The model is broken…..

22 11 2017

This amazing article was originally published here…….

IS ‘SUSTAINABLE DEVELOPMENT’ A MYTH?

For a long time now, “sustainable development” has been the fashionable economic objective, the Holy Grail for anyone aiming to achieve economic growth without inducing catastrophic climate degradation. This has become the default position for two, very obvious reasons. First, no politician wants to tell his electorate that growth is over (even in countries where, very clearly, prosperity is now in decline). Second, policymakers prepared to invite ridicule by denying the reality of climate change are thin on the ground.

Accordingly, “sustainable development” has become a political article of faith. The approach seems to be to assume that sustainable development is achievable, and use selective data to prove it.

Where this comfortable assumption is concerned, this discussion is iconoclastic. Using the tools of Surplus Energy Economics, it concludes that the likelihood of achieving sustainable development is pretty low. Rather, it agrees with distinguished scientist James Lovelock in his observation that sustainable retreat might be the best we can expect.

This site is dedicated to the critical relationship between energy and economics, but this should never blind us to the huge threat posed by climate change. There seems no convincing reason to doubt either the reality of climate change science or the role that emissions (most obviously of CO²) are playing in this process. As well as counselling sustainable retreat, James Lovelock might be right, too, in characterising the earth as a system capable of self-regeneration so long as its regenerative capabilities are not tested too far.

False comfort

Economics is central to this debate. Here, comparing 2016 with 2001, are some of the figures involved;

Real GDP, 2016 values in PPP dollars:

2001: $73 trillion. 2016: $120tn (+65%)

Energy consumption, tonnes of oil equivalent:

2001: 9.5bn toe. 2016: 13.3bn toe (+40%)

Emissions of CO², tonnes:

2001: 24.3bn t. 2016: 33.4bn t (+37%)

If we accept these figures as accurate, each tonne of CO² emissions in 2001 was associated with $2,990 of GDP. By 2016, that number had risen to $3,595. Put another way, 17% less CO² was emitted for each $1 of GDP. By the same token, the quantity of energy required for each dollar of GDP declined by 15% over the same period.

This is the critical equation supporting the plausibility of “sustainable growth”. If we have really shown that we can deliver successive reductions in CO² emissions per dollar of GDP, we have options.

One option is to keep CO2 levels where they are now, yet still grow the economy. Another is to keep the economy where it is now and reduce CO2 emissions. A third is to seek a “goldilocks” permutation, both growing the economy and reducing emissions at the same time.

Obviously, the generosity of these choices depends on how rapidly we can continue our progress on the efficiency curve. Many policymakers, being pretty simple people, probably use the “fool’s guideline” of extrapolation – ‘if we’ve achieved 17% progress over the past fifteen years’, they conclude, ‘then we can expect a further 17% improvement over the next fifteen’.

Pretty lies

But what if the apparent ‘progress’ is illusory? The emissions numbers used as the denominator in the equation can be taken as accurate, as can the figures for energy consumption. Unfortunately, the same can’t be said of the economic numerator. As so often, we are telling ourselves comforting untruths about the way in which the world economy is behaving.

This issue is utterly critical for the cause of “sustainable development”, whose plausibility rests entirely on the numbers used to calculate recent trends.

And there are compelling reasons for suspecting the validity of GDP numbers.

For starters, apparent “growth” in economic output seems counter-intuitive. According to recorded numbers for per capita GDP, the average American was 6% better off in 2016 than in 2006, and the average Briton was 3% more prosperous. These aren’t big numbers, to be sure, but they are positive, suggesting improvement, not deterioration. Moreover, there was a pretty big slump in the early part of that decade. Adjustment for this has been used to suggest that people are growing more prosperous at rates faster than the trailing-10-year per capita GDP numbers indicate.

Yet the public don’t buy into the thesis of “you’ve never had it so good”. Indeed, it isn’t possible reconcile GDP numbers with popular perception. People feel poorer now than they did in 2006, not richer. That’s been a powerful contributing factor to Americans electing Donald Trump, and British voters opting for “Brexit”, crippling Theresa May’s administration and turning in large numbers to Jeremy Corbyn’s collectivist agenda. Much the same can be said of other developed economies, including France (where no established party made it to the second round of presidential voting) and Italy (where a referendum overwhelmingly rejected reforms proposed by the then-government).

Ground-level data suggests that the popular perception is right, and the per capita GDP figures are wrong. The cost of household essentials has outpaced both incomes and general inflation over the past decade. Levels of both household and government debt are far higher now than they were back in 2006. Perhaps worst of all – ‘though let’s not tell the voters’ – pension provision has been all but destroyed.

The pension catastrophe has been attested by a report from the World Economic Forum (WEF), and has been discussed here in a previous article. It is a topic to which we shall return in this discussion.

The mythology of “growth”

If we understand what really has been going on, we can conclude that, where prosperity is concerned, the popular perception is right, meaning that the headline GDP per capita numbers must be misleading. Here is the true story of “growth” since the turn of the century.

Between 2001 and 2016, recorded GDP grew by 65%, adding $47tn to output. Over the same period, however, and measured in constant 2016 PPP dollars, debt increased by $135tn (108%), meaning that each $1 of recorded growth came at a cost of $2.85 in net new borrowing.

This ratio has worsened successively, mainly because emerging market economies (EMEs), and most obviously China, have been borrowing at rates far larger than growth, a vice previously confined to the developed West.

This relationship between borrowing and growth makes it eminently reasonable to conclude that much of the apparent “growth” has, in reality, been nothing more substantial than the spending of borrowed money. Put another way, we have been boosting “today” by plundering “tomorrow”, hardly an encouraging practice for anyone convinced by “sustainable development” (or, for that matter, sustainable anything).

Nor is this all. Since the global financial crisis (GFC) of 2008, we have witnessed the emergence of enormous shortfalls in society’s provision for retirement. According to the WEF study of eight countries – America, Australia, Britain, Canada, China, India, Japan and the Netherlands – pension provision was deficient by $67tn in 2015, a number set to reach $428tn (at constant values) by 2050.

Though the study covers just eight countries, the latter number dwarfs current GDP for the entire world economy ($120tn PPP). The aggregate eight-country number is worsening by $28bn per day. In the United States alone, the annual deterioration is $3tn, equivalent to 16% of GDP and, incidentally, roughly five times what America spends on defence. Moreover, these ratios seem certain to worsen, for pension gaps are increasing at annual rates far in excess of actual or even conceivable economic growth.

For the world as a whole, the equivalent of the eight-country number is likely to be about $124tn. This is a huge increase since 2008, because the major cause of the pensions gap has been the returns-destroying policy of ultra-cheap money, itself introduced in 2008-09 as a response to the debt mountain which created the GFC. Finally, on the liabilities side, is interbank or ‘financial sector’ debt, not included in headline numbers for debt aggregates.

Together, then, liabilities can be estimated at $450tn – $260tn of economic debt, about $67tn of interbank indebtedness and an estimated $124tn of pension under-provision. The equivalent number for 2001 is $176tn, expressed at constant 2016 PPP values. This means that aggregate liabilities have increased by $274tn over fifteen years – a period in which GDP grew by just $47tn.

The relationship between liabilities and recorded GDP is set out in the first pair of charts, which, respectively, set GDP against debt and against broader liabilities. Incidentally, the pensions issue is, arguably, a lot more serious than debt. This is because the real value of existing debt can be “inflated away” – a form of “soft default” – by governments willing to unleash inflation. The same cannot be said of pension requirements, which are, in effect, index-linked.

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Where climate change is concerned, what matters isn’t so much the debt or broader liability aggregates, or even the rate of escalation, but what they tell us about the credibility of recorded GDP and growth.

