, target them they will, because they have to make a PROFIT here. The only way to do that is to turn the world into their Debt Slaves.
I’m getting very interested in MMT, as I have posted at my blog. What we are really saying when we argue there is too much debt (there is) and this sucker is going down, is that money is the most important thing there is, that nothing can be done about it, someone’s got to pay, and so on. But in reality of course money’s just so much numbers. Ecological issues aside, real wealth is not diminishing, only debt obligations are growing. What do we do about this? Drown in our idea of what money is, or redesign it?
on MMT as well. Many of the concepts we have covered in the past seem to be a
part of this. You seem to favor these days offering up the whole panopoly of
currency forms here, from Demurrage money on the international level to a
variety of state and local currencies all operating at the same time.Clearly, if this was actually operating on the local level commerce would be
quite the bear for your local Convenience Store clerk. You show up at the store
with some of RE’s Moosechips, and the clerk has to check to see first if MCs are
on the list of currencies he is authorized to take. Then he has to check the
daily (hourly?) exchange rate for Moosechips to price out the merchandise
against whatever currency it usually is priced out in. Granted, the Computer he
uses probably could be programmed to do this all automatically and even monitor
exchange rates in nanosecond intervals, but its still going to mean a drawer
full of lots of different notes, and how do you make change?Next problem is exactly how do you save your money? Do you save it in
Moosechips? This is kind of like the problem people who worked for companies
that paid in their own Scrip faced. Its only good for buying stuff at the
Company Store, and when the Company goes outta biz, its worthless Toilet Paper.
Sort of like what will happen when the FsoA goes outta biz on the grand scale.
Beyond this, I don’t see how having many forms of currency operating resolves
the Interest problem. People who Loan out money will still expect Interest on
it, elsewise there is no point in loaning it out. With many currencies
operating, the problems you have now of unscrupulous Banskters creating more
notes than they actually have assets to back them up would be even more
intractable than it is now.
Clearly on the International level the Top Level Demmurage Money has to be used
as a settlement form, and a 5% Demurrage is liking saying you have 5% Inflation
all the time. If you aren’t growing faster than that you are gonna be losing
money. Is there room for 5% Growth in our real economy? Considering the Energy
problems we have even BEFORE the Big Spill, I think we would be lucky to keep
the Shrinkage at 5%, which is a total 10% differential between the Demurrage and
the Negative Growth rate.
As bad as our Money problem is, the real problem here for the Industrial society
remains the Energy problem. For the Transportation portion of this economy, its
more than that, its Portable Energy as well. The society needs to be
restructured along lines which require less movement of goods and people around
and a slower pace of life all around. Unfortunately, all the infrastructure we
have built here is built around precisely the opposite concept, and REBUILDING
it now with substantially less Available Energy per capita will be quite
difficult, if not impossible. Of course, a 90% Die Off of the Human Population
would solve the per capita problem by lowering the denominator, but this is not
a concept most people consider a good solution.
My guess here remains that the current monetary system we are using is going to
continue onward here in Epic Fail mode for a while yet to come, exactly how long
I am not sure. Whether it reaches a Critical Point that results in a Sudden
Stop Event or whether it just continues to deteriorate and we all slowly Boil
like Frogs also is open for debate. If/When the Dollar fails completely,
likelihood would be states and local communities will substitute their own
currencies, but even if well managed and temporarily successful all will also
collapse due to the interest problem in a negative growth environment. It
doesn’t matter if you put a Demurrage on the Money of 5% or Inflate the currency
at 5%, it’s the same result in either case. In fact 5% is even more onerous
than the 2% or so Inflation the Fed sets as a Target Rate, so I expect you would
see a monetary collapse even faster than the typical 60 –80 year cycle we see
So, is it all HOPELESS and we are just spinning our wheels here to no purpose?
Well, if the hole they poked in the crust of the Earth down in the GOM keeps
spilling out PUSS here, yes its quite hopeless and worrying about what kind of
money we are going to use in the future is a massive waste of the short time we
have left breathing the last Oxygen the phytoplankton produce for us. However,
on the slim chance that the Bozo Engineers who popped this pimple can plug it up
and we are not currently experiencing the beginning of a new Permian Extinction,
the exercise is worthwhile. Not so much for us in this generation, but for
those a few generations down the line AFTER the great Die Off is finished.
Perhaps we can leave a legacy for them of how they can build a Better Tommorow
and NOT make the same mistakes half a millennia of Capitalism led us into here.
Talk about EPIC FAILURE of an economic system, Capitalism is going out with a
mighty Big Bang here. Yeesh.
they work. It is not about some guys saying accept my MCs because I say
so, or the two of us agree so, but is more well thought out than that.
I’m not going to go into all the details, but there are variants out
there in operation and have been for a while. Time will kill off the
weak ones, and favour the strong, as it always does.As for the demurrage currency, that is global and for investment and
international trade purposes only, not for saving. The demurrage
inspires investment in projects which have long term value. See the
Bernard Lietaer talk: http://vimeo.com/6491175for more details.Interest/usury still acts as it does now on the natinoal currency, as a
kind of vacuum cleaner on fiat national currencies and spur to savings,
so people will get into debt and so on, as the prudent will be able to
save, though the kind of future the changes I hope for would initiate
would change plenty, perhaps even how saving and retirement works. But
when big problems through over indebtedness arise there won’t have to be
any bail outs. Those banks that got too greedy have no leverage on the
sovereign to save themselves with, because the sovereign controls money
supply with the tools laid out in MMT (existing tools actually like
taxation and bond issuance and purchase). Life would still have its
financial ups and downs, but they would not represent systemic threats.
The ride would be a bit smoother.All of this is moot in an energy crisis, as you say, but the viable and
working alternatives to oil are out there (unless that GOM spill undoes
everything — time will tell). Also an absolute necessity is the death
of our lust for eternal GDP-growth and a corresponding transition away
from consumerism. MMT offers an attitude to money which allows us,
culturally, to be more open minded about where value lies. To my mind
real value lies in healthy relationships: ecological, socioeconomic and
societal. Technological unemployment could be embraced too by a more MMT
way of thinking about the economy, which would help us review what we
are alive on this planet for, and the kinds of activities and behaviours
which really make life sustainable and enjoyable.So in the end this is going to be about striking the right balance
(isn’t it always?). It’s not just Joe’s currency versus Jack’s, versus
fiat versus the Terra (Lietaer’s suggestion for the global demurrage
currency), but other things too, outlined above. To me MMT is but one
important plank in all this, though perhaps the first that needs to be
laid down, because the way most people think of money and value, they
seem prepared to let the world go down for money’s sake. That’s plain
stupid, and I don’t want any part of it.Toby
Off the keyboard of John Ward
Published on The Slog beginning April 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Note from RE: The first 2 installments of this new Series by John in this article. We’ll feature the rest in Chunks as John whacks them out off his Keyboard.
In the Red
This picture was taken, unstaged, at 3.43 pm on Friday 19th April 2013 in Athens, a eurozone capital.
It shows a young Greek male, his arm outstretched to beg…but with a face hidden by the shame of being reduced to such a state. As I passed this hapless figure today – and I have encountered a great many similar sights since arriving here – what struck me was the tragic rigidity of rigor mortis in this quasi-crucifixion: a boy barely mature condemned to living like the Undead. He is a victim of eurocrat hubris and the selfish lies of feral neocon gargoyles – walking obscenities who recognise nothing beyond the business bottom line and the Sovereign banking balance sheet.
At one level, this is just a young kid who deserved better. At another, he represents both a horribly wasted resource for social capitalism….and more fuel for the furnace of extreme and destructive politics.
Throughout this weekend, The Slog will be entirely devoted to showing and explaining a side of Clubmed the Western European business and mainstream press titles seem largely unwilling to examine: the disgraceful tableau of business decimation and social destruction being wreaked by scorched-earth austerity.
CRISIS ATHENS begins tomorrow and will run through to Sunday evening
These pictures are of a main Athenian thoroughfare, Stadiou. Think ‘Tottenham Court Road’, and then imagine every kiosk, stall, shop and indoor precinct closed down, every small shop empty and impossible to rent, and the once-bustling pavements half empty.
The Greek media that care run endless stories about starving children, lack of medication, old people dying because they cannot afford heating, and huge cuts in welfare relief.
These are all worthy topics for anyone still unclear about the catastrophic social effects of repayment-focused austerity in ClubMed. But if nobody buys in shops, eats in restaurants, sits in cafes or furnishes homes, businesses die in very short order.
In three short years, the banks of the world, the bureaucrats of the EU, and the Central Bank of Mario Draghi have wiped out Stadiou. Like the American South after the Civil War, it is a culture gone with the wind. All that remain are kids shooting up in the darkness of formerly thriving alleyways, and bill posters advertising things nobody has the money to buy.
Behind much of Athens’ attraction as a tourist centre lies another layer of self-sustaining business: the wholesale trade. This above any other is small family business, where honesty, trust and quality are the basis of commerce. It too has been decimated, as both domestic and tourist consumption of goods plummeted after 2010.
Everywhere are grills, graffiti, parked scooters, litter, and locks. Nowhere is any business being done. An entire sector of the City’s economy has been surgically removed. But nobody bothered to stitch up the open wound afterwards.
What you can see in Athens is the death of independent small business competition, the desecration of families that depended on it, and the reassuring certainty for the fat cats that in future, where once there was community liberty and self-reliance, there will before too long be imported global goods produced by multinational companies, cheap property ready to be torn down by developers, and the State enjoying control over a demoralised population totally dependent on it.
Some of the commercially naive bureaucrats and anthropologically ignorant political ‘leaders’ behind this policy represent yet more examples of what is wrong with European establishments throughout the continent. But for others – the Stateists, the neocon social engineers, the bourses, and the banks – all of this lost human energy is seen as the logical (and desirable) consequence of driving the Great Global God of Growth.
In the vicious circle that is hard-sold debt >> government overspending and embezzlement >> high-tax austerity >> economic collapse >> social misery >> drastic political change, the Far Right is getting 1 vote in 8, and the Radical Left looks like having the largest number of Deputies after the next election. Both have reached these positions from having been tiny (<4%) Parties three years ago.
