TIME IS SHORT: REASONING TO RESISTANCE

6 07 2016

15 Realities of our Global Environmental Crisis

By Deep Green Resistance

  1. Industrial civilization is not, and can never be, sustainable.

Any social system based on the use of non-renewable resources is by definition unsustainable. Non-renewable means it will eventually run out. If you hyper-exploit your non-renewable surroundings, you will deplete them and die. Even for your renewable surroundings like trees, if you exploit them faster than they can regenerate, you will deplete them and die. This is precisely what civilization has been doing for its 10,000-year campaign – running through soil, rivers, and forests as well as metal, coal, and oil.

  1. Industrial civilization is causing a global collapse of life.

Due to industrial civilization’s insatiable appetite for growth, we have exceeded the planet’s carrying capacity. Once the carrying capacity of an area is surpassed, the ecological community is severely damages, and the longer the overshoot lasts, the worse the damage, until the population eventually collapses. This collapse is happening now. Every 24 hours up to 200 species become extinct. 90% of the large fish in the oceans are gone. 98% of native forests, 99% of wetlands, and 99% of native grasslands have been wiped out.

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  1. Industrial civilization is based on and requires ongoing systematic violence to operate.

This way of life is based on the perceived right of the powerful to take whatever resources they want. All land on which industrial civilization is now based on land that was taken by force from its original inhabitants, and shaped using processes – industrial forestry, mining, smelting – that violently shape the world to industrial ends. Traditional communities do not often voluntarily give up or sell resources on which their communities and homes are based and do not willingly allow their landbases to be damaged so that other resources – gold, oil, and so on – can be extracted. It follows that those who want the resources will do what they can to acquire these resources by any means necessary. Resource extraction cannot be accomplished without force and exploitation.

  1. In order for the world as we know it to exist on a day-to-day basis, a vast and growing degree of destruction and death must occur.

Industrialization is a process of taking entire communities of living beings and turning them into commodities and dead zones. Trace every industrial artifact back to its source­ and you find the same devastation: mining, clear-cuts, dams, agriculture, and now tar sands, mountaintop removal, and wind farms. These atrocities, and others like them, happen all around us, every day, just to keep things running normally. There is no kinder, greener version of industrial civilization that will do the trick of leaving us a living planet.

  1. This way of being is not natural.

Humans and their immediate evolutionary predecessors lived sustainably for at least a million years. It is not “human nature” to destroy one’s habitat. The “centralization of political power, the separation of classes, the lifetime division of labor, the mechanization of production, the magnification of military power, the economic exploitation of the weak, and the universal introduction of slavery and forced labor for both industrial and military purposes”[1] are only chief features of civilization, and are constant throughout its history.

  1. Industrial civilization is only possible with cheap energy.

The only reason industrial processes such as large-scale agriculture and mining even function is because of cheap oil; without that, industrial processes go back to depending on slavery and serfdom, as in most of the history of civilization.

  1. Peak oil, and hence the era of cheap oil, has passed.

Peak oil is the point at which oil production hits its maximum rate. Peak oil has passed and extraction will decline from this point onwards. This rapid decline in the availability of global energy will result in increasing economic disruption and upset. The increasing cost and decreasing supply of energy will undermine manufacturing and transportation and cause global economic turmoil. Individuals, companies, and even states will go bankrupt. International trade will nosedive because of a global depression. The poor will be unable to cope with the increasing cost of basic goods, and eventually the financial limits will result in large-scale energy-intensive manufacturing becoming impossible – resulting in, among other things – the collapse of agricultural infrastructure, and the associated transportation and distribution network.

At this point in time, there are no good short-term outcomes for global human society. The collapse of industrial civilization is inevitable, with or without our input, it’s just a matter of time. The problem is that every day the gears of this destructive system continue grinding is another day it wages war on the natural world. With up to 200 species and more than 80,000 acres of rainforest being wiped out daily as just some of the atrocities occurring systematically to keep our lifestyles afloat, the sooner this collapse is induced the better.

  1. “Green technologies” and “renewable energy” are not sustainable and will not save the planet.

Solar panels and wind turbines aren’t made out of nothing.  These “green” technologies are made out of metals, plastics, and chemicals. These products have been mined out of the ground, transported vast distances, processed and manufactured in big factories, and require regular maintenance. Each of these stages causes widespread environmental destruction, and each of these stages is only possible with the mass use of cheap energy from fossil fuels. Neither fossil fuels nor mined minerals will ever be sustainable; by definition, they will run out. Even recycled materials must undergo extremely energy-intensive production processes before they can be reused.[2]

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  1. Personal consumption habits will not save the planet.