Here, to illustrate the issues involved, are comparative annual growth rates between 2001 and 2016, a period long enough to be reliably representative:

GDP: +3.4% per year

Debt: +5.0%

Pension gap and interbank debt: +9.1%

To this we can add two further, very pertinent indicators:

Energy consumption: +2.2%

CO2 emissions: +2.1%

The real story

As we have seen, growth of $47tn in recorded GDP between 2001 and 2016 was accompanied – indeed, made possible – by a vast pillaging of the balance sheet, including $135tn in additional indebtedness, and an estimated $140tn in other liabilities.

The only realistic conclusion is that the economy has been inflated by massive credit injections, and by a comparably enormous unwinding of provisions for the future. It follows that, absent these expedients, organic growth would have been nowhere near the 3.4% recorded over the period.

SEEDS – the Surplus Energy Economics Data System – has an algorithm designed to ex-out the effect of debt-funded consumption (though it does not extend this to include pension gaps or interbank debt). According to this, adjusted growth between 2001 and 2016 was only 1.55%. As this is not all that much faster than the rate at which the population has been growing, the implication is that per capita growth has been truly pedestrian, once we see behind the smoke-and-mirrors effects of gargantuan credit creation.

This isn’t the whole story. The above is a global number, which embraces faster-than-average growth in China, India and other EMEs. Constrastingly, prosperity has actually deteriorated in Britain, America and most other developed economies. Citizens of these countries, then, are not imagining the fall in prosperity which has helped fuel their discontent with incumbent governing elites. The deterioration has been all too real.

The second set of charts illustrates these points. The first shows quite how dramatically annual borrowing has dwarfed annual growth, with both expressed in constant dollars. The second sets out what GDP would have looked like, according to SEEDS, if we hadn’t been prepared to trash collective balance sheets in pursuit of phoney “growth”. You will notice that the adjusted trajectory is consistent with what was happening before we ‘unleashed the dogs of cheap and easy credit’ around the time of the millenium.

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Flagging growth – the energy connection

As we have seen, then, the very strong likelihood is that real growth in global economic output over fifteen years has been less than 1.6% annually, slower than growth either in energy consumption (2.2%) or in CO² emissions(2.1%). In compound terms, growth in underlying GDP seems to have been about 26% between 2001 and 2016, appreciably less than increases in either energy consumption (+40%) or emissions (+37%).

At this point, some readers might think this conclusion counter-intuitive – after all, if technological change has boosted efficiency, shouldn’t we be using less energy per dollar of activity, not more?

There is, in fact, a perfectly logical explanation for this process. Essentially, the economy is fuelled, not by energy in the aggregate, but by surplusenergy. Whenever energy is accessed, some energy is always consumed in the access process. This is expressed here as ECoE (the energy cost of energy), a percentage of the gross quantity of energy accessed. The critical point is that ECoE is on a rising trajectory. Indeed, the rate of increase in the energy cost of energy has been rising exponentially.

As mature resources are depleted, recourse is made to successively costlier (higher ECoE) alternative sources. This depletion effect is moderated by technological progress, which lowers the cost of accessing any given form of energy. But technology cannot breach the thermodynamic parameters of the resource. It cannot, as it were, ‘trump the laws of physics’. Technology has made shale oil cheaper to extract than shale oil would have been in times past. But what it has not done is transform shales into the economic equivalent of giant, technically-straightforward conventional fields like Al Ghawar in Saudi Arabia. Any such transformation is something that the laws of physics simply do not permit.

According to estimates generated on a multi-fuel basis by SEEDS, world ECoE averaged 4.0% in 2001, but had risen to 7.5% by 2016. What that really means is that, out of any given $100 of economic output, we now have to invest $7.50, instead of $4, in accessing energy. The resources that we can use for all other purposes are correspondingly reduced.

In the third pair of charts, the left-hand figure illustrates this process. The area in blue is the net energy that fuels all activities other than the supply of energy itself. This net energy supply continues to increase. But the red bars, which are the energy cost of energy, are rising too, and at a more rapid rate. Consequently, gross energy requirements – the aggregate of the blue and the red – are rising faster than the required net energy amount. This is why, when gross energy is compared with economic output, the energy intensity of the economy deteriorates, even though the efficiency with which netenergy is used has improved.

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Here’s another way to look at ECoE and the gross/net energy balance. Back in 2001, we needed to access 104.2 units of energy in order to have 100 units for our use. In 2016, we had to access 108.1 units for that same 100 units of deployable energy. This process, which elsewhere has been called “energy sprawl”, means that any given amount of economic activity is requiring the accessing of ever more gross energy in order to deliver the requisite amount of net (surplus) energy. By 2026, the ratio is likely to have risen to 112.7/100.

The companion chart shows the trajectory of CO² emissions. Since these emissions are linked directly to energy use, they can be divided into net (the pale boxes), ECoE (in dark grey) and gross (the sum of the two). Thanks to a lower-carbon energy slate, net emissions seem to be flattening out. Unfortunately, gross emissions continue to increase, because of the CO2 associated with the ECoE component of gross energy requirements.

Shot down in flames? The “evidence” for “sustainable development”

As we have seen, a claimed rate of economic growth (between 2001 and 2016) that is higher (65%) than the rate at which CO2 emissions have expanded (37%) has been used to “prove” increasing efficiency. It is entirely upon these claims that the viability of “sustainable development” is based.

But, as we have also seen, reported growth has been spurious, the product of unsustainable credit manipulation, and the unwinding of provision for the future. Real growth, adjusted to exclude this manipulation, is estimated by SEEDS at 26% over that period. Crucially, that is less than the 37% rate at which CO² emissions have grown.

On this basis, a claimed 17% “improvement” in the amount of CO2 per dollar of output reverses into a deterioration. Far from improving, the relationship between CO2 and economic output worsened by 9% between 2001 and 2016. In parallel with this, the amount of energy required for each dollar of output increased by 11% over the same period.

The final pair of charts illustrate this divergence. On the left, economic activity per tonne of CO2 is shown. The second chart re-expresses this relationship using GDP adjusted for the artificial “growth” injected by monetary manipulation. If this interpretation is correct – and despite a very gradual upturn in the red line since 2010 – the comforting case for “sustainable development” falls to pieces.

In short, if growth continues, rising ECoEs dictate that both energy needs, and associated emissions of CO2, will grow at rates exceeding that of economic output.

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We are back where many have argued that we have been all along. The pursuit of growth seems to be incompatible with averting potentially irreversible climate change.

There is a nasty sting-in-the-tail here, too. The ECoE of oil supplies is rising particularly markedly, and there seems a very real danger that this will force an increased reliance on coal, a significantly dirtier fuel. A recent study by the China University of Petroleum predicted exactly such a trend in China, already the world’s biggest producer of CO2. As domestic oil supply peaks and then declines because of higher ECoEs, the study postulates a rapid increase in coal consumption to feed the country’s voracious need for energy. This process is most unlikely to be confined to China.

Where does this leave us?

The central contention here is that the case for “sustainable development” is fatally flawed, because the divergence between gross and net energy needs is more than offsetting progress in greening our energy mix and combatting emissions of harmful gases. “Sustainable development” is a laudable aim, but may simply not be achievable within the laws of physics as they govern energy supply.

If this interpretation is correct, it means that growth in the global economy can be pursued only at grave climate risk. A (slightly) more comforting interpretation might that the super-heated rate of borrowing, and the seemingly disastrous rate at which pension capability is being destroyed, might well crash the system before our obsession with ‘growth at all costs’ can inflict irreparable damage to the environment.

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Post collapse, just what will we eat…..?

21 11 2017

Further to my post where I explained how Australia’s poor soils are largely incapable of growing much more than meat, this article landed in my news feed…

Here’s a list of what Australian farmers produce:

  • Each year, on average each Australian farmer feeds 600 people.
  • Agriculture powers 1.6 million Australian jobs.
  • Australian farmers manage 48 per cent of the nation’s landmass.
  • Cattle, wheat and whole milk are our top three commodities by value.
  • More than 99% of Australia’s agricultural businesses are Australian owned.
  • Out of the $58.1 billion worth of food and fibre Australian farmers produced in 2015-16 77 per cent ($44.8 billion) was exported. 
  • 6.8 million hectares of agricultural land has been set aside by Australian farmers for conservation and protection purposes.
  • Australian farmers are among the most self-sufficient in the world, with government support for Australian farms representing just 1% of farming income. In Norway it is 62%, Korea 49%, China 21%, European Union 19% and United States 9%.