But now at last, the focus is beginning to move away from corrupt old Parties and polemic ideologues towards a sort of patriotic pragmatism that no longer wants the euro. I spoke to several business people during my stay in Athens; most of them were not politically radical, but they recognised the need for a radical change to the economic model.
“The austerity programme is counter-productive because it destroys economic consumption in order to pay off State debt,” said a middle manager in a larger foreign-owned Greek furniture business, “this is like asking Berlin to pay off French municipal debt. It is resented, but more importantly it is sacrificing recovery to the lenders’ needs. The lenders may get their pound of flesh, but afterwards the patient is paraplegic.”
“The euro is the problem, no doubt,” said the co-owner of a medium-sized hitech business, “but if Greece were to go it alone and quit the euro, our business would be destroyed by a loss of credit confidence internationally. People like us want the euro to fail completely, so everyone will have to start again”.
His partner agreed. “The biggest problem we have right now is liquidity with which to expand, and credit so we can close deals with customers. Every week we work more and more to make less and less”.
“These fantasies of the Troika,” one CEO of a rapidly-growing political lobbying consultancy began, “they are all bullsh*t. The New Democracy and Pasok go along with it because they are weak and corrupt. But now things are far too serious for this to continue. The threats to Greek business and national sovereignty will get worse as the lenders’ demands get more and more crazy. We have to elect commercial people now who will gain public respect, and say “No” to the EU.”
Resentment towards the State sector and powerful bureaucrats is every bit as visceral as the disdain felt about the Troika.
Said one small entrepreneur, “These Troika people, so well dressed, such nice attache cases. They stay in the Hilton at Greece’s expense. None of them has any idea about business – only debt and repayment schedules. Now they insist that 150,000 civil servants be fired. Hah! That’ll be the day. Now they try to retire them off with fat pensions, but still they demand that the empty desks are filled with young recruits. They will cling onto our skin until we are all dead.”
There is a lot for the body politic to change here. The attitude to the euro, the weak resistance of Troika demands, fear of the bureaucrats, and the development of under-appreciated export businesses such as olive oil and wine. Nobody I met thinks the current crop of MPs is ever going to be capable of it. But there are endless scenarios in play as to how drastic change might come.
Of which, more later today.
Acropolis Now: Athens may be in slavery, but it is not in chaos
One thing I just love about the Brussels-am-Berlin approach to repression is the way that, the instant an ice-pick has been thrust into the heart of a ClubMed economy, in bounds Olli Rehn to tell the cadaver how keen the EU is to help with the funeral expenses.
Pretty much since the start of the Greek debt crisis, the Troika’s agents of mass distraction have been putting out a commentary about Greece which runs as follows:
“The Greeks are dishonest donkeys who sit around in string vests drinking Ouzo all day and dreaming up new ways to cheat the taxman. Now that they have descended into self-inflicted debt, their social systems are chaotic, their false accusations against Germany are nothing more than self-pity, and the Greek economy is revealed to be dysfunctional.”
This approach has been honed over time, a truth clearly visible in the bullying EC’s approach to Cyprus. Allegedly, the Cypriot banking system was based on an unsustainable model of offering high interest-rates to Russian crooks, and thus had to be ‘rescued’ by Brussels.
The truthful alternative to that Spin From Berlin is, ‘Cyprus banks 0bserved EU rules at a far higher rate than Germany, and at a level of total gdp half that of Luxembourg. Far from being unsustainable, the model was going from strength to strength until the Eunatics begged Cyprus to back the Greek bailout. From that moment on, Cyprus was doomed. Not only has it not been rescued by B-am-B, Nicosia’s reward for backing the Troika over Greece has been to have its depositors and taxpayers forced to pay for their own bailout’.
But setting this aside, allow me to explain (with pictures too) that despite all this, Athens is not remotely chaotic…and its sights are more wonderful than ever.
I call these next few pictures ‘Work in Progress’. if only because Athens sites don’t look after themselves…but while preservation and further archaeology continue, good local planning rules ensure that good sight of the tourist sights continues.
Hadrian’s Arch for instance (left) has a timeless sweep to dwarf the contemporary crane. But equally (below) the humble scaffold is vital for the restoration of noble arches. The ‘architectural’ paving and street lights that surround the overall structure, however, complement the original perfectly.
There truly is something of a grey/beige softness to the natural stone here that is quintessentially Greek. The classic postcard from Greece shows a stark white of a church dome, but the Acropolis in Athens has every couleur doux on offer, from sand to lime
There is virtually nowhere in Athens where you can’t see the Acropolis. Even from the far side of a three-lane highway (below) well to the north east, it still stands out as a monument to ancient Greek civilisation.
The Olympic ideal was revived by the Greeks in 1898, after which the modern Olympiad began. The symmetry of the stadium built at that time is a joy to behold from every angle.
The Temple of Olympian Zeus provides perhaps the best site from which to get a sense of Athens in its setting. There can be few cities on the planet with a more breathtaking location, taking in mountains and sea beneath: any shot taken on the open ground of this site gives away that location superbly.
But away from the monuments, Athens is a place of secret surprises wherever you wander. Parkland, forests, small oases of restoration
The smells, meanwhile, are dizzying at this time of year: the heady scent of orange blossom, and – in many of the coniferous woods – that flinty smell of pine-sap that makes you long for a glass of Retsina. (And the next morning, makes you wish you hadn’t)
That’s not to say Athens lacks its fair share of ghastly mistakes in sculpture and architecture. There is, for instance, the running green man sculptural monstrousity to commemorate the last Olympics on the Vassileos Konstantinou: it looks like a veg-humaan grafting failure from the botanical garden of Dr Moreau. And there is in turn a hotel where black-smoked windows must’ve seemed to someone like the perfect backdrop to five gigantic kitsch terra-cotta window-boxes. I didn’t photograph either eyesore, for fear of putting you off.
In truth, with the right – that is to say, fair – publicity, it would be hard to put anyone of discernment who likes cafe society, good food and warm people off Athens. But somehow, those beautiful people who brought you the euro, apple mountains, wine lakes, bailouts, bailins, Wolfgang Schäuble and the Troika seem dead set on doing so. All the more reason, then, to come here anyway.
Off the keyboard of Michael Snyder
Published on Economic Collapse on April 17, 2013
Discuss this article at the Economics Table inside the Diner
Is the United States about to experience another major economic downturn? Unfortunately, the pattern that is emerging right now is exactly the kind of pattern that you would expect to see just before a major stock market crash and a deep recession. History tells us that when the price of gold crashes, a recession almost always follows. History also tells us that when the price of oil crashes, a recession almost always follows. When both of those things happen, a significant economic downturn is virtually guaranteed. Just remember what happened back in 2008. Gold and oil both started falling rapidly in July, and in the fall we experienced the worst financial crisis that the U.S. had seen since the days of the Great Depression. Well, a similar pattern seems to be happening again. The price of gold has already crashed, and the price of a barrel of WTI crude oil has dropped to $86.37 as I write this. If the price of oil dips below $80 a barrel and stays there, that will be a major red flag. Meanwhile, we have just seen volatility return to the financial markets in a big way. When volatility starts to spike, that is usually a clear sign that stocks are about to go down substantially. So buckle your seatbelts – it looks like things are about to get very, very interesting.
Posted below is a chart that shows what has happened to the price of gold since the late 1960s. As you will notice, whenever the price of gold rises dramatically and then crashes, a recession usually follows. It happened in 1980, it happened in 2008, and it is happening again…
A similar pattern emerges when we look at the price of oil. During each of the last three recessions we have seen a rapid rise in the price of oil followed by a rapid decline in the price of oil…
That is why what is starting to happen to the price of oil is so alarming. On Wednesday, Reuters ran a story with the following headline: “Crude Routed Anew on Relentless Demand Worries“. The price of oil has not “crashed” yet, but it is definitely starting to slip.
As you can see from the chart above, the price of oil has tested the $80 level a couple of times in the past few years. If we get below that resistance and stay there, that will be a clear sign that trouble is ahead.
However, there is always the possibility that the recent “crash” in the price of gold might be a false signal because there is a tremendous amount of evidence emerging that it was an orchestrated event. An absolutely outstanding article by Chris Martenson explained how the big banks had been setting up this “crash” for months…
In February, Credit Suisse ‘predicted’ that the gold market had peaked, SocGen said the end of the gold era was upon us, and recently Goldman Sachs told everyone to short the metal.
While that’s somewhat interesting, you should first know that the largest bullion banks had amassed huge short positions in precious metals by January.
The CFTC rather coyly refers to the bullion banks simply as ‘large traders,’ but everyone knows that these are the bullion banks. What we are seeing in that chart is that out of a range of commodities, the precious metals were the most heavily shorted, by far.
So the timeline here is easy to follow. The bullion banks:
- Amass a huge short position early in the game
- Begin telling everyone to go short (wink, wink) to get things moving along in the right direction by sowing doubt in the minds of the longs
- Begin testing the late night markets for depth by initiating mini raids (that also serve to let experienced traders know that there’s an elephant or two in the room)
- Wait for the right moment and then open the floodgates to dump such an overwhelming amount of paper gold and silver into the market that lower prices are the only possible result
- Close their positions for massive gains and then act as if they had made a really prescient market call
- Await their big bonus checks and wash, rinse, repeat at a later date
While I am almost 100% certain that any decent investigation by the CFTC would reveal that market manipulating ‘dumping’ was happening, I am equally certain that no such investigation will occur. That’s because the point of such a maneuver by the bullion banks is designed to transfer as much wealth from ‘out there’ and towards the center, and the CFTC is there to protect the center’s ‘right’ to do exactly that.
You can read the rest of that article right here.
There are also rumors that George Soros was involved in driving down the price of gold. The following is an excerpt from a recent article by “The Reformed Broker” Joshua Brown…
And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he’s making an absolute killing.
Once again, I have no way of knowing if this is true or false.
But enough people are saying it that I thought it worthwhile to at least mention.
And to me, it would make perfect sense:
1. Soros is a macro investor, this is THE macro trade of the year
so far(okay, maybe Japan 1, short gold 2)
2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being “When I see a bubble, I invest.” He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble.
3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the “smartest guy in the room” locking in a profit after a 12 year bull market.