Consumer culture and the capitalist mindset have taught us to substitute acts of personal consumption for organized political resistance. Personal consumption habits — changing light bulbs, going vegan, shorter showers, recycling, taking public transport — have nothing to do with shifting power away from corporations, or stopping the growth economy that is destroying the planet. Besides, 90% of the water used by humans is used by agriculture and industry. Three quarters of energy is consumed and 95% of waste is produced by commercial, industrial, corporate, agricultural and military industries. By blaming the individual, we are accepting capitalism’s redefinition of us from citizens to consumers, reducing our potential forms of resistance to consuming and not consuming.

  1. There will not be a mass voluntary transformation to a sane and sustainable way of living.

The current material systems of power make any chance of significant social or political reform impossible. Those in power get too many benefits from destroying the planet to allow systematic changes which would reduce their privilege. Keeping this system running is worth more to them than the human and non-human lives destroyed by the extraction, processing, and utilization of natural resources.

  1. We are afraid.

The primary reason we don’t resist is because we are afraid. We know if we act decisively to protect the places and creatures we love or if we act decisively to stop corporate exploitation of the poor, that those in power will come down on us with the full power of the state. We can talk all we want about how we live in a democracy, and we can talk all we want about the consent of the governed. But what it really comes down to is that if you effectively oppose the will of those in power, they will try to kill you. We need to make that explicit so we can face the situation we’re in: those in power are killing the planet and they are exploiting the poor, and we are not stopping them because we are afraid. This is how authoritarian regimes and abusers work: they make their victims and bystanders afraid to act.

  1. If we only fight within the system, we lose.

Things will not suddenly change by using the same approaches we’ve been using for the past 30 years. When nothing is working to stop or even slow the destruction’s acceleration, then it is time to change your strategy. Until now, most of our tactics and discourse (whether civil disobedience, writing letters and books, carrying signs, protecting small patches of forest, filing lawsuits, or conducting scientific research) remain firmly embedded in whatever actions are authorized by the overarching structures that permit the destruction in the first place.

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  1. Dismantling industrial civilization is the only rational, permanent solution.

Our strategies until now have failed because neither our violent nor nonviolent responses are attempts to rid us of industrial civilization itself. By allowing the framing conditions to remain, we guarantee a continuation of the behaviors these framing conditions necessitate. If we do not put a halt to it, civilization will continue to immiserate the vast majority of humans and to degrade the planet until it (civilization, and probably the planet) collapses. The longer we wait for civilization to crash – or we ourselves bring it down – the messier will be the crash, and the worse things will be for those humans and nonhumans who live during it, and for those who come after.

  1. Militant resistance works.

Study of past social insurgencies and resistance movements shows that specific types of asymmetric warfare strategies are extremely effective.

  1. We must build a culture of resistance.

Some things, including a living planet, that are worth fighting for at any cost, when other means of stopping the abuses have been exhausted. One of the good things about industrial civilization being so ubiquitously destructive, is that no matter where you look – no matter what your gifts, no matter where your heart lies – there’s desperately important work to be done. Some of us need to file timber sales appeals and lawsuits. Some need to help family farmers or work on other sustainable agriculture issues. Some need to work on rape crisis hot lines, or at battered women’s shelters. Some need to work on fair trade, or on stopping international trade altogether. Some of us need to take down dams, oil pipelines, mining equipment, and electrical infrastructure. [NOTE: I am NOT in favor of taking down dams…]

We need to fight for what we love, fight harder than we have ever thought we could fight, because the bottom line is that any option in which industrial civilization remains, results in a dead planet.

 

Parts of this article were drawn from Deep Green Resistance: A Strategy to Save the Planet, by Aric McBay, Lierre Keith, and Derrick Jensen.

[1] Lewis Mumford, Myth of the Machine, Volume 2,  Harcourt Brace Jovanovich, 1970, page 186.

[2] Recycled materials also usually degrade over time, limiting their recycling potential.





This is the big one……

11 02 2016

This article from The Great Recession Blog just arrived in my news feed, straight from Nicole Foss no less…… written by David Haggith, it’s an amazing read, and you better hang onto your seat, we’re in for a pretty wild ride.

 

 

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David Haggith

Only a couple of weeks ago, I said we were entering the jaws of the Epocalypse. Now we are sliding rapidly down the great beast’s throat toward its cavernous belly. The biggest economic collapse the world has ever seen is consuming everything — all commodities, all industries, all national economies, all monetary systems, and eventually all peace and stability. This is the mother of all recessions.