Farm facts by commodity

  • In total, Australian beef cattle farmers produce 2.5 million tonnes of beef and veal each year. Australians eat an average 26kg of beef per person, per year. 
  • Australians consume an average of 45.3kg of chicken meat per person, per year. This not only cements chicken’s position as Australian consumers’ favourite meat, but also makes Australia one of the largest consumers of chicken meat in the world!
  • In a normal year, Australia’s cotton growers produce enough cotton to clothe 500 million people.
  • Australia produces about 3 per cent of the world’s cotton but is the fifth largest exporter, behind the USA, India, Brazil, Uzbekistan.
  • Australian dairy farmers produce 9,539 million litres of whole milk per year with the farmgate value of milk production being $4.3 billion.
  • On average, each Australian eats 3.08kg of dried fruit per year. Total Australian dried fruit exports in 2015–16 totalled 5,000 tonnes and was valued at $19.4 million.
  • The Australian forestry, logging and wood manufacturing industry employs 64,300 in the forest products industry. At the end of 2010, 13,067 million tonnes of carbon was held in Australia’s forests and harvested wood products in service and in landfill. Almost all this carbon 12,841 million tonnes – 98% was stored in living forest.
  • Australia’s grains industry accounts for more than 170,000 jobs across Australia from farm to export dock. About 65% of Australia’s grain is exported, including up to 90% of that grown per annum in Western Australia and South Australia.
  • Australians consumed more than 27kg of pig meat per person in 2015–16; ranked second behind poultry.  The Australian pig herd is free from many serious viral and bacterial diseases afflicting other pork producing countries.
  •  In 2016–17 there were 772 farmers who harvested rice, a significant increase on the 347 growers from the year prior. Australian rice growers use 50% less water to grow one kilo of rice than the world average.
  • Australia is the world’s largest exporter of sheepmeat, and is the world’s third largest producer of lamb and mutton. In 2016–17, Australians, on average, ate 9.5 kg of mutton and lamb per person.
  • The sugar industry directly employs some 16,000 people. The world’s principal sugar exporters in 2015–16 were Brazil, Thailand, Australia and India.
  • Wool production for 2016–17 is forecast to increase by 4.3%, to 339 million kilograms (greasy) from the estimated 2015–16 production period. The increase is largely the result of excellent seasonal conditions in many areas resulting in higher fleece weights.

So, I ask you, WHERE do our fruit and veggies come from?

We may export 77% of what we produce, but it’s all meat, dairy, grains, and wool or cotton……  the money earned therefrom pays for the importation of fruit and veggies not farmed here. In a post oil crash, most of that stuff we export will no longer be made, because it all utterly depends on fertilisers and tractors and harvesters……. If we can’t afford to import non meat/dairy food, will we all turn into carnivores…?

These are serious questions to ponder…..

The mobile butcher came this afternoon, and cut up our two sheep, which are now in the freezer.  We won’t be starving, that’s for sure!

If you are vegan, you might also like (or not..!) to read this… https://qz.com/1131428/if-the-entire-us-went-vegan-itd-be-a-public-health-disaster/





Brace for impact….

21 11 2017

This piece is particularly interesting because it’s from someone who campaigns for the Scottish Greens. He’s also a scientist, so knows what’s going on better than most politicians.

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ianbaxter

Ian Baxter

Politics will not save us from abrupt climate change because we don’t want to be saved

Forty years ago I was studying for a Physics degree at Edinburgh University. I chose Edinburgh because it offered a course which included Meteorology and Atmospheric Physics, interests which have stayed with me since.

When I came across articles about the Greenhouse Effect, this intrigued me as a scientist, but also worried me as a human being, and although it was only a theory at the time, I felt the implications if true were so severe that at the very least, we should adopt the precautionary principle and take immediate action to prevent it.

It was this that led me to join the Ecology Party in 1979 and since then, politics for me has always been about climate change and the need to address it before it became unstoppable. In the seventies and eighties, the threat of an impending nuclear war was on everyone’s minds, but here was another existential threat to humanity that although distant, required no less attention to defuse or at least to quantify.

Then it was a theory and if proven, we still had time to do something about it. Forty years on and the Greenhouse Effect is now known as Global Warming or Climate Change. The effects predicted are not only happening, but they are happening much faster than predicted and events over the last three years have led me to believe that this is not only irreversible, but we are now entering a period of what is known as ‘abrupt climate change’, which will lead to the breakdown of society within 30 years and near human extinction by the end of the century.

To understand how this will happen so quickly, we need to appreciate that climate change is not linear. We are on an exponential curve. The three warmest years on record globally have been 2014, 2015 and 2016 (with 2017 set to join them).  Floods, droughts, wildfires and storms are this year setting records and records are not only being broken, but they are starting to be broken by some margin. We’re on an curve where not only will events happen more often and be more severe, but the rate at which they increase will itself be increasing. That’s what exponential means.

We also need to appreciate some of the deficiencies in climate modelling. Specifically, climate scientists (in common with nearly all scientists) are experts in their own fields only. Looking at a specific aspect of science in isolation is fine if nothing else is changing, but if everything else is changing, you need to take that into account if you’re predicting what will happen in the future.

There are around 70 feedback effects now kicking in, and few if any models are taking these into account. For example, scientists studying the Arctic sea ice may take into account higher sea surface temperatures, but not the incursion of water vapour (a greenhouse gas) into the Arctic resulting from a distorted jet stream, or the impact of soot on ice albedo from increased wildfires thousands of miles away.

A recent example is the speed with which this year’s Atlantic hurricanes strengthened from tropical storms to Category 5 hurricanes due to higher sea surface temperatures. This surprised meteorologists as the computer models were only forecasting Cat 2 or 3 at most. Only now are they recognising that the models are underestimating the effect of warmer sea surfaces and the additional energy and water vapour they provide.

As Peter Wadhams writes in his recent book ‘A farewell to ice’, to reverse the effects of man made carbon dioxide in the atmosphere would demand a switch in global focus on the scale of the post war Marshall plan. We would need not only to stop producing CO2 but also turn over many of our factories to producing carbon capture and storage machines, and we would need to start right now. The cost to the world economies would be huge, possibly running to over $100 Trillion.

If, and it’s still an if, we are capable of reversing the trajectory we’re on, there are no signs of a willingness to do so – neither from politicians nor people in general. CO2 takes over a decade to become fully effective as a greenhouse gas, and lingers in the atmosphere for decades. Methane (CH4) is 130 times as effective as a greenhouse gas in the first 3 years after release and due largely to melting permafrost is starting to rise rapidly in global concentration (another feedback).

So what are we actually doing about it? ‘Emissions’ as measured by countries themselves levelled out over the past three years – but are now rising once again. Leaving aside allegations that the figures have been doctored anyway, the extra CO2 from increasing wildfires is not included (as an example, the CO2 from those in British Columbia, just one Canadian province, this year equated to the annual emissions from 40 million cars on the road). The litmus test is the actual measure of CO2 in the atmosphere – now reaching a peak of around 410 ppm and rising at a record annual rate of around 2.5 ppm per year.

In 1989, the UN issued a warning that we had only ten years to address global warming before irreversible tipping points start kicking in. That was 30 years ago. Similar warnings have appeared since, none of them heeded. Instead of issuing warnings, more and more scientists are now coming round to the view that it really is too late. What I have witnessed over the last three years has led me to believe the same. We really are too late and are now entering the sixth mass extinction.

Too many articles on climate change contain the phrase “By 2100…” or “By the end of the century…”. That really is too far away for most people to treat as urgent. While it’s difficult to make predictions, it should be made clear that the catastrophic impacts of climate change will affect us well before then.