4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque’s previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that – as a technician – the very obvious breakdown of gold’s long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) – what else is there? Cash flow? Book value?
5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he’s doing in gold but he does reveal his thoughts on it having been “destroyed as a safe haven”
It is also important to keep in mind that this “crash” in the price of “paper gold” had absolutely nothing to do with the demand for physical gold and silver in the real world. In fact, precious metals retailers have been reporting that they have been selling an “astounding volume” of gold and silver this week.
But that isn’t keeping many in the mainstream media from “dancing on the grave” of gold and silver.
For example, New York Times journalist Paul Krugman seems absolutely ecstatic that gold has crashed. He seems to think that this “crash” is vindication for everything that he has been saying the past couple of years.
In an article entitled “EVERYONE Should Be Thrilled By The Gold Crash“, Business Insider declared that all of us should be really glad that gold has crashed because according to them it is a sign that the economy is getting better and that faith in the financial system has been restored.
Dan Fitzpatrick, the president of StockMarketMentor.com, recently told CNBC that people are “flying out of gold” and “getting into equities”…
“There have been so many reasons, and there remain so many reasons to be in gold,” Fitzpatrick said, noting currency debasement and the fear of inflation. “But the chart is telling you that none of that is happening. Because of that, you’re going to see people just flying out of gold. There’s just no reason to be in it.Traders are scaling out of gold and getting into equities.”
Personally, I feel so sorry for those that are putting their money in the stock market right now. They are getting in just in time for the crash.
As CNBC recently noted, a very ominous “head and shoulders pattern” for the S&P 500 is emerging right now…
A scary head-and-shoulders pattern could be building in the S&P 500, and this negative chart formation would be created if the market stalls just above current levels.
“It’s developing and it’s developing fast,” said Scott Redler of T3Live.com on Wednesday morning.
Even worse, volatility has returned to Wall Street in a huge way. This is usually a sign that a significant downturn is on the way…
Call options buying recently hit a three-year high for the CBOE’s Volatility Index, a popular measure of market fear that usually moves in the opposite direction of the Standard & Poor’s 500 stock index.
A call buy, which gives the owner the option to purchase the security at a certain price, implies a belief that the VIX is likely to go higher, which usually is an ominous sign for stocks.
“We saw a huge spike in call buying on the VIX, the most in a while,” said Ryan Detrick, senior analyst at Schaeffer’s Investment Research. “That’s not what you want to hear (because it usually happens) right before a big pullback.”
The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.
And according to Richard Russell, the “smart money” has already been very busy dumping consumer stocks…
What do billionaires Warren Buffet, John Paulson, and George Soros know that you and I don’t know? I don’t have the answer, but I do know what these billionaires are doing. They, all three, are selling consumer-oriented stocks. Buffett has been a cheerleader for US stocks all along.
But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks. Berkshire sold roughly 19 million shares of Johnson and Johnson. Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble. He has also cleared out his entire position in Intel. He has sold 10,000 shares of GM and 597,000 shares of IBM.
Fellow billionaire John Paulson dumped 14 million shares of JP Morgan and dumped his entire position in Family Dollar and consumer goods maker Sara Lee. To wrap up the trio of billionaires, George Soros sold nearly all his bank stocks including JP Morgan, Citigroup and Goldman Sachs. So I don’t know exactly what the billionaires are thinking, but I do see what they’re doing — they are avoiding consumer stocks and building up cash.
… the billionaires are thinking that consumption is heading down and that America’s consumers are close to going on strike.
So what are all of those billionaires preparing for?
What do they know that we don’t know?
I don’t know about you, but when I start putting all of the pieces that I have just discussed together, it paints a rather ominous picture for the months ahead.
At some point, there will be another major stock market crash. When it happens, we will likely see even worse chaos than we saw back in 2008. Major financial institutions will fail, the credit markets will freeze up, economic activity will grind to a standstill and millions of Americans will lose their jobs.
I sincerely hope that we still have at least a few more months before that happens. But right now things are moving very rapidly and it is becoming increasingly clear that time is running out.
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on April 13, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Thatcher: The Oily Lady
There has been an awful lot of debate raging since former British prime minister Margaret Thatcher died last week. And like many debates that raise the emotional tempo this one is crystalizing nicely into two competing camps, namely the camp that says she ‘saved’ the UK from decline and the camp that says she left it a scorched moral wasteland where only the greedy and the bigoted flourish.
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 John Ward
Published on The Slog on April 13, 2013
Discuss this article at the Economics Table inside the Diner
What you see above isn’t just the tale of a horrendous day for gold – it fell $88, or just over 4%, in a day – it is the record of a fall that steepened the minute New York opened, twice tried (and failed) to rally, and yet managed to do all this on a day when the vast majority of fundamentals should’ve been pushing the price up, not down.
The one exception to this was the Troika demand on Thursday that Cyprus sell its gold to help pay off debt. I have two observations to make about that: one, why do that to Cyprus now and not to anyone else before? And two, on paper it didn’t look like the sort of volume to start a gold freefall.
This is a murky business, so we need to consider it from all sensible angles.
The US is degrading and diluting its currency, the UK’s austerity strategy is falling apart, the EU economy is flatlining, and Russia is massively overdependent on energy sales in a world where the outlook for energy consumption is awful: indeed, only the coldest european Spring for decades has enabled it to maintain any kind of momentum.
China’s slowdown now looks inevitable given the atrocious consumption outlook outside its borders, and US economic nerves tightened yesterday when the IMF cut its growth forecast for the year from 2% to 1.7%, alongside official figures confirming a 0.4% slump in retail sales in March – the biggest fall since last July. Factory output in the EU declined, and the north-south imbalance worsened as Slovenia edged towards the centre of the debt radar. Italy’s output fell by a disastrous 8%, and Portugal’s constitutional Court has rejected the Troika’s bailout plan. 41% of Germans no longer believe their banked money is safe.
The myth of Obama’s ‘recovery’ long ridiculed here is now clearly seen for the lie it was. The Cyprus ‘bailin’ has caused massive leakage of capital from the eurozone. The Troika’s Athens talks are acrimonious and stalled.
Every last indicator last week suggested a turning tide for gold as a hedge against currency devaluation, and as an asset which – even if it fell in value medium term – would be better than worthless paper. But that wasn’t the market mood, and it wasn’t what happened. To call that strange is like referring to the Krakatoa eruption as a small bang: worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion – the highest fourth quarter ever and real volume demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.
So who were the suspects behind what, I’m fairly sure this morning, was a massive fix?
The manipulation clues
The central banks bought gold at a rate ahead of market growth last year – which means their share of it grew.
Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes - the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter – up 9% from the comparable period in 2011. Central banks have now been net purchasers of gold for eight consecutive quarters. This despite the non-stop stream of CB spin about there being no money-printing or inflation to get concerned about. Fancy that.
Did anything else make sense of this strategic decision by the Draghulas? Spookily enough it did. Last year, Basel III moved the goalposts on gold’s risk score, moving gold from tier 3 to quasi tier 1 status. Gold thus became “zero percent risk-weighted” in terms of credit risk – a whopping upgrade for the shiny metal. But to buy lots of it (and thus reduce risk-panic among investors) one needs the price to go down.
And guess what? Despite that massive Central Bank buying splurge since late 2010, gold has hovered and wobbled, been weak in its challenging of top prices – and persistent in challenging lows. Or put another way, the exact opposite of what the first rule of Supply and Demand dictates. My oh my.
The Guardian this morning ran a truly daft piece saying that ‘gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months’. Pardon me Gruauniad, but “Bollocks”. The sum total of Cypriot selling required is €400m tops. That is a flea-bite on the ankle of the gold sector.
More pertinent, perhaps, is that the Cyprus sale (1) enabled the CBs to buy still more of it, and (2) provides an excuse for the price fall that naifs might accept at face value.
Other potential culprits are also implicated. During January 2013, the COMEX gold futures platform pushed expectations for the price up by 8.3%. One wonders who pushed it in that direction, and why. What’s more, over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record. JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million ounces – a staggering $1.8 billion dollars worth of physical gold in just 120 days. The owners involved took their metal offsite, and it’s no longer stored in Comex warehouses…did they do so from a lack of trust? Or did they know something we didn’t?
Then there’s the chance that the Fed itself was trying to reduce its cost of returning gold: Germany’s Bundesbank recently announced it would be moving a major portion of its reserves from the US and all of its reserves from France back to Frankfurt. Nearly half of Germany’s gold reserves are held in a vault at the Federal Reserve Bank of New York. Nice way to reduce loss of face on safe assets if you work for Washington.
Is there a bottom line here?
There is, but I don’t think one can see the exact nature of it just yet. What seems to me clear, however, is that this was a fix….and Cyprus was a cover story for it, not the reason why.
On balance, it feels to me like some leaking, some massaging, and some reduction in the cost of global looting. But whatever: next week is indeed going to be interesting.
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 11, 2013
Discuss this article at the Energy Table inside the Diner
We in the United States, the Euro-zone, and Japan are already past peak oil demand. Oil demand has to do with how much oil we can afford. Many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply. A chart of oil consumption shows that oil consumption peaked for the combination of the United States, EU-27, and Japan in 2005 (Figure 1).
We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies.
Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006.
Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.
Anything else that is done which raises costs for businesses will also have an impact. This would include “carbon taxes,” if competitors do not have them, and if there is no tariff on imported goods to reflect carbon inputs.
High-cost renewables can also have an adverse impact, regardless of whether the cost is borne by businesses, consumers or the government.
- If the cost is borne by businesses, those businesses must raise their prices to keep the same profit margins, and because of this become less competitive.
- If the cost is borne by consumers, those consumers will cut back on discretionary expenditures, in order to balance their budgets. This is likely to mean a cutback in demand for discretionary goods by local consumers.
- If the government bears the cost, it still must pass the cost back to businesses or consumers, and thus reduce competitiveness because of higher tax costs.
This importance of competitiveness holds, no matter how worthy a given approach is. If costs were “externalized” before, and are now borne by the local system, it makes the local system less competitive. For example, putting in proper pollution controls will make local industry less competitive, if the competition is Chinese industry, acting without such controls.
