The Crash Ratchets Up…..

13 07 2014

It’s often been said among Peakniks that ‘the crash’ is not an event that will occur smoothly or suddenly, but rather in steps… so a sudden downturn like what happened when the GFC first hit would hit a low, followed by perhaps another rise at best, or a plateau.  Then another sharp downturn would shape the next step down to an even lower plateau.  How long these plateaus last of course is anyone’s guess, and they are at the mercy of events.  Who can guess what might happen in the Middle East next?

Just such a downturn may now not be far away.

Bank lending, it seems, has been setting new records since mid-2013, especially in the USA.  If the last credit bubble – when too many dodgy loans were made by overenthusiastic loan officers before it all blew up in 2008 – was spectacular, this one is even more so….. Based on the loose principle that the US economy can only grow if bank lending balloons, it appears that the lowering ERoEI of the oil industry may be at its core.

This is what the auspicious chart of core bank loans outstanding looks like (via OtterWood Capital Management):

This time around, economists have been using the borrowing binge as proof that investment was suddenly picking up, that these investments would filter into economic growth, and that after all this time of mirages and sour disappointments, the ever elusive “escape velocity” would finally come……..

It turns out that that jump in investment – powered by bank lending, investment is a code word for debt – that economists have so enthusiastically shown as ‘proof of return to normal’ has been nothing but an illusion. And no, it wasn’t some blogger spouting off pessimistic data, but the Financial Times, quoting such sources as “senior executives” inside major US banks who “are privately warning” that this new lending binge “should not be seen as evidence of an economic recovery.”

Instead, much of the borrowed money was used “to fund payouts to shareholders” via dividends (remember Shell..?) and stock buybacks and to “finance acquisitions,” the source said.  None of these activities are productive, in fact, these acquisitions lead companies to boast about synergies and labour efficiencies – that is, redundencies – at either end, as these businesses get consolidated.

And here’s the sting……  Part of that borrowed money is being ploughed into the American fracking boom where drillers on the terrible treadmill that fracking really is have to contend with terribly sharp depletion rates, forcing them to drill ever more wells just to maintain production.  And they can never get off that treadmill because production would soon collapse if they did, and with each new well they have to borrow more, and then they require more production just to service the ballooning debt.  Revenues have risen 5.6% over the last four years while debt that drillers have piled on has nearly doubled [read… The Fracking Shakeout].

Watch this space, things might get awfully interesting soon…… because as soon as Peak Fracking hits, and that is bound to happen before 2020, all hell will break loose.




2 responses

20 07 2014
Douglas Evans

Despite reading your latest comments over at AIMN I had misunderstood you. I had you down as just another optimistic rational technology survivalist but now I’ve had a look at your blog and it seems you see the big picture as well as the necessary micro-response. We are in furious agreement on most things. Dennis Meadows is unquestionably right as is Dr Turner. I have the original Club of Rome report Limits to Growth and the updated version. I’ve read Paul Gilding’s analysis and given this find his expressed optimism about the future completely baseless. I note that despite what he says he has retreated to rural southern Tasmania. I’ve read Clive Hamilton’s chillingly logical Requiem for a Species which focuses only on the climate crisis. The evidence for impending collapse is undeniable. I find myself in a very difficult position. If I was fifty or younger the choice for me would be clear but my wife and I are around seventy and increasingly limited physically. I’ve been hoping that we would get a good decade before the global crunch really kicked in (and we may yet as the crisis may well play out unevenly) and then some time as the leviathan grinds to a halt. We are selling the family home and committed to spending the last decade or so in what is at the moment a rather pleasant retirement village. The illogicality of increasing our dependence on the system just as it is about to fail catastrophically doesn’t escape me and the likelihood that our retirement home will be worthless by the time we move on has occurred to me also. A chunk of the expected differential between sale price and purchase price will go to helping the next generation (and the one after that) get established – hopefully in a setting where they can mount some sort of rearguard action. Anyway. All the best in the darkening times ahead.

20 07 2014

Thanks Douglas. It is indeed very difficult to convince people of the most inconvenient truths.

I am in my early 60’s, and moving to Tasmania both excites and terrifies me……. what if the shit hits the fan just as I arrive there with nothing but worthless money…..??

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