Within five to ten years I expect to see food prices rising well above inflation – perhaps by as much as 50% to 100% with some empty shelves appearing in supermarkets as specific crops are devastated (we already had a ‘taste’ of this earlier this year with courgettes and lettuce crops hit by unusual weather in Spain; world wine production is now at a 50 year low due to extreme weather events).

Wildfires are already becoming uncontrollable. Portugal has seen six times its average this year. There have been fires in Greenland and in Australia during its winter, not to mention the devastation in California, Canada and Siberia. Hurricanes are becoming stronger and appearing in unusual places (Ophelia was the strongest on record in the east Atlantic and Greece is currently being hit by what is called a ‘Medicane’). Sea surface temperatures need to be over 28.5 C for a hurricane to strengthen. The Mediterranean off Italy’s coast reached 30 degrees this year. With the right conditions, it would only take one stray east Atlantic hurricane to head into the Med to cause widespread devastation. I can easily see this happening within ten years. Elsewhere we will see hurricanes and typhoons strong enough to flatten cities within the next decade.

The economic implications will be immense. The impact of hurricanes Harvey, Irma and Maria in the US is expected to be around $400 Billion this year, not counting the wildfires in California and drought in Montana. Over the next decade, super hurricanes, flooding and drought will cause insurance companies to collapse. Banks will follow and pension funds will start to come under pressure. With food prices increasing way ahead of wages, disposable incomes will be hit hard, leading to worldwide economic depression.

And that’s not taking into account the hundreds of millions of climate refugees (already begun in the Caribbean). With the jet stream already getting seriously messed up, or if the Hadley cells become severely disrupted, it’s not out of the question that the Indian monsoon could fail permanently and within a year we have a billion people starving.

There’s a saying that if something is unsustainable it will not be sustained. Obvious, perhaps, but we have been living well beyond the sustainability of the planet for decades and continue to believe that somehow we can do so increasingly and indefinitely. That will not be sustained.

So for forty years I tried to warn people. Now I tell them it’s too late and we’re f***ed, they say I’m being too negative need to give people a positive message. OK then, will “We’re positively f***ed” do?, because when we could save ourselves nobody listened, and even now when they think we still can, there is absolutely no will to do so.

For a long time, we have needed to change our lifestyles and that, for most people, is a red line area. There are no quick fixes. We cannot continue with mass air transport – the only non polluting alternative to fossil fuels requires huge areas of land to be removed from food production, which is already coming under pressure due to climate change and increasing population. We need to stop owning cars (not just leaving them in the driveways) – the resource requirements and human rights implications of even switching to electric cars present largely insurmountable problems. And even if these problems can be fixed, the solution needs to come first, rather than assuming as always that the next generation will somehow pick up the bill and sort out the mess we are creating by our profligate lifestyles.

And so we continue to build more runways and roads, drill for more oil, burn more forests for palm oil plantations and clear the rainforests for agriculture and logging, despite the fact that these massive environmental problems are no longer a theory but are staring us in the face. But we keep on driving and keep on flying and keep on buying things we don’t need from halfway across the globe without the slightest thought that all this will kill our children.

I was perhaps naive to believe that politics would solve the problem. If the bottom line is that people will not change their lifestyles, then they will not vote for politicians who say we need to. So politicians will not tell people the truth and tell them instead that we can get by with replacing petrol cars with electric ones by some decade well in the future and convince people we’re all ‘doing our bit’ for the planet by planting a few wind turbines. They talk vaguely about carbon capture and how air transport is important for economic growth and without that we cannot tackle climate change. As a councillor I was the only one even vaguely interested in the council’s climate change plan (including both councillors and officers).

And people believe them because they want to. I’ve long maintained that people get the politicians they deserve (good and bad) and they certainly don’t want politicians to tell them they can’t have their cheap holidays in Spain. I joined the Ecology Party (which became the Green Party) because it was, and still is, the only party to come anywhere close to telling people the truth on climate change. That people are generally not in the least interested in the environment that keeps them alive is borne out by the derisory vote Greens get – around 2% support except where they campaign strongly on non-environmental issues.

And Green Party activists have also realised this. So they focus on being more user friendly and campaigning on issues that ‘matter to people’ like independence or austerity, rather than lose votes by telling people it’s about time they faced the harsh truth.

I’ve been accused of being too Utopian, that before we address climate change we need an independent Scotland, or a Socialist Republic, or something else. And those arguments were rational thirty years ago – after all, it’s the free market Capitalist system that brought us to this position. However, thirty years ago is not now – when your house is on fire, you don’t try and get ownership of the keys, you reach for the hose. When I attend a climate rally and see it attracts less than a tenth of the numbers at a Scottish independence rally, it brings home how insane our politics has become. What planet do these people expect an independent Scotland to exist on? Venus by the look of it.

So we might be f***ed, but should we give up? No, I don’t think so. We may not be able to stop the process, but we can slow it down and offer the next generation at least some kind of palliative care. I have not flown or owned a car for around 20 years and will continue that way. Because very soon my children’s generation will become angry with mine, and will ask why, in the face of so many warnings from scientists for decades, we did nothing about it.

It will be little consolation, but at least I will be able to say I tried.





AND the shale oil rout continues unabated…….

16 11 2017

Republished from SRS Rocco Report….  for those of you who don’t know it exists!

U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals.  The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution.  If you are in need of a good laugh, I highly recommend watching part of the video.  At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever.  Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.”  While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil.  We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production.  Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs.  I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.  As I stated in a previous article, Continental Resources long-term debt ballooned from $165 million in 2007 to $6.5 billion currently.  So, how did advanced technology lower costs when Continental now has accumulated debt up to its eyeballs?

Of course… it didn’t.  Debt increased on Continental Resources balance sheet because shale oil production wasn’t profitable… even at $100 a barrel.  So, now the investor who purchased Continental bonds and debt are the Bag Holders.

Regardless, while U.S. oil production continues to increase at a moderate pace, there are some troubling signs in one of the country’s largest shale oil fields.

Shale Oil Production At the Mighty Eagle Ford Stagnates As Companies’ Financial Losses Mount

It was just a few short years ago that the energy industry was bragging about the tremendous growth of shale oil production at the mighty  Eagle Ford Region in Texas.  At the beginning of 2015, Eagle Ford oil production peaked at a record 1.7 million barrels per day (mbd).  Currently, it is nearly 500,000 barrels per day lower.  According to the EIA – U.S Energy Information Agency’s most recently released Drilling Productivity Report, oil production in the Eagle Ford is forecasted to grow by ZERO barrels in December:

The chart above suggests that the companies drilling and producing oil in the Eagle Ford spent one hell of a lot of money, just to keep production flat.  Even though the shale oil producers were able to bring on 88,000 barrels per day of new oil, the field lost 88,000 barrels per day due to legacy declines.  We need not take out a calculator to understand production growth at the Eagle Ford is a BIG PHAT ZERO.

Here are the five largest shale oil and gas producers in the Eagle Ford where:

  1. EOG Resources
  2. ConocoPhillips
  3. BHP Billiton
  4. Chesapeake Energy
  5. Marathon Oil

The company that doesn’t quite fit in the energy group above is BHP Billiton.  BHP Billiton is one of the largest base metal mining companies in the world.  Unfortunately for BHP Billiton, the company decided to get into U.S. Shale at the worst possible time.  BHP Billiton bought shale oil properties when prices were high and eventually had to liquidate when prices were low.  A Rookie mistake made by supposed professionals.  I wrote about this in my article; DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE.”

I decided to take a look at the current financial reports published by the five companies listed above.  The largest player in the Eagle Ford is EOG Resources.  I went to YahooFinance and created the following Cash Flow table for EOG:

In the latest quarter (Q3 2017), EOG reported $961 million in cash from operations.  However, the company spent $1,094 million on capital (CAPEX) expenditures and another $96 million in shareholder dividends.  Applying simple arithmetic, EOG spent $229 million more on CAPEX and dividends than it made from its operations.  Maybe someone can tell me how advanced technology is bringing down the cost for EOG.