One issue in competitiveness is wage levels. Wages in turn are related to standards of living. In a global economy, countries with higher wage levels for workers, and higher benefit levels for workers (such as health insurance and pensions) will be at a competitive disadvantage. Countries that use coal as their prime source of energy will be at an advantage, because workers’ wages will tend to “go farther” in heating their homes and buying electricity.
Countries that are warm in the winter will be at a competitive advantage, because homes don’t have to be built as sturdily, and don’t have to be heated in winter. Workers can commute by bicycle even in the coldest weather.
Energy usage (all types combined, not just oil) is far higher in cold countries than it is in warm wet countries. Countries that extract oil also tend to be high users of energy.
The difference in per capita energy usage among the various countries is truly astounding. For example, Bangladesh’s per capita energy consumption is slightly less than 2% of US energy consumption. This difference in energy consumption means that salaries can be much lower, and thus products made in Bangladesh can be much cheaper, than those made in the United States. This is part of our competitiveness problem, even apart from the energy mix problem mentioned earlier.
In my view, globalization brought on many of our current problems. Perhaps globalization could not be avoided, but we should have foreseen the problems. We could have put tariffs in place to make a more level playing field. See my post, Twelve Reasons Why Globalization is a Huge Problem.
Inadequate world oil supply isn’t exactly the problem. The issue is far more that the price of oil extraction is rising. The price of oil extraction is rising for a variety of reasons, an important one being that we extracted the easy to extract oil first, and what is left is more expensive to extract. Another issue is that oil exporters now have large populations that need to be kept fed and clothed, so they don’t revolt. This is a separate issue, that raises costs, even above the direct cost of extraction. There is no reason to believe that these costs will level off or fall, no matter how much oil the US produces using high-priced methods, such as fracking.
When oil prices rise, wages don’t rise at the same time. In fact, in the US there is evidence that wages stagnate when oil prices are high, partly because fewer are employed, and partly because the wages of those employed flatten.
The countries that are most affected by rising oil prices are the countries that use oil to the greatest extent in their mix of energy products. In Figure 3, that would be the PIIGS. The rest of the US, EU-27, and Japan would be next in line.
When oil prices rise, consumers need to balance their budgets. The price of oil products and food rises, so they cut back on discretionary items. Their smaller purchases of discretionary goods and services means that workers in discretionary sectors get laid off.
Businesses find that the price of oil used in manufacturing and shipping their products has risen. If they raise the sales price of the goods to reflect their higher costs, it means that fewer people can afford their products. This too, leads to cutbacks in sales, and layoffs of workers. Sometimes businesses decide to outsource production to a cheaper country, or use more automation, as a way of mitigating the cost increases that higher oil prices add, but automation or outsourcing also tends to reduce US wages.
The net effect of all of these changes is that there are fewer workers with jobs in the countries with high oil usage. This reduces the demand for oil in the high oil usage countries, both from business owners making goods and from the consumers who might use gasoline to drive their cars. This price mechanism is part of what leads to the oil consumption shift we see in Figure 1.
We are dealing with is close to a zero-sum game, when it comes to oil supply. The amount of oil that is extracted from the ground is almost constant (very slightly increasing for the world in total). If prices stayed at the low level they were in the past (say $20 barrel), there would not be enough to go around. Instead, higher prices redistribute oil to countries that can use it manufacture goods at low overall cost. Workers in factories making these goods are then able to afford to buy goods that use oil, such as a motor scooter.
Citigroup recently released a report titled, “Global Oil Demand Growth, – the End is Nigh.” Its subtitle says,
The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point.
This is out-and-out baloney, for a number of reasons:
1. There are way too many of “them” compared to the number of “us,” for energy efficiency to make even a dent in our problem.
2. When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
3. Substituting natural gas for oil still leaves cost levels for the US, Europe, and Japan very high, compared to those for the rest of the world, where little energy is used.
4. There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers until they reach a different limit of some sort.
Let’s look at these issues separately.
There are way too many of “them” relative to us, for energy efficiency to even make a dent in our problem.
If we look at world population, this is what we see:
Using a ruler, we could probably make fairly reasonable projections of future population for each of these groups.
If we look at per capita oil consumption for the two groups separately, there is a huge disparity:
Per capita oil consumption for the EU, US, and Japan group peaked in 1973–a very long time ago. In recent years, it has been drifting down fairly rapidly, just to keep up with a slight per capita rise in oil consumption of the Rest of the World. Even with recent changes, per capita oil consumption of the EU, US and Japan group is more than 4.5 times that of the rest of the world.
If cars were made more efficient, more people could afford them. The market for cars is unbelievably huge, compared to today’s market, if costs could be brought down. Furthermore, gasoline accounts for less than half of US oil consumption. Even if efficiency were improved to allow cars to use half as much fuel, it would save a little less than one-fourth of current oil consumption. How far would this oil go in satisfying the needs of 6 billion other people–and growing every year?
When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
If we look at per capita oil consumption in the US, split between gasoline and other oil products, we see that the big drop in oil consumption came from the drop in other oil products–that is the commercial and industrial part of US oil consumption.
The amount of fuel used for gasoline has stayed in the 10 to 12 barrels a year per capita band, since 1970, in spite of huge improvements in vehicle efficiency.
I recently wrote a post called Why is US Oil Consumption Lower? Better Gasoline Mileage? In it, I looked at the decrease in US oil consumption between 2005 and 2012. I concluded that the majority of the decrease in consumption was due to a drop in commercial use. Only 7% was due to an improvement in miles per gallon for gasoline powered vehicles.
Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.
Living in the US, Europe or Japan, it is hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.
We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.
There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.
When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well. If we look at the per capita energy consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below). If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.
The Rest of the World followed a very different pattern of energy consumption. Non-oil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.
More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.
How does peak oil demand work out in the end?
I would argue that lack of competitiveness in world markets is a limit that the US, EU-27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.
It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.
Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy. They also use Quantitative Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.
One possible way I see of the current situation working out is that the total energy consumption (including all types of energy products, not just oil) of the EU, US and Japan will continue to fall, as high-priced oil continues to erode our competitive position in the world marketplace.
The slope of the decline is based on the type of decline experienced by the Former Soviet Union, in the years immediately following its collapse. This pattern might reflect a combination of different patterns for different countries. Greece and Spain, for example might continue to fall quite quickly. The US might lag the EU in the speed at which problems take place. The likely path seems downward, because any action taken to fix the government gap between income and expense can be expected to have a recessionary impact, and thus have an adverse impact on energy consumption.
The Rest of the World is now growing rapidly, but at some point they will start reaching limits. One of these limits will be lack of an export market. Another will be lack of spare parts, because businesses in the US, Europe and Japan are failing for financial reasons. Some of these limits will relate to pollution and lack of fresh water. The effect of these limits will also be to raise costs. For example, a shortage of water can be worked around through desalination, but this raises costs. Lack of spare parts can be worked around by building a new plant to make the spare part. Pollution problems can be mitigated by pollution controls, but these add costs. These higher costs, when passed on to consumers will also lead to a cutback in demand for discretionary goods, and the same kinds of problems experienced in oil exporting nations. Thus, these countries will also have “Peak Demand” problems, because of rising prices, related to limits they are reaching.
I don’t know exactly how soon the Rest of the World will hit limits, but given the interconnectedness of the world system, it would seem to be within the next few years. Figure 13 shows one estimate of how this may occur.
Here again, individual countries may do better than others. Countries with little connectedness to the world system (for example, countries in central Africa) may have fewer problems than others. Of course, their energy consumption (of the type measured by the EIA or BP) is very low now. They may use cow dung and fallen branches for fuel, but these are not counted in international data.
Figure 14, below, shows the sum of the amounts from Figures 12 and 13. Thus, it gives one estimate of future world energy consumption based on Peak Demand considerations.
If there is a silver lining to all of this, it is that world CO2 emissions are likely to start falling quite rapidly, because of Peak Oil Demand. World CO2 emissions could quite possibly drop below 20% of current levels before 2050. In the scenario I show, energy consumption drops faster than forecasts such as those put out by the Energy Watch Group. Such forecasts do not take into account financial considerations, so are likely overstated.
The downside of Peak Oil Demand is that the world we live in will be very much changed. Population levels will likely drop, indirectly because of serious recession, job loss, and cutbacks in government benefits. The financial system will need to be completely revised, because debt financing will make sense much less often than today. In fact, in a shrinking world economy, money can no longer act as a store of value. There no doubt will be some people who survive and prosper, but their lives will likely be very different from what they are today.
Off the keyboard of John Ward
Published on The Slog on April 6, 2013
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The eurozone ‘is haemorrhaging investment’ – Brussels source
“Capital outflow from eurozone especially pernicious” – UBS analysts
In trying to calm nerves, the ECB’s denial of Cyprus Template Syndrome is acting as a confirmation of what unofficial but well-informed sources already know: the investment seeds the eurozone so desperately needs for recovery have been blown far, far away by the hurricane of mistrust following the EC’s Cyprus energy grab. Not only is this going to get worse, it has ensured that the first domino of disaster is about to hit the second. The timescale remains, as ever, uncertain: but its duration just got decimated. The Slog analyses the ‘unforeseen consequences’ of depositor theft.
Mario ‘No Shadow’ Draghi arose from his coffin last Thursday afternoon for a grudging attempt at eurozone damage limitation.
“Cyprus is no template, Cyprus is no turning point in euro area policy,” said Mr Draghi. “I am absolutely sure that the chairman of the Eurogroup has been misunderstood.” He was of course referring to Dutch stream of consonants Jeroen Djisselbloem’s blasé agreement with the concept of stealing our money going forward. It had all been a terrible mistake, allegedly: there would be No More Nicosias, watch my lips.
I spoke to a representative cross-section of dealers, traders, wealth managers, and bond market opinion leaders afterwards. I also spoke to four expats in France, an Italian, a Spaniard, two Americans and three Greeks. None of them believed a word of it. All of them were convinced that, almost certainly, Draghi was trying to stem a capital flight crisis. I have been warned by a Brussels contact that the leakage of euro-investment monies to elsewhere after the Cyprus Heist has been “disastrous”. But I don’t as yet have any hard evidence about the total picture. (If anyone does, then email@example.com is the place to send it).