The next largest player in the Eagle Ford is ConocoPhillips.  If we look at ConocoPhillips net income at its different business segments, we can see that the company isn’t making any money producing oil and gas in the lower 48 states:

While ConocoPhillips enjoyed a $103 million profit in Alaska, it suffered a $97 million loss in the lower 48 states.  Thus, the third largest oil company in the U.S. isn’t making any money producing oil and gas in the majority of the country.  According to the data, ConocoPhillips produced twice as much oil and gas in the lower 48 states then what they reported in Alaska, but the company still lost $97 million.

The third largest company producing oil in the Eagle Ford is BHP Billiton.  Instead of providing financial results, I thought this chart on BHP Billiton’s Return On Capital Employed was a better indicator of how bad their U.S. Shale assets were performing.  If we look at the right-hand side of the chart, BHP Billiton’s shale oil resources have become one hell of a drag on the company’s asset portfolio:

While BHP Billiton is enjoying a healthy positive Return On Capital Employed on most of its assets, shale oil resources are showing a negative return.  Furthermore, the company makes a note to above stating, “Detailed plans to improve, optimize or EXIT.”  I would bet my bottom Silver Dollar that their decision will end up “EXITING” the wonderful world of shale energy, with the sale of their assets for pennies on the dollar.

Moving down the list to the next shale company, we come to Chesapeake.  While Chesapeake is the country’s second-largest natural gas producer, the company has been losing money for more than a decade.  Unfortunately, the situation hasn’t improved for Chesapeake as its current financial statement reveals the company continues to burn through cash to produce its oil and gas:

Chesapeake’s net cash provided by its operating activities equaled $273 million for the first three-quarters of 2017.  However, the company spent a whopping $1,597 million on drilling and completion costs (CAPEX).  Thus, Chesapeake spent $1.3 billion more on producing its oil and natural gas Q1-Q3 2017 than it made from its operations.  Again, how is advanced technology making shale oil and gas more profitable?

If it weren’t for the asset sale of $1,193 million, Chesapeake would have needed to borrow that money to make up the difference.  Regrettably, selling assets to fortify one’s balance sheet isn’t a long-term viable business model.  There are only so many assets one can sell, and at some point, in the future, the market will realize those assets will have turned into worthless liabilities.

Okay, we finally come to the fifth largest player in the Eagle Ford…. Marathon Oil.  The situation at Marathon isn’t any better than the other companies drilling and producing oil in the Eagle Ford.  According to the companies third-quarter report, Marathon suffered a $600 million net income loss:

Again, we have another example of an energy company losing a lot of money producing shale oil and gas.  You will notice how high Marathon’s Depreciation, depletion, and amortization are in both the third-quarter and nine months ending on Sept 30th.  While some may believe this is just a tax write off for the company… it isn’t.  Due to the massive decline rate in producing shale oil and gas, PLEASE SEE the FIRST CHART ABOVE on the EAGLE FORD GROWTH OF ZERO, these companies have to write off these assets as it represents the BURNING of CASH.

For example, Marathon reported cash from operations of $1,487 million for Q3 2017.  However, it spent $1,305 million on CAPEX and $128 million on dividends for a total of $1,433 million.  Thus, Marathon actually enjoyed a small $53 million in positive free cash flow once dividends were deducted.  But, that is only part of the story.  If we go back to 2005 when the oil price as about the same as it is today, Marathon was reporting quarterly profits, not losses.

In the first quarter of 2005, Marathon earned a positive $324 million in net income.  It also reported a $258 million net income gain in 2004, even at a much lower oil price of $38 a barrel versus the $48-$50 during Q3 2017.  So, the Falling EROI – Energy Returned On Invested is killing the profitability of shale oil and gas companies today, whereas they were making profits just a decade ago.

Now, I didn’t provide any data on the other shale oil fields in the U.S., but production continues to increase in several regions, especially in the Permian.  However, one of the largest players in the Permian, Pioneer Resources, isn’t making any money either.  If we look at their financials, we can see that Pioneer continues to spend more money on CAPEX than they are receiving from cash from operations:

In all three quarters in 2017, Pioneer spent more money on capital expenditures than it made from its operating activities.  Pioneer spent $400 million more on CAPEX spending than from its operations for the first nine months of 2017 ending on Sept 30th.  So, here is just another example of a U.S. shale oil producer who partly responsible for the rising production in the Permian, but it still isn’t making any money.

Now, some investors or readers on my blog would say that the situation will get better when the oil price continues towards $60, $70 and then $80 a barrel.  Well, that would be nice, but I believe we are heading towards one hell of a market crash.  Even though some economic indicators are looking rosy, this market is being propped up by a massive amount of debt and the largest SHORT VIX trade in history.  When the markets start to go south as the massive VIX TRADE reverses… well, watch out below.

Thus, as the markets crash, the oil price will head down with it.  Unfortunately, this will be the final blow to the U.S. Shale Oil Ponzi Scheme and with it… the notion of Energy Independence forever.





Self sufficiency, comes at a price……

14 11 2017

IF you are one of my vegan friends, turn away, don’t read this…..  this morning, our two wethers met their fate and will be in our freezer next week.

I originally bought them 14 months ago with two young ewes, which have now both lambed, thanks to 20171104_184005Matt my neighbor who kindly allowed me to have them serviced by his ram. It’s a cooperative thing, all his Wilties are now on our orchard, gorging on luscious grass now going ballistic. We’ve had copious rain, and yesterday, today, and tomorrow, it’s hotter here than in Brisbane…. and the grass loves it! Normal Tasmanian weather will resume tomorrow afternoon!

As I have mentioned here before, our farm’s land capability, as it is officially known, is class 4 which is perfect for pastures, and therefore grazing animals. We are also lucky that our pastures have actually been improved by previous owners, and it’s great animal fattening land. We are not exactly making the most of it yet, because fully one third of our property is yet to have more animals eating our grass….. most likely, Matt’s cows will be put to the test soon!

20171114_091836We can’t eat grass, but the sheep can, and it’s a simple process to convert grass into protein for human consumption. The hard part is always the killing, which I do not enjoy, until the delicious result is on the table. And believe me, this is by far the best way to get high quality meat. The two wethers have had a great, if admittedly short life, and were never mistreated, right up til the very end……..

When the time came, one bullet is all it took, they never knew what happened…… stress20171114_092600 free meat means no adrenaline in the system, makes for better meat, and you can’t do it more humanely. The mobile butchers were efficient beyond belief, they were only here for forty minutes, and both carcasses were in their mobile cold room ready for cutting up later, all in that short time.  It actually took me longer to dispose of the leftovers, now composting for future use in the market garden. NOTHING is wasted…… this is how sustainable agriculture is done,

With the state of our soils in Tasmania and virtually everywhere else in Australia, incapable as they are of growing high energy food like grain and vegetables without loads of fossil energy inputs, I believe that in a post crash era we will be eating even more meat than we are currently…. and in any case, I’m sure we’ll be eating a lot less of everything, period…..





More on money and the economy………

11 11 2017

Articles that, as far as I am concerned, confirm my desire to print local money are coming into my newsfeed thick and fast. This latest one, from the consciousness of sheep, claims the UK economy is as good as finished…….

I don’t agree with everything in it, but bear with me…..

This article also ties in with the looming oil problems. Of course, with the North Sea oil fields depleting in double digits figures, and the UK being as good as out of coal and gas, it’s no wonder an English website would be expressing concern. Make no mistake though, with Australia importing well over 90% of all its liquid fuel requirements, we are in no better shape, really….