I can tell you this, however: a Singaporean banker to whom a Slogger kindly introduced me earlier in the week said he had “never been busier” handling panicked demands to open investment and chequing accounts. Another institution in Singapore dealing in accounts larger than $5million had a record week for takings from the eurozone. And the Californian office of a senior banking firm saw “a mega-spike” in ezone euros switching into Dollars.
If all this feels too anecdotal and sample of one, think again: UBS Research Analyst Gareth Berry is happy to confirm the trend in full based on the bank’s own monitoring: “We expect that the theme of capital flight out of the Eurozone will continue to run for some time in the wake of the Cyprus bailout,” he says, “capital flight in the form of investment outflows is even more pernicious.”
Supporting The Slog’s ECB website observations, Berry adds:
“As timely data is still rather difficult to come by, we used our Equity Flow monitor from last week to see if asset managers are now liquidating underlying investments in the Eurozone, especially taking into account that our FX Flow Monitor has been showing such trends for several weeks. The Eurozone suffered the most out of all G10 markets we track, but the distribution of selling was even more troubling – ie, for non-Eurozone based investors it was one way: the US and UK both registered strong inflows last week but almost all of the buying came from their own clients leaving the Eurozone. If past history is anything to go by, the Eurozone’s funding gap may widen further and it’s the real economy, beyond the banks, that will suffer.”
However, the thing is, nobody outside the self-appointed élite knows the official numbers. And this is a bit naughty of the ECB, because it’s supposed in theory to publish some indicative figures on this every week. I’ve yet to read a single mainstream media article that’s noticed just how far behind on this the ECB’s website is. Somehow, Mario Draculaghi managed to get through his monthly report two days ago without being asked a single question about it. He said his forecasts for Q 3&4 2013 were on target “but subject to downside risks”, and that “all incoming data will be monitored closely”. In short, he said nothing whatsoever. Signor Draghi didn’t have to: he has no boss, he has no regulator, and he is not democratically responsible to anyone. But the idea of a Q 3&4 recovery in an investment desert is complete tosh.
Look at the schedule of media releases for the coming week, and you will see that eurozone capital flow trends are absent. The next Governing Council meeting of the ECB in Frankfurt is not until 18th April. The last eurozone risk dashboard was published on March 23rd. The April stats overview shows no data beyond Q3 2009.
In theory, The Big One is the euro area monthly balance of payments and quarterly international investment position to be issued on 19th April. However, that will cover up to the end of February…..long before the alleged capital flight panic got under way.
The reality, as I understand it, is that we are not going to know anything about the eurozone official capital investment position until mid July. And it gets more curiously inconsistent the more one digs into it: the eurozone balance of payments data is known already up to the end of January: but the eurozone international investment stats stop at the end of 2011. We don’t have a single published stat on this for 2012.
Clearly, the ECB’s inner sanctum (and, I’d imagine, the Chancellery, the Elysée Palace, and the Big Beast central banks) will know these numbers almost up to date. My Brussels source says yes, of course they know. He doesn’t know the details: he just alleges that the eurozone “is haemorrhaging money”. He admits that he is simply peddling inside gossip; but I believe him when he says he is sure it’s right. And the UBS monitoring analysis supports his contention entirely.
It would be hard to overestimate the importance of this, a combo of informed gossip and hard data that reflect intuitive common sense. It isn’t conclusion jumping, it’s educated guesstimating: following the blatant theft from depositors in the Cypriot banking system, it should be clear to even the most anally pedantic commentator now that a major exit of vital investment capital from the eurozone is under way. Expect mendacious drivel from Olli Rehn, Tubby Barroso, the key eurogroup players, and it’s incompetent flappy-mouth Dijsselbloem: expect it, and ignore it. The cat is out of the bag, and unless the eurocrats can find a way to stop the outflow and/or replace it, not only is their precious currency project doomed: the eurozone economy will collapse at every point of the compass.
For the debtor eurozone countries, the obvious question to ask from here on is this: what on earth is the point of staying inside a millstone currency? Not only will it price them out of every export market in the world, loss of business investment trust will be swiftly followed by loss of debt bond trust…..the debt mountain ClubMed has will become a beanstalk to infinity they cannot possibly climb.
I suspect the key Sovereign in this context is Italy. That the unofficial certainty of capital outflow is now obvious plays straight into the hands of emerging radical voice Beppo Grillo. This too is clearly evidenced in the desperate attempts by Mario Monti there to cobble together (and force through with Presidential help) a technocratic administration to block further elections. But throughout the formerly supine ClubMed, local attitudes are hardening: Portugal’s Constitutional Court has ruled that the planned austerity measures there are unconstitutional, thus at a stroke derailing the Troika’s strategy. The Court threw out cuts in state pensions and public sector wages, potentially forcing Prime Minister Pedro Passos Coelho to negotiate alternative measures with the country’s international lenders.
In Greece, we have a bailout schedule that is really nothing more than a debt volcano spewing out more suffocating fumes and lava with every year. In Cyprus, a non-economy stabbed in the neck by frenzied rapists. In Italy, a growing tide of public antipathy towards the eurozone. And now in Portugal, a poke in the eye for the Troikanauts from the lawyers. The euro project faces a democratic crisis in southern Europe, and support for those ridiculing it is on the rise throughout the EU . Almost every ClubMed sovereign would today, technically, be better off defaulting on its debt.
For Brussels and ECB-Frankfurt, the game plan now must be to stifle any attempt at new elections in the South. I cannot see how this could succeed: there is no effective eurozone ‘standing army’ to enforce financial repression, and even if there was, the growing rift between Paris and Berlin would ensure the blockage of any such measures.
For Berlin, the pressure from hysterical anti-bailout Bankfurters is increasing and must soon become crucial to this inter-city power struggle. In a thundering lead-article yesterday, its mouthpiece the Frankfurter Allgemeine Zeitung wrote:
‘The European heads of state and governments are sitting in a burning house haggling over the total sum they will have to rustle up for the water damages from putting out the fire. The reproach that they have lost contact with the citizens doesn’t ring true: the fact is, they never had any to start with. The system we live in neither provides for nor admits any legitimate representation for the citizens of Europe.’
Terribly stirring and all that, but the FAZ agenda remains “let’s GTF out of the euro now”. Angela Merkel may feel smug about public anger in Germany about ClubMed depictions of her as a Nazi control-freak, but still 41% of them don’t believe she can protect German savings. One bad election result and one default in the eurozone will put her under irresistible pressure to quite the common currency.
For Paris, Greek default remains the nightmare which dare not speak its name. Embroiled in an offshore banking scandal (Le Monde’s headline this morning is ‘Two French banks fingered’) Hollande found himself depicted as a lame duck on the front page of almost every newspaper yesterday. But whatever Credit Agricole and BNP Paribas have been up to, behind the headlines the French President knows this crisis for him is as nothing compared to the crisis rapidly heading for the country like a runaway truck. Ironically, Le scandale d’offshore is a distraction which may suit some of the Elysée’s advisers down to the ground.
If Berlin starts to make noises about leaving the eurozone – suggesting default as the route for Athens – then the French banking system is dead in the water. Just one ‘bad’ ClubMed election result would be enough to send French debt bond yields heading for the stratosphere. Hollande has, in reality, done little to rein in French State spending and employment: that which he had done is far too little far too late. There is now no way back for Paris, and I suspect the ENAs know it.
For Wall Street, beyond the standard MSM reassurance the growing fear is that two outcomes are likely. First, contagion from eurozone economic flatlining in Q 3&4 will openly reverse Obama’s fake recovery. Yesterday’s NFP Report continued a string of US data output falling short on hope: only 88,000 jobs were created in March, far less than the 190,000 expected. The markets responded with nervous selling of equities. The Great QE Stock Market Wily E Coyote illusion is about to get into serious trouble.
Second, it is fine to get your investment deposits out of the eurozone, but impossible to reverse one’s previously crazy bets. Again, an anarchic eurozone member election could be enough to trigger trouble for a major US bank: confirmed capital flight and economic standstill data from Europe would make one at least almost inevitable.
The first domino is no longer wobbling: it is about to hit the second.
The twelve dominoes of Crashmas
Cyprus has turned out, against all the odds, to be the first domino to head towards the second domino. That Number Two will be the eurozone bond market going from sick to dead. Only events can dictate the exact order of dominoes after that one. But there follows a sensible attempt to suggest one.
The third will be the release (0r leak) of official capital flight figures from Brussels. The fourth will be a consequent acceleration of capital flight. The fifth will be the release of Q3 eurozone economic data.
The sixth will be a Chinese export slowdown. Few people grasp this, but the EU represents 16% of all Beijing’s exports – just one percentage point behind the US.
The seventh will be Berlin backing away from further involvement, while maintaining a vice-like grip over Cyprus. The eighth a Greek default alongside Italian political stalemate. The ninth a chaotic German election. The tenth a major French banking collapse. The eleventh a banking sell-off on Wall Street, and the Dow starting to slide as the White House mirage fades. The twelfth….the hyper-acceleration of a gold rush as global stockmarket confidence implodes.
Off the keyboard of Monsta666
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The terms below should help those unfamiliar with financial terms to understand how to read money supply graphs and what the various metrics are used when determining money supply:
|Transactional Deposit – Also known as a demand deposit account, checking account (US) or a current account (UK). These accounts are used to deposit and withdraw money easily as well as make payments to various other parties. The money in transaction accounts can be used as a medium of exchange.
|Savings Deposit – Are accounts that are used to accrue interest but cannot directly be used as a medium of exchange. To use the money held in a savings account it must first be transferred to a transactional account. Interest generated from savings accounts are subjected to taxes at source before it even enters the holders saving accounts. Tax deductions are income and not capital gain based.|
|Time Deposit – Also known as certificate of deposits (US) or bonds (UK). These operate in much the same manner as savings account except that the money is kept for a fixed term until it can be withdrawn. If money is withdrawn before the term has expired then a penalty will be charged. Time deposits are not subject to reserve requirements in the US.|
|M0 money supply (US) – Notes and coins in circulation.M0 money supply (UK) – Notes and coins in circulation plus the commercial bank deposits in the Bank of England. This metric is referred to as “narrow money”.
|M1 money supply (US) – M0 + money held in checking accounts.
|M2 money supply (US) – M1 + money held in savings accounts and small time deposits (under $100,000).|
|M3 money supply (US) – Broadest measure of money supply and is M2 + all time deposits and other large liquid assets. M3/M0 is the multiplier ratio.|
|M4 money supply (UK) – Equivalent to M3 money supply for US is referred to as “broad money”. M4/M0 is the multiplier ratio.|
In part two of this series the basic mechanics of how the monetary system works was explained. In part three of this money series we will go into the implications of having a debt-based currency speculating on how it was created as well as discussing the various advantages and disadvantages of using such a system.
To observant readers who read the second part you will notice that in all instances described money was created by some form of credit expansion. In other words all money that currently exists has been loaned into existence. As we know, all loans made carry an interest component and it is this interest that means that the money supply must always increase at an exponential rate to meet debt repayment obligations. It is this interest bearing component and the exponential rising money supply that acts as a large driver on why the economy must grow and grow at an exponential rate even if this economic growth comes at a detrimental cost such as environmental degradation, rising social inequality, loss of freedoms etc. as repayments must be made.
Another inherent property of the momentary system is that the amount of debt in the system is greater than the total money supply. If you notice with the example provided with the fractional reserve system all money was loaned to new customers what was not highlighted in that instance was the fact those loans carry interest. The same is also true for the quantitative easing; in those instances we can see that the total debt exceeds the money supply because if we include the interest on those loans then we need more money than currently exists. It is this property of the monetary system that means some existing debts (at least if we consider things on a total macro level) must be rolled over with new debts as it would be impossible to repay all the existing debts in their entirety with the current money supply. As a result the existing system can only be sustained if there is continued growth of the money supply and for the money supply to continue growing it requires that the underlying economy must also keep growing.
This need for constant economic growth comes because – as highlighted in the first part of this series – the claims on wealth (money) must roughly equal the amount wealth in the underlying economy. If the number of claims against actual wealth goes out of balance then the value of money diminishes as it no longer offers a reliable means of valuing wealth even on an exchange value basis. Indeed it is this lack of economic growth in the major advanced economies of the world that is the chief cause for the instability in the financial system. While there can be complex debates about the precise nature of why these events transpired and who is to blame it must be recognised that the inherent properties of the system means it can only maintain stable if there is continued growth in the economy. Unfortunately infinite growth is not possible as the amount of wealth (resources) in the planet is finite so at some point this basic reality must be confronted.
This leads us to the question of why such a system came into being in the first place. Why create a system that is so inherently unstable? Now what comes next – at least in terms of how the debt based currency was created – is informed speculation on my part so it must be taken with a pinch of salt. However we can be sure that this is the system that currently exists so we are only speculating about its creation and not its existence. With that in mind I will offer a number of explanations of why this system was established. One of the major reasons is probably as mundane as a basic ignorance of how the monetary system operates. This allows the money makers to create an insidious system with relatively little resistance. Second the desire to make a return on investment is so high that without proper regulation there is always an incentive over time to use any asset be it food, gold a house etc. as collateral for a loan and then gain an income through the interest accrued by those loans. If a person earns enough income through interest then there will be no need to labour (and generate actual wealth) for an income; you just live through the “rents” from the interest and you become part of the rentier class. If enough parties seek a return for their investments then over time money will often naturally evolve to become debt based to service those needs.
Perhaps the biggest driver for a debt based currency however is that debt provides the means to fight wars more effectively. As we know wars are expensive and as time has gone on wars have become increasingly expensive; so much so that merely taxing the populace was not enough to fund a war. As a result many countries eventually had to find other means of securing funds and this came through utilizing debt to increase military spending. After all it is often the side that spends the most becomes the winner. Furthermore it is the winner of the war that gets to dictate the terms of peace and this often involves passing on the debt and most important of all the interest to the losing state. This is what happened at the conclusion of World War I and explains why the loser, Germany, went bankrupt as it was forced into paying all the debts (from itself, Britain and France) accumulated during the war years.
Therefore in light of this it should not come as any surprise that the first ever government bond issued was made by the Bank of England in 1694 to raise funds for a war against France. If all the above is true then we can establish the motive of using this system and why it started but then even this explanation fails to answer the question why this system of bonds (and by extension debt servitude) persisted outside of the wars. Wouldn’t it make more sense if the government simply issued debt free money instead of having to pay interest on money it created? The reason why this system of debt likely persisted outside of war is because in many cases the people who fund wars are either rich domestic citizens or foreign investors both of which are likely to hold significant political clout. This relationship becomes even more telling if these investors are other national states especially if that national state is stronger than the debtor nation (examples of this abound between third world debtor states and first world creditor nations). It is because of those reasons that interest payments must be honoured or the country in question will be cut off from international markets.
Over the centuries these debt obligations have become even stronger. First as most countries moved away from monarchist rule to that of democratic governments this meant that debts accumulated through previous administrations never died. In the past when a king died his debt died with him but under a democratic arrangement all debts become that of the state and so debts never expire. This issue is highlighted in the case when a despotic regime is overthrown but the new government is still under obligation to payback old debts from the old regime; such debt is sometimes recognised as odious debt in international law.
This issue of debt repayments has become even more acute in today’s globalised economy as nations have become dependent on the global economy to provide its basic needs such as food, energy and basic goods. This dependence coupled with the strength of “foreign investors” who own the largest financial and corporate institutions means that states are beholden to their demands and can only function by staying in this globalised system as national states have, for the most part, lost their autonomy as they have lost their means of production for some vital resource and can only obtain them from other markets. This can lack of “production” even extends to money itself as states do not create money themselves as all money is essentially created by private institutions that governments must effectively pay a rent (interest) to use; this dependence in obtaining money (debt actually) means the relationship between state and private financial institutions has – over time – come to resemble more of a parent and child relationship than that where both counterparties wield equal power. This issue of dependence would explain why various EU nations have continued to accept the onerous bailout conditions despite the damage it does to the country’s economy, finances and political legitimacy. This control, through financial dependence, seems to be recognised by various financial elites most notably Mayer Amschel Rothschild who had this to say:
“Give me control of a nation’s money supply, and I care not who makes its laws” – Mayer Amschel Rothschild
In addition, as noted earlier; all money is created into existence through loans and since these loans are created out of “thin air” it does not cost the people who issue the loans anything. Because of this money can act as an instrument of wealth extraction due to the interest bearing component of all debts accumulated this system. This means so long as the person controls the money supply it is possible from them to extract wealth from people with no/limited money (or credit) who must not only labour to repay the principle on the loan but they must work that “bit extra” to pay off the interest on the debt. All that’s really required is that the loans issued are not invested too badly to allow someone to accumulate great wealth over time as effectively they will claim a small percentage of the entire countries production. If even this gain is 1% (it is likely higher than this) then through compound growth large numbers will be generated in a relatively modest timeframe. Thus another inherent property of this system is it acts as a form of wealth redistribution that sieves wealth from the bottom and takes it towards the top. It should come as no surprise then that during a period of large banking (and by extension credit expansion) that the level of inequality in society will rise appreciably. The video below describes the points raised quite well:
Note: While Damon explains the money side of the equation well he largely ignores the wealth side of the debate which concerns limited resources. Because of this oversight his theory of how the world banks will rule the world is likely to be false as the large institutions can only be maintained with abundant sources of energy.
Saying all that there are numerous advantages to this monetary system and these must be acknowledged. First of all as already established since the monetary system expands at an exponential rate this insures that the money supply can match the increase in the economy as both tend to expand at an exponential rate. It is important to recognise that the economy is expanding at an exponential rate and is not increasingly in a linear manner (which tends to be what we think intuitively). If we look at the production and consumption of various resources we can see this exponential growth more clearly:
For most of human history economic growth primarily came from expanding populations but in more recent years, economic expansion came about through increased worker productivity. It is commonly stated that this increase in productivity came through the use of machine but as explained in Energy part 1 this increase in productivity primarily comes from the arbitrage between expensive labour energy and cheap energy that derives from fossil fuels. In fact the difference in use and exchange value as described in part 1 of this series has been a huge source of wealth and is one of the instrumental factors in how the US has maintained hegemony over the global economy by not only being the reserve currency of the world but by directly tying their currency to that of oil thus forming the petro dollar. This issue will be described more fully in part 4 of this series.
In any case an exponentially increasing economy means more wealth enters the human economy (at the expense of the overall ecosystem) so for a money system to remain stable (in the sense of stable prices) then the claims on this wealth must increase in tandem. This balancing act between money supply and the real wealth of an economy is crucial because if this balance is not kept then we will either see inflation (too much money) or deflation (too little money). Therefore an exponentially rising money supply serves as a good platform in the sense it avoids deflation (a fall in prices) which is a perennial problem of capitalism as there is always the issue of overproduction or as it is sometimes described underconsumption or declining aggregate demand (which is the current issue facing economies since the financial crisis). To learn more about this particular matter it is advisable to read the Waste-Based series (here and here) as this is a topic in itself. It should be noted however that deflation also means that it becomes harder to pay debts which is another big reason why central banks strive to avoid deflation. In fact one of their chief objectives is to avoid deflation. Indeed Ben Bernanke, head of the Federal Reserve, has made a doctrine about avoiding deflation and had this to say about deflation:
“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an on-going basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress.” – Ben Bernanke, 2002
Another advantage that comes from a debt based monetary system is it reduces the issue of hoarding which is quite problematic in gold based or less developed monetary systems (such as those in Sudan). The dilemma that comes with saving is that money leaves the economy and until this money is spent it is left out of the money supply. If enough people save or hoard money (under the mattress perhaps) then it will mean insufficient amounts of money can be invested which will adversely affect the economy as growth will be severely curtailed. By offering interest to these savers there is an incentive for savers to give their money to the banks who then loan this money out to other users who will invest or spend it in the greater economy. A percentage of the interest gained from those loans is then passed back onto the saver and this is how the saver can accrue interest from their savings account. This method of incentivising savers through interest also has the beneficial effect that less savings must be held by the saver privately to meet on-going expenses thus reducing the cost of providing security in protecting and transporting this hoarded cash.