“Inflation” says the author “results in the appearance of rising prices; but is actually the devaluation of money.” In my opinion, this is one of the biggest mistakes of economics. Money has no value. It’s for trading and spending. When we sold our house a couple of years ago, we were suddenly the owners of $400,000 instead of a house. Were we rich? I don’t think so…….  not until we spent it on a farm, a couple of utes, a bunch of tools, building materials, livestock, soil improvers, earthworks, concrete…… and now most of the money is gone, I feel richer than ever, because I have the things I need to face our uncertain future. No I’ll take that back, the future is certain, it will be bad…!

There are, however, other reasons for rising prices [than money printing].  And unlike monetary inflation, these are self-correcting.  For example, global oil prices have begun to break out of the $40-$60 “goldilocks” band in which consumers and energy companies can just about keep their heads above water.  Most economists believe this to be dangerously inflationary.  Indeed, almost all previous recessions are the result of monetary tightening (usually by raising interest rates) in response to an upward spike in oil prices.  Since oil is used to manufacture and/or transport every item that we buy, if the price of oil increases, then the price of everything else must increase too.

But the price of oil is not increasing in response to money printing.  Rather, it is the result of declining inventories which point to a global shortage of oil early in 2018 – traders are currently bidding up the price on futures contracts to guarantee access to sufficient oil to meet anticipated demand.  Since oil is considered “inelastic” (we have little choice but to pay for it) the assumption is that rising wholesale prices will be passed on to consumers, causing general inflation.  Frank Shostak from the Mises Institute challenges this assumption:

“Whether the asking price set by producers is going to be realized in the market place, however, hinges on whether or not consumers will accept those prices. Consumers dictate whether the price set by producers is ‘right’.  On this Mises wrote, ‘The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.’

“If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realized.”

And the result is a recession/depression……. Shostak further argues that in this case:

“If the price of oil goes up and if people continue to use the same amount of oil as before, then this means that people are now forced to allocate more money for oil. If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come off.”

Clearly there is a difference between something as ubiquitous as oil and those other goods and services that must fall in price unless more money is printed into existence.  The difference is this; each of us has a series of “non-discretionary” purchases that we have little or no choice but to make every month.  These include:

  • Rent/mortgage payments
  • Utility bills
  • Debt interest
  • Council tax
  • Food
  • Transport
  • Telephone/broadband

In addition, we make various “discretionary” purchases of goods and services that we want rather than need.  These include pretty much everything else that we buy, including:

  • TV subscriptions
  • Cinema
  • Eating out
  • Going to the pub
  • Music downloads/subscriptions
  • Electrical equipment
  • Clothes
  • Home furnishings

Oddly enough…..  I have nothing to do with that last list! Am I already out of discretionary spending power…?

If the cost of living rises without appropriate increases in people’s access to money, then we as individuals do what governments are trying to do to the economy as a whole – we cut back on everything that we consider discretionary.  In this way, the rising price of oil – and electricity -does not result in generalised inflation; it merely redistributes our spending across the economy. Just ask the retail sector how well it’s doing at the moment….. When I recently replaced my freezer for a bigger one, I went to Gumtree, not Hardly Normal, and the perfectly functioning small freezer will be sold to pay for it.

This is of course where ‘free money’ from the community, to only be spent in the community really comes in handy. It allows people to buy their essentials, when locally made, without spending the government money, thus allowing the real stuff to be spent on energy and taxes and other stuff created in the Matrix.

Make no mistake, one day soon, the ONLY economy left will be our local economies.

The articles continues…….

Another mistake made by economists and politicians is the belief that rising prices will generate political pressure for additional public spending and for wage increases across the economy.  Indeed, one of the greatest economic mysteries of our age is why apparently full employment has failed to translate into rising wages.  The obvious answer, of course, is that working people have traded employment for low wages.

There is good reason for this.  Since 2010, government attempts to run a budget surplus have sucked money out of the economy.  Public spending and social security payments (the two ways new government money enter the economy) have been savagely cut.  If government refuses to spend new money into the economy, only the banks can.  But since 2008 the banks have stubbornly refused to spend money into the “real economy,” preferring instead to pump up asset bubbles that add no new value to the wider economy.  Only those working people fortunate enough to get a foot on the housing ladder get to benefit from this; but even they can see the illusion – a house may have risen in price since it was bought… but it is still the same house; no commensurate additional value has been added.  The same is true for bubbles in bonds, shares, cryptocurrencies, luxury property, collectibles and fine art.

“Full employment”? The writer seems unaware of the manipulation of statistics regarding employment… don’t know if the UK suffers from the same problem, but here in Australia, anyone working just one hour a week is no longer considered unemployed! A remarkable nmber of people ‘on the dole’ actually work, they are merely underemployed, but not counted.

And the way governments have stopped spending in vain attempts to reach budget surpluses is truly baffling. As is of course the tsunami of privatizations going on all over the world. This wealth transfer is the biggest con the planet has ever seen…

Economically, people are responding to this in the only way they can.  The working poor – increasingly dependent upon in-work benefits and foodbanks – have not only cut their discretionary spending; they have been eating into their supposedly non-discretionary spending too.  As Jamie Doward in the Guardian reports:

“More than a third of people who earn less than the “real living wage” have reported regularly skipping meals to save money…  A poll carried out for the Living Wage Foundation also found that more than a third of people earning less than this had topped up their monthly income with a credit card or loan in the last year, while more than one in five reported using a payday loan to cover essentials. More than half – 55% – had declined a social invitation due to lack of money, and just over half had borrowed money from a friend or relative.”

As I’ve said in past posts on this issue, if you don’t have access to money, you simply have to borrow it. Credit card debt in Australia accounts for a full quarter of all private debt, and when you have to pay extortionary interest rates on those, it limits your spending power even more.

Things look grim in the UK it seems….

Cat Rutter Pooley in the Financial Times reports that:

“In-store sales of non-food items fell 2.9 per cent over the three months to October and 2.1 per cent in the past year — the worst performance since the BRC started compiling the data in January 2012. Clothing sales were particularly hard hit, according to the report, with unseasonably warm weather holding down purchases. Online sales growth was also lacklustre, at less than half the pace of the three- and 12-month averages.”

This latter point is particularly important because until now economists and politicians have peddled the myth that high street sales were falling because consumers were buying online.  The reality is that they are falling because – with the exception of food – we are not buying anymore.  The news of the fall in high street shopping comes just a day after the British Beer and Pub Association reported a massive fall in the sale of beer.  On the same day, energy company SSE threatened to shut down its energy supply business as a result of falling profits.  Back in December last year, we reported a similar shift in purchasing behaviour as people cut back on personal hygiene products.

You know things are bad when beer sales are falling…! If ever there was an argument to be made for self sufficiency, this does the job. I make 90% of the alcohol I drink (and it isn’t much, believe me… my wife gave me a bottle of Scotch when I left Queensland for good two years ago, and the bottle was only recently emptied..); and I am finally growing more and more of my own food, even selling excess produce I cannot eat fast enough myself…  Nicole Foss’ deflationary spiral sounds like it’s started, and while no one is saying so yet, I think it’s on in Australia too.

The one consolation is that when Britain’s poor have finally cut their spending to the bone, and a swathe of businesses have been forced into bankruptcy, it is the rich who are going to face the biggest losses.  The Positive Money campaign highlights the Bank of England/Treasury dilemma:

“The Bank of England faces its current predicament thanks to an ongoing failure to think beyond a limited, orthodox form of the central bank’s role. By keeping rates low, it risks inflating asset bubbles even further. But with incomes so weak, now is the wrong time to raise them.”

This lesson will only be learned retrospectively.  Once it becomes apparent that millions of British workers are not going to be repaying their debts, banks will crash.  Once it becomes apparent that British workers cannot provide the government with the tax income to pay back its borrowing, the bond market will crash.  Ironically, JPMorgan has already christened the coming collapse; as Joe Ciolli at Business Insider reported last month:

“JPMorgan has already coined a nickname for the next financial meltdown.  And while the firm isn’t sure exactly when the so-called Great Liquidity Crisis will strike, it figures that tensions will start to ratchet up in 2018…”

And I thought 2020 would be crunch time…….. how often can I be called an optimist..??

When the time comes, Britain will be particularly badly hit because our economy has been all but hollowed out.  The supposed “wealth” that makes up a large part of our GDP comes from the movement of precisely the asset classes that the coming Great Liquidity Crisis will render worthless.  The difference compared to 2008 is that this time around the banks are too big to save and individual central banks and governments are too small to save them.

Limits to growth, limits everywhere….. and nobody’s acknowledging it.

 





I’m not the only one who’s worked it out….

7 11 2017

Following up on the post where I ‘claimed’ to have worked it out, along comes this article from a website I recently discovered that all my readers should also follow. Dr Tim Morgan who runs the WordPress blog Surplus Energy Economics, published the following, called Anticipating the next crash. While he doesn’t exactly mention printing one’s own community money, every single argument he makes proves my point as far as I am concerned…… the loss of trust in money in particular really caught my attention…..

Enjoy….

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THIS TIME IT COULD BE MONEY – NOT BANKS

tim morganBecause the global financial crisis (GFC) was caused by a collapse of trust in banks, it can be all too easy to assume that the next crash, if there is one, must take the same form.

In fact, it’s more likely to be different. Whilst the idiocy-of choice before 2008 had been irresponsible lending, by far the most dangerous recklessness today is monetary adventurism.

So it’s faith in money, rather than in banks, that could trigger the next crisis.

Introduction – mistaken confidence

Whenever we live through a traumatic event, such as the GFC of 2008, the authorities ‘close the stable door after the horse has bolted’. They put in place measures that might have countered the previous crisis, if only they had they known its nature in advance.

The reason why such measures so often fail to prevent another crash is simple – the next crisis is never the same as the last one.

That’s where we are now. We might be slightly better-placed to combat a GFC-style event today than we were back in 2008, though even that is doubtful. But we are dangerously ill-prepared for what is actually likely to happen.

Put at its simplest, the GFC resulted from the reckless accumulation of debt over the previous 8-10 years. Debt creation has continued – indeed, accelerated – since 2008, but the new form of recklessness has been monetary adventurism.

So it’s likely to be money, not debt, which brings the house down this time. Where 2008 was triggered by a collapse of faith in banks, a loss of faith in currencies could be the trigger for the next crisis.

And, judging by their actions, the authorities seem not to have spotted this risk at all.

Unfinished business?

Where the likelihood of a sequel to 2008 is concerned, opinion divides into two camps.

Some of us are convinced that the GFC is unfinished business – and that another crisis has been made more likely by the responses adopted back then. That we’re in a minority shouldn’t worry us because, after all, change happens when the majority (‘consensus’) view turns out to be wrong.

Others, probably the majority, believe that normality has now been restored.

But this view, frankly, is illogical. To believe that what we have now is “normality”, you would have to accept each of these propositions as true.

1. Current monetary conditions, with interest rates that are negative (lower than inflation), are “normal”

2. It is “normal” for people to be punished for saving, but rewarded for borrowing

3. It is also “normal” for debt to be growing even more rapidly now than it did before 2008

4. Buying $1 of “growth” with $3 or more of borrowing is “normal”

5. QE – the creation of vast sums of new money out of thin air – is also “normal”

6. Vastly inflated asset values, and extremely depressed incomes, are “normal”

7. Policies which hand money to the already-wealthy, at the expense of everyone else, are another aspect of “normal”

8. It is quite “normal” for us to have destroyed the ability to save for pensions, or for any other purpose.

To be sure, Lewis Carroll’s White Queen famously managed to believe “six impossible things before breakfast”, but even she would have struggled to swallow this lot with her croissants and coffee.

When we consider, also, the continued stumbling global economy – which, nearly a decade after the crisis, remains nowhere near “escape velocity” – the case for expecting a second crash becomes pretty compelling.

But this does not mean that we should expect a re-run of 2008 in the same form.

Rather, everything suggests that the sequel to 2008 will be a different kind of crisis. The markets won’t be frightened by something familiar, but will be panicked by something new.

This means that we should expect a form of crisis that hasn’t been anticipated, and hasn’t been prepared for.

2008 – a loss of trust in banks

We need to be clear that the GFC had two real causes, both traceable in the last analysis to reckless deregulation.

First, debt had escalated to unsustainable levels.

Second, risk had proliferated, and been allowed to disperse in ways that were not well understood.

Of these, it was the risk factor which really triggered the crash, because nobody knew which banks and other financial institutions were safe, and which weren’t. This put the financial system into the lock-down known as “the credit crunch”, which was the immediate precursor to the crash.

Ultimately, this was all about a loss of trust. Even a perfectly sound bank can collapse, if trust is lost. Because banks are in the business of borrowing short and lending long, there is no way that they can call in loans if depositors are panicked into pulling their money out.

This also means – and please be in no doubt about this – that there is no amount of reserves which can prevent a bank collapse.

So – and despite claims to the contrary – a 2008-style banking crisis certainly could take place again, even though reserve ratios have been strengthened. This time, though, banks are likely to be in the second wave of a crash, not in the front line.

Coming next – a loss of trust in money?

The broader lesson to be learned from the financial crisis is that absolute dependency on faith is by no means unique to banks.

Trust is a defining characteristic of the entire financial system – and is particularly true of currencies.

Modern money, not backed by gold or other tangible assets, is particularly vulnerable to any loss of trust. The value of fiat money depends entirely on the “full faith and credit” of its sponsoring government. If that faith and creditworthiness are ever called into serious question, the ensuing panic can literally destroy the value of the currency. It’s happened very often in the past, and can certainly happen again.

Loss of faith in a currency can happen in many ways. It can happen if the state, or its economy, become perceived as non-viable. In fact, though, this isn’t the most common reason for currency collapse. Rather, any state can imperil the trustworthiness of its currency if it behaves irresponsibly.

Again, we can’t afford to be vague about this. Currency collapse, resulting from a haemorrhaging of faith, is always a consequence of reckless monetary policy. Wherever there is policy irresponsibility, a currency can be expected to collapse.

In instances such as Weimar Germany and modern-day Zimbabwe, the creation of too much money was “route one” to the destruction of the trust. But this isn’t the only way in which faith in a currency can be destroyed. Another trust-destroying practice is the monetizing of debt, which means creating money to “pay” government deficits.

So the general point is that the viability of a currency can be jeopardized by any form of monetary irresponsibility. The scale of risk is in direct proportion to the extent of that irresponsibility.

The disturbing and inescapable reality today is that the authorities, over an extended period, have engaged in unprecedented monetary adventurism. As well as slashing interest rates to levels that are literally without precedent, they have engaged in money creation on a scale that would have frightened earlier generations of central bankers out of their wits.

Let’s be crystal clear about something else, too. Anyone who asserts that this adventurism isn’t attended by an escalation in risk is living in a fantasy world of “this time it’s different”.

Here is a common factor linking 2008 and 2017. In the years before the GFC, reckless deregulation created dangerous debt excesses. Since then, recklessness has extended from regulation into monetary policy itself. Now, as then, irresponsible behaviour has been the common factor.

A big difference between then and now, though, lies in the scope for recovery. In 2008, the banks could be rescued, because trust in money remained. This meant that governments could rescue banks by pumping in money. There exist few, if any, conceivable responses that could counter a haemorrhage of faith in money.

Obviously, you can’t rescue a discredited currency by creating more of it. [ED. hence the need to create local currency]

If a single currency loses trust, another country or bloc might just bail it out. But even this is pretty unlikely, because of both sheer scale, and contagion risk.

So there is no possible escape route from a systemic loss of trust in fiat money. In that situation, the only response would be to introduce wholly new currencies which start out with a clean bill of health.

An exercise in folly

To understand the current risk, we need to know how we got here. Essentially, we are where we are because of how the authorities responded to the GFC.

In 2008, the immediate threat facing the financial system wasn’t the sheer impossibility of ever repaying the debt mountain created in previous years. Most debt doesn’t have to be repaid immediately, and can often be replaced or rolled-over.