It is due to these advantages why this monetary system has persisted and can even explain why a fiat based system has even superseded the gold standard as the money supply can increase faster if it is fiat based and does not follow a gold standard. By doing so, this allows the relationship between a growing economy and growing money supply to be maintained for longer. Saying that, this was not the only reason for the departure from the gold standard and a large cause for leaving gold was to prevent the US losing its entire gold reserves which would eventually lead to it defaulting on its debt obligations. On this note of debt repayments it is important to understand and appreciate the mathematics of compounding growth.
Mathematics of compounding growth
We often here that the economy is growing annually by 1% or if we are lucky 2.0% and consider this growth rate rather benign and harmless at least from a resource depletion perspective but if we consider the matter more deeply we will find the basic arithmetic that comes from compound growth means that very large numbers can be generated by a modest number of doublings. Albert Bartlett in the video below describes this phenomenon succinctly:
To understand the significance of compound growth it is best to consider the amount of time it takes for a given quantity to double. The simple method in calculating this would be to apply the rule of 70 which has the advantage of being relatively easy to calculate mentally. In fact if any annual percentage is given (say for the rate of interest) then it is highly recommended you apply this mental calculation in your head to see how quickly it will reach its doubling time. To make a more precise calculation however the following formula should be applied:
Doubling time = In 2/ In (1+R)
r= Interest for example 1%=0.01
For the mathematically inclined the following
formula came from this equation:
FV = PV*(1+r)t
2 = 1 * (1+r)t
In 2 = In (1+r)t
In 2 / In (1+r) = t
where FV =Future Value , PV = Present Value, r= interest t =time
When using the rule of 70 or the formula shown above we will find that the doubling time is 70 years for 1% compound growth and this will decline to approximately 35 years for 2% compounding growth. What is most significant in this process is that after every double the total number of the new doubling amount will be greater than the sum of all the preceding growth. This phenomenon can be easily seen in the table below:
|Growing quantity||Cumulative total|
The significance of this chart is that as demonstrated earlier we live in an exponential world where various resources are consumed at an exponential rate (or needs to meet exponential growth rates) in tandem with economic and money supply growth. However as there are limits to growth due to resources being finite this dynamic of compound growth insures that the end point will be reached surprisingly quickly. In fact as we will find out many of the resources exhibit a bell type curve for its depletion profile and this is most notably the case for oil (see the peak oil article for more information on this). It is likely that when the most critical resource reaches the decline phase of the bell curve we will see issues with the monetary system as well as, on a fundamental level; it will not reflect the amount of wealth that is being extracted. Once this happens it is likely the claims of wealth will go out of sync and we will either experience deflation or hyperinflation as the monetary system can longer reflect reality of the actual wealth in our country.
We have a debt based currency system where the vast majority of all money creation comes from commercial banks and not the central banks. As a result it is primarily the commercially banks that will dictate what happens with the money supply. While the central banks can add reserves to these commercial banks this does not create new money for the general economy unless these banks decide to actually loan this money out. If that can happen then there would be an expansion of the money supply. Therefore much of the growth or possible destruction of money will come from the side of commercial banks and it is their activities we must monitor if we wish to determine how the monetary system will unfold.
Since all money is created out of interest bearing debt then it means our money supply increases at an exponential rate and can only survive by continued growth. This continued growth while clearly unsustainable has worked well however as the growth in the money supply has matched economic growth that also increases exponentially. However due to maths of compound growth it will become increasingly untenable for this dynamic to continue particularly if energy resources pass their peak in global production. When looking at the depletion profile of critical resources such as oil we find it follows a bell shaped curve:
If we observe the graph carefully we will notice that the first half of the bell shaped curve resembles the profile of an exponential curve and it is this property why the money supply could match increasing rates of consumption quite well for most of the 20th century and the early part of the 21th century. It is after this point of peak however where we will see a mismatch between our money supply and our overall economy. Since money is a claim on wealth if the monetary continues expanding despite a reduction in our economy then we would get high inflation to possible hyperinflation. If on the other hand money is destroyed (via bank defaults or excessive hoarding) caused by a contracting economy then we may get deflation but only if money is destroyed at a faster rate than a reduction in the overall economy.
In part four of this series we will explore the possibilities of this hyperinflation/deflation debate.
 = My life and work (pg. 179)
 = ‘Money: Whence it came, where it went’ (pg. 5)
 = Economics 12th Edition by Lipsey, R. G. and Chrystal, K. A. (2011) (Oxford University Press. pg. 455)
 = Banking Regulation of Uk and Us Financial Markets (pg. 83)
 =The Financial Crisis Inquiry Report: Official US government edition (pdf document: enter page 76 on pdf file is page 48 on actual report.)
 = Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument (Bank of International Settlements – pdf file)
 = GDP ranking (World Bank – pdf file)
 = Remarks by Governor Ben S. Bernanke (Federal Reserve Board)
 = National Economic Accounts (Bureau of Economic Analysis)
 = Tax on bank and building society accounts (HM Revenue & Customs)
Off the keyboard of RE
Published on the Doomstead Diner on April 2013
Discuss this article at the Frosbite Falls Daily Rant inside the Diner
As the Collapse marches its way around the world and both Sovereigns and Banks are “discovered” to be completely Insolvent and BROKE, the BIGGEST of Newzpeak inventions is the idea of “Recapitalization”. This sounds Technical and Capitalist enough that most J6Ps buy it without a PEEP, even when their own Deposit Money is stolen for the purpose of “Recapitalizing” a Bank which has just gone BK and lost everybody’s money!
If I go BK, does anybody Recapitalize ME? WTF do people accept the idea FAILING Banks who JUST lost EVERYBODY’s Money should be “Recapitalized”, with the SAME jackasses running the show who just lost everything?
What a fucking RACKET! Anytime you Go Broke in the Casino, you just “Recapitalize” and go out gambling AGAIN! You just gotta be close enough to the Nodes of Power at the Top of this Game to ALWAYS get “Recapitalized”, even when the whole SYSTEM goes Kaput!
Then there is the Nonsense of Splitting Failed Banks into a “Good Bank” with performing Assets and a “Bad Bank” with all the garbage. Who will Buy Stock in the “Bad Bank”? The Bad Bank is just a Newzpeak Euphimism for TAXPAYER LIABILITY. Da Goobermint gets the Bad Bank, the Illuminati get the Good Bank! There’s a Fair Deal for you! Privatize the Profits, Socialize the Losses in a NUTSHELL!
Next is the Dumbass idea of “Nationalizing” Failing Banks. WTF do I want to Nationalize a LOSER company? Put the whole NATION on the Hook for the bad debt of said Bank, that’s a GREAT IDEA! Why not just let the LOSER Bank go to the Great Beyond and start a NEW Bank on a National Level?
Why NOT is because of course everyone bought into the system, and if you let those Bad Banks go Belly Up, lotsa folks won’t get their Pension Checks. Hell, they won’t even get back their Savings or Checking Account Money nowadays!
Money is a SYSTEM people become dependent on, just like say having a Smart Phone. When I was a kid, you had a Phone at your house, that is how people could talk to you from far away, but you did have to be HOME to receive the call. “Answering Machines”, the precursor of Voicemail didn’t exist at the time. Those Cassette Driven Recorders didn’t emerge until I was well into my teens. Nowadays though, you simply can’t EXIST and be a part of the Techno-Economy without a Smart Phone, to not only keep you Hooked in to communication with your Workplace (why didn’t you pick up? we NEEDED you to come in and fix the Server Crash!), but of course also to Tweet to all the WORLD your latest 1 sentence declaration on Monetary Collapse! Even fucking Bill Gross of PIMPCO Tweets idiocy!
Somehow though,before Voicemail, before Answering Machines, before even the Fucking TELEPHONE was invented, society managed to function OK, to one extent or another. In my parents time when they were kids, though the Telephone had been invented, almost nobody even had a phone in their domicile. How did they “Call in Sick” to work in those days? Answer, they didn’t of course. Workplace made do, so-and-so isn’t here today. If SaS does this too often, he gets fired. Now though, you gotta answer the phone, concoct a REASON (my dog is having a mid-life crisis!) and show up next day with a note & diagnosis from the Canine Social Worker to explain yourself and your Dog’s emotional angst. LOL.
Dependent most of us are in the Industrial Economy on our Automobiles, and Cheap Fuel to push them down the Road to get us to Walmart to buy Everything at Low, Low Prices Every Day and to get to the Workplace or to get the Kids to Skule…etc. That is a tough dependency to BREAK, but NOTHING compared to breaking the dependency on the Monetary System. Removing yourself from this inside Industrialized Nations is for all intents & purposes quite impossible for most people, there isn’t any real Wilderness left to escape to and do Jeremiah Johnson. OK, up here in Alaska you can still sorta do it if you stay on the move all the time, but soon as you drop down a Cabin anywhere the Rangers will drop in on you. You certainly can’t start a COMMUNITY out in the Bush without Goobermint dropping in to regulate your lives. A LAW up here is if you have kids, your Domicile has to have Hot Water and Toilets. You can’t keep your kids if you live in TeePees and use the Great Outdoors as a Toilet like every other mammal does. Child Protective Services will drop in and take the kids and drop them into the Foster Care system. Which is a pretty good Racket also if you DO live in a McMansion with Hot Water, you get around $700/mo from the state for every kid you take in this way. The state does NOT however pay the Original/Biological Parents 700 Bananas/mo to maintain the kid. How fucking STUPID is this system?
The coming REALITY of course is that the State is FRESH OUT of Bananas. Amongst the FIRST Casualties of Banana Shortage will be the Pension Funds of J6P, first the Corporate Ones from BK companies, then the Municipal and State ones, finally the large Goobermint ones like Social Security. All these funds are already being raided to keep the failing banking system propped up with creative accounting tricks.
Sadly of course, JUST raiding Pension Funds isn’t sufficient to prop up a system which in Euotrashland is leveraged probably 100:1, and here is probably 50:1, though nobody KNOWS really because so much of the leveraging is in the Shadow Banking System of Derivatives. No, now they ALSO gotta “Haircut” the Depositors, who don’t REALLY own their Money as soon as they Deposit it in a Bank. Once deposited, the Bank is free to Legally Gamble it however they like, Pledge it as Collateral 10 times over in Rehypothections schemes, and it just ONE of those bets goes South and they get a Margin Call, you can say Bye-Bye to your Money.