Rather, the “clear and present danger” back then was an inability to keep up interest payments on that debt. Because the spending of borrowed money had given an artificial boost to apparent economic activity, there was widespread complacency about how much debt we could actually afford to service. When the crash unmasked the weakness of borrowers, it became glaringly apparent that the debt mountain simply couldn’t be serviced at a ‘normal’ rate of interest (with ‘normal’, for our purposes, meaning rates in the range 4-6%).

The obvious response was to circumvent this debt service problem by slashing rates. Cutting policy rates was a relatively straightforward, administrative exercise for central bankers. But prevailing rates aren’t determined by policy alone, because markets have a very big say in rate-setting. This, ultimately, was why QE (quantitative easing) was implemented. QE enabled central banks to drive down bond yields, by using gigantic buying power to push up the prices of bonds.

Beyond the mistaken assurance that QE wasn’t the same as “printing money” – so wouldn’t drive inflation up – little or no thought seems to have been devoted to the medium- or longer-term consequences of monetary adventurism.

In essence, ZIRP (zero interest rate policy) was a medicine employed to rescue a patient in immediate danger. Even when responding to a crisis, however, the wise physician is cognisant of two drug risks – side-effects, and addiction.

The financial physicians considered neither of these risks in their panic response to 2008. The result is that today we have addiction to cheap money, and we are suffering some economic side-effects that are very nasty indeed.

The inflation delusion

Even the assurance about inflation was misleading, because increasing the quantity of money without simultaneously increasing the supply of goods and services must create inflation. This is a mathematical certainty.

Rather, the only question is where the inflation is going to turn up.

As has been well explained elsewhere, handing new money to everyone would drive up general inflation. Giving all of it to little girls, on the other hand, would drive up the price of Barbie dolls. Since QE handed money to capital markets, its effect was to drive up the price of assets.

That much was predictable. Unfortunately, though, when policymakers think about inflation, they usually think only in terms of high street prices. When, for example, the Bank of England was given a degree of independence in 1997, its remit was framed wholly in CPI terms, as though the concept of asset inflation hadn’t occurred to anyone.

This is a dangerous blind-spot. The reality is that asset inflation is every bit as ‘real’ as high street inflation – and can be every bit as harmful.

Massive damage

In itself, though, inflation (asset or otherwise) is neither the only nor the worst consequence of extreme monetary recklessness. Taken overall, shifting the basis of the entire economy onto ultra-cheap money must be one of the most damaging policies ever adopted.

Indeed, it is harmful enough to make Soviet collectivism look almost rational.

The essence of cheap money is policy to transform the relationship between assets and incomes through the brute force of monetary manipulation.

Like communism before it, this manipulation seeks to over-rule market forces which, in a sane world, would be allowed to determine this relationship.

By manipulating interest rates, and thereby unavoidably distorting all returns on capital, this policy has all but destroyed rational investment.

Take pensions as an example. Historically, a saver needing $10,000 in twenty-five years’ time could achieve this by investing about $2,400 today. Now, though, he would need to invest around $6,500 to attain the same result.

In effect, manipulating rates of return has crippled the ability to save, raising the cost of pension provision by a factor of about 2.7x.

Therefore, if (say) saving an affordable 10% of income represented adequate provision in the past, the equivalent savings rate required now is 27%. This is completely unaffordable for the vast majority.  In effect, then – and for all but the very richest – policymakers have destroyed the ability to save for retirement.

Small wonder that, for eight countries alone, a recent study calculated pension shortfalls at $67 trillion, a number projected to rise to $428 trillion (at 2015 values) by 2050.

What this amounts to is cannibalizing the economy. This is a good way to think about what happens when we subsidise current consumption by destroying the ability to provide for the future.

Savings, of course, are a flip-side of investment, so the destruction of the ability to save simultaneously cripples the capability to invest efficiently as well. The transmission mechanism is the ultra-low rate of return that can now be earned on capital.

A further adverse effect of monetary adventurism has been to stop the necessary process of “creative destruction” in its tracks. In a healthy economy, it is vital that weak competitors go under, freeing up capital and market share for new, more dynamic entrants. Very often, the victims of this process are brought down by an inability to service their debts. So, by keeping these “zombies” afloat, cheap money makes it difficult for new companies to compete.

Obviously, we also have a problem with inflated asset values in classes such as stocks, bonds and property. These elevated values build in crash potential, and steer investors towards ever greater risk in pursuit of yield. Inflated property prices are damaging in many ways. They tend towards complacency about credit. They impair labour mobility, and discriminate against the young.

More broadly, the combination of inflated asset values and depressed incomes provides adverse incentives, favouring speculation over innovation. And this is where some of the world’s more incompetent governments have stepped in to make things even worse.

In any economic situation, there’s nothing that can’t be made worse if government really works at it. The problems created by “zombie” companies are worsened where government fails to enforce competition by breaking up market domination. Though the EU is quite proactive over promoting competition, the governments of America and Britain repeatedly demonstrate their frail grasp of market economics when they fail to do the same.

Worse still, the US and the UK [and AUSTRALIA…] actually increase the shift of incentives towards speculation and away from innovation. Having failed to tax the gains handed gratuitously to investors by QE, these countries follow policies designed to favour speculation. Capital gains are often taxed at rates less than income, and these gains are sheltered by allowances vastly larger than are available on income.

The United Kingdom has even backstopped property markets using cheap credit, apparently under the delusional belief that inflated house prices are somehow “good” for the economy.

How will it happen?

As we’ve seen, monetary recklessness – forced on central bankers by the GFC, but now extended for far too long – has weakened economic performance as well as intensifying risk. In some instances, fiscal policy has made a bad problem worse.

In short, the years since the crash have been characterised by some of the most idiotic policies ever contemplated.

All that remains to consider is how the crash happens. The prediction made here is that, this time around, it will be currencies, rather than banks, which will be first suffer the crisis-inducing loss of trust (though this crisis seems certain to engulf the banks as well, and pretty quickly).

The big question is whether the collapse of faith in currencies will begin in a localized way, or will happen systemically.

The former seems likelier. Although Japan has now monetized its debt to a dangerous scale (with the Bank of Japan now owning very nearly half of all Japanese government bonds), by far the most at-risk major currency is the British pound.

In an earlier article, we examined the case for a sterling crash, so this need not be revisited here. In short, it’s hard to find any reason at all for owning sterling, given the state of the economy. On top of this, there are at least two potential pitfalls.  One of these is “Brexit”, and the other is the very real possibility than an exasperated public might elect a far-left government.

Given a major common factor – the fatuity of the “Anglo-American economic model” – it is tempting to think that the dollar might be the next currency at risk. There are, pretty obviously, significant weaknesses in the American economy. But the dollar enjoys one crucial advantage over sterling, and that is the “petro-prop”. Because oil (and other commodities) are priced in dollars, anyone wanting to purchase them has to buy dollars first. This provides support for the dollar, despite America’s economic weaknesses (which include cheap money, and a failure to break up market-dominating players across a series of important sectors).

[ED. More and more countries, not least China, are now buying oil without US$]

Conclusion

Once the loss of trust in currencies gets under way, many different weaknesses are likely to be exposed.

The single most likely sequence starts with a sterling crash. By elevating the local value of debt denominated in foreign currencies, this could raise the spectre of default, which could in turn have devastating effects on faith in the balance sheets of other countries. Moreover, a collapse in Britain would, in itself, inflict grave damage on the world economy.

Of course, how the next crisis happens is unknowable, and is largely a secondary question. Right now, there are two points which need to be taken on board.

First, the sheer abnormality of current conditions makes a new financial crisis highly likely.

Second, rather than assume that banks will again be in the eye of the storm, we should be looking instead at the most vulnerable currencies.

Losing faith in banks, as happened in 2007-08, was bad enough.

But a loss of faith in money would be very, very much worse.