So, due to insufficient Pension Funds and Deposits to STEAL here to make good on all the various BAD BETS of Filthy Rich Pigmen Banksters, after everything is STOLEN, what is asked for NEXT? RECAPITALIZATION!
Let me explain this concept to you in PLAIN ENGLISH. Somebody else can translate it into Kraut for our Kraut readers. The Chinese Readers are SOL since we have no Han Diners I am aware of at the moment, and the Chinese are TOAST anyhow. LOL.
The folks who Own the World run this system of Ownership through the TBTF Banks they Own. If the Bank goes Belly Up, they lose everything, money and Ownership, it all gets thrown into a big Bankruptcy Pool to be divied up and sold off to whoever still has some money, which really is about nobody.
What “recapitalizing” a Bank really is takes theoretical Future Tax Revenue from the Taxpayer and GIVES it to the Uber Rich, the VERY SAME PEOPLE who just LOST EVERYTHING to begin with! As I said at the beginning of this Rant, WHAT A RACKET! You can’t EVER go Broke, every time you lose your bets in a big CRASH of the monetary system you are running, you get J6P to “recapitalize” you because you so expertly handled his life savings last time.
In reality however, “Capital” is not Debt nor is it the Fiat Money representing that Debt nor is it even Piles of Gold stored in Basement Safes of Sovereigns, Illuminati or Small Time Zero Hedge Piglets either. Capital is the Resources of the Earth, Energy stores in particular in the form of Fossil Fuels through the Industrial Era. Through the process of the War Machine and the Legal System regulating Property Ownership, a small Cabal of People gained control over most of the important Resources of the Earth, Land to begin with, Energy stores in the form of Coal & Oil through the Industrial Era. Here in the FSoA, around the time Da Fed was chartered in 1913, this Cabal was probably around 150 Industrialists and Banksters, probably somewhat larger now though the ones who got in earliest on the Ponzi remain the most powerful ones here. In the FSoA,you can identify the Rockefellers, Astors, Vanderbilts, Morgans et al, the “Robber Barrons” of the 1800s as the main players. Part of a still larger Ponzi which goes back to the Collapse of the Roman Empire, same general Monetary System has been perpetuated throughout the millenia, though it took a Big Hit during the Dark Ages. Did not disappear though, it was mainly perpetuated under the auspices of the Holy Roman Catholic Church through the Dark Ages. This crowd mainly identified by the Rothschilds, Kuhns and Warburgs on the Banking end, and the Plantaganets, Hapsburghs et al on the Political End in Eurotrashland.
Why is it every time there is a Massive Monetary Crash (and this is not the first one by any means, they occur regularly every 80 years or so), the SAME people get “Recapitalized” by J6P to remain in what appears to be Perpetual Control over the Resources of the Earth, and the Political Systems which Goobern the life of J6P? The reason was probably best stated by Henry Ford, who went BK around 5 times on his way to becoming one of the world’s most “Wealthy” men:
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.
You see, probably 99% of people have ZERO understanding of how the Monetary Sytem works at ALL. They simply TRUST in it, and they don’t have smarts enough to separate and devise their own. In fact you DO have to be VERY SMART and CRAFTY to set up a Monetary system which will last any length of time at all, and even then you have to have Political Control over vast resources of the Earth to do it. Such has been the case for most of History, going right back as far as the Tower of Babel. Those IN CONTROL recruit and sift out people who can run such a system, Ben Bernanke and Mario Draghi are examples of that. “The Smartest Guys in the Room”. J6P can’t field anyone who holds a Candle to these guys, they ARE really smart, even if they are working from some really flawed basic principals.
So when a given iteration of the Monetary System fails, you get a buncha Wars as was the case in Eurotrashland from the collapse of the Roman Empire circa say 350AD or so, or WORLD WARS as was the case around 1900 to Present Day. WWII never ended, its just been pursued at a somewhat lower level regionally since Armistice was signed between the major powers of the Industrial Era.
Why do we get stuck with a NEW iteration of the same Bad Old System every time so far? Because when the Monetary System collapses, the SAME people are in control of the Military Apparatus. J6P has no control over that, he just ends up as Cannon Fodder fighting the battles as new alighnments and geopolitical and economic structures are refabricated. This leads MANY people to believe this will be the case in perpetuity, it is a Popular Meme amongst many Diners even. I have Ranted at length on numerous occassions why this is not so, but I STILL don’t have too many BELIEVERS on this subject. It’s hard to get people to understand Money to begin with, still harder to explain a Paradigm Shift of this nature.
You see, all reconstructions of this type of Monetary System depend on a SURPLUS of Capital,aka NATURAL RESOURCES. Mathematically speaking, you simply cannot reconstruct such a system in the absence of such resource, THAT is the Capital! It’s not the money, it’s not even the Gold. It is what those things REPRESENT, and when it is GONE, both represent nothing at all.
Are resources COMPLETELY gone? Of course they are not, but relative to current population size, they are in serious DEFICIT. You cannot get any REAL GROWTH out of this, no way no how, so you cannot pay any Interest. Thus you get ZIRP. Under ZIRP, Pensions, Equity Investment, everything FAILS. ZIRP is a KLUDGE to keep the system rolling another day, but it fails to bring return on investement, regardless of money printing to prop up markets. That is mainly just a redistribution of wealth mechanism, taking money from the Poor to Prop up investments of the Rich. All going south though, just the poor get hit first here this way.
The structure is bound to implode mathematically speaking, it doesn’t have basic energy support to keep it running. It CANNOT be rebooted in the absence of copious energy, or a massive population die off of Homo Sapiens. The latter is a likely outcome, but such a massive die off would deconstuct Global Power Structure, so you still don’t arrive at equilibrium this way. You’ll just get a lot of flux in the system as it re-equilibrates. I don’t think too many of the Pundits understand the equilibation dynamics, I am quite sure John Michael Greer doesn’t, nor Jimmy Kuntser. Dmitry Orlov to an extent. Steve from Virginia sorta gets it, but he traps himself in the 1700 Paradigm most of the time.
Anyhow, Recapitalization of Banks is COMPLETE garbage, and needs to be Politically Repudiated, which it will be. Unfortunate OUTCOME of that is most of the systems we take for granted will collapse, and and EXTRAORDINARY number of people will DIE. So it goes. You can’t make an Omellette without Breaking a Few Eggs.
Off the keyboard of RE
Published on the Doomstead Diner on April 3, 2013
Discuss this article at the Frostbite Falls Daily Rant inside the Diner
In the most recent elections over in Italy, a bunch of Beppe Grillo MPs were elected, the ruling Party lost some seats, the coalition they had for running Italy fell apart, so for the last Month, Italy has had “No Goobermint”. Wait a minute…
Whaddya mean they don’t have a Goobermint? All those MPs elected are getting paid, right? Cops are still giving out tickets, right?
What they mean by No Goobermint is there is nobody who will sign for Italy for the next loan they need. No “Ruler” who will take responsibility for Axing Pensions and Raising Taxes. WTF in their Right Mind would take responsibility for that? You might as well paint a Bullseye on your forehead.
Italy of course is running on Inertia, and so of course also is the FSoA. CONgress hasn’t agreed on a Budget in years here now, they just keep taking Emergency Measures and raise the debt limits if not directly, then by Stealth. Since letting the FSoA Collapse means GAME OVER, the Banksters still print money to buy the worthless Bonds issued by Treasury, keeping the ball in the air another day. What happenned to all the Doomsday Sequester Scenarios? Is the Pentagon handing out Pink Slips? Not insofar as I am aware. They still got plenty-o-money to buy Jet Fuel for the Fighters & Drones patrolling MENA.
Back to the more pressing problem of Italy though, what happens when “Democratic Process” fails to come up with a Goobermint that can decide to do ANYTHING? The general approach so far has been “Caretaker” Goobermints like the one Super Mario “3-card” Monti was running for Goldman, which was so successful it was sent packing in a year. 3-card would sign whatever Goldman wanted him to sign, but sadly the Ities weren’t Cooperating with the diktats. Hard to Goober if the people you Goober don’t buy into your Leadership.
So eventually here you arrive at a point where the Democratic Process just votes into office a bunch of squabbling bureaucrats who because they don’t command control over anybody cannot make deals that stick with the Banking Oligarchy. At this point they are Set Adrift to descend into Failed State status, which then allows the Military Arm of NATO to drop in on “Peacekeeping” Missions, so that any remaining assets can be further Strip Mined.
Thing about Greece and Cyprus, really there is nothing LEFT to be strip mined, not too much left in Italy either. Nothing left but what Food can be produced and shipped off their lands, but as Transportation costs increase, even shipping around food isn’t profitable. So the populations will shrink down to just what the local land will support, which in both cases of Greece and Cyprus isn’t all that many.
The trick here of course is for EVERYONE to get off the bandwagon of Coveting the products of the Age of Oil. Why did humanity get sucked down this toilet to begin with? Because of the CARGO. Jared Diamond writes about Polynesian cultures who were essentially Self-Sufficient,but when Europeans arrived with their Amazing Toys, Metal Knives and Farming Implements, well they just HAD to have them. Only way to GET them was to become part of the Money based Banking system these Europeans used to trade about their goods.
Essentially, every community needs to be self-sufficient in local production for all basic needs, water, food, shelter, clothing. This can’t be done at current populations just about anywhere Industrialization and the Banking system has already infected with the Plague of Money, at least not in aggregate. Further, re-learning how to be self-sufficient in the basics and Reverse Engineering infrastructure to do that with will not occur overnight, which leads to the probability of an Undershoot event following the crash of the current Overshoot.
Here on the Diner, our Foxstead Group is aware of these issues, and together seeks to develop models for integrated self-sufficiency in the Post-Fossil Fuel driven era of Industrialization. The Monetary system WILL COLLAPSE, IS COLLAPSING as we speak in real and rapid time. Building resilient systems BEFORE collapse arrives in your neighborhood is the key, and it can only be done effectively with groups of people all working together to achieve these goals.
Here on the Diner, we welcome all such Kindred Souls who see the Writing on the Subway Walls, and will join with us in the effort to Build a Better Tomorrow. Come visit with us in the Community Owned Doomstead thread and share your ideas on Community Building.