That’s a big statement to swallow, especially when many don’t see the beast because we’re already inside of it. You need to look down from 100,000 feet up in order to observe the scale of this monster that is rising up out of the sea and to see how rapidly it is enveloping the globe and how the world’s collapse into its throat is accelerating. The belly of this leviathan is a swirling black hole, composed of all the word’s debts, that is large enough to swallow every economy on earth.

Mexican retail billionaire Hugo Salinas Price has looked long into the stomach of this mammoth, and this is what he has seen:

 

[Global] debt [as a percentage of GDP] peaked in August of 2014. I’ve been watching this for 20 years, and I have never seen anything like it. It was always growing, and now something has changed. A big change of this sort is an enormous event. I think it portends a new trend, and that trend will be to get out of debt. Deleverage and pay down debt. That is, of course, a contraction. Contraction means depression. The world is going into a depression. It’s going to get very nasty. (USAWatchdog)

 

So, let’s step back and look at the big picture in order to see how immense this thing is: (One thing that you’ll notice is common in the statements of many sources below is comparisons to 2008, when we first entered the Great Recession. You hear that comparison every day now, which says many people feel that, after piling on trillions of dollars and trillions of euros and trillions of ___ in debt to save ourselves, we are right back where we started … but exhausted from the effort.)

 


Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy


 

Toxic debt flush heard round the world

 

As Hugo Salinas Price warns, toxic debt may have hit a ceiling where it has stopped going up because individuals, industries, and now nations have reached real debt limits they cannot support. According to the New York Times, toxic loans around the world are weighing heavily on global growth:

 

Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come. The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising.

 

The Times lists China as leading the world for personal and industrial bad debt at $5 trillion, which in terms of its economy is half of China’s GDP. As a result of hitting this ceiling, Chinese banks reeled in lending in the last month of 2015.

And this is just bad debt. It does not include debts that are being properly paid or China’s national debts. These are the loans already failing. Likewise with the global debt problem The Times is writing about. Bad loans in Europe, for example, total about $1 trillion. Again, that’s just the loans that are already falling into the abyss.

Many national debts are more than the entire annual GDP of the nation, including the enormous US national debt, which will reach $20,000,000,000,000 by the time the next president takes office. (You can’t even see wide enough to focus on that many zeroes at the same time. The “2” gets lost in your peripheral vision.) And many places like Greece and Brazil and Puerto Rico are defaulting on their debts.

The United State’s debt alone is only payable so long as interest rates stay near zero; but rates are now rising, and the number of financiers has greatly retreated. The only thing to save the US from its toppling debt problem in the short term may be that people all over the world run to the shelter of US bonds when everything else is caving into the black hole.

 


Between Debt and the Devil: Money, Credit, and Fixing Global Finance. One of Financial Times Best Economics Books of 2015. “A devastating critique of the banking system. Most credit is not needed for economic growth — but it drives real estate booms and busts and leads to financial crisis and depression.”


 

Bulls become bears

 

The first sign that this global change is now consuming the US is in how many of the market’s permabulls are becoming neobears and which sizable institutions are making the switch quickly. Citi has been bullish over the years, but now they have stepped out of the back half of the bull suit and put on a toothy bear suit, expecting oil to drop to the mid-twenties and geopolitical change that “is maybe unprecedented for the last decades”:

 

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi … strategists have warned…. “The stakes are high, perhaps higher than they have ever been in the post-World War II era.”(Yahoo)

 

Here’s a 100,000-foot-high look at the US stock market that is now swirling down the throat of the beast: Last year, the number of stock dividend reductions surpassed 2008. In fact, 2015’s number of cuts — now that the year is barely past — was 35% higher than the number of cuts going into the Great Recession. That gives you some sense of the scale of corporate pain that is just starting to be felt. Companies cut dividends when they have less profit to share with their owners. Bloomberg referred to it as “equity investors … suffered death by 394 cuts.”

Another high-view snapshot of corporate collapse can be see everywhere in US retail: Walmart, Macy’s, J.C. Penny’s, K-Mart, The Gap and many smaller retailers have all announced a large number of store closures and layoffs to come.

US Corporate earnings across all industries are on track for their third quarter in a row of year-on-year declines. That is an ominous signal because back-to-back periods of decline for just two quarters are always followed by a decline of, at least, 20% (a bear market) in the S&P 500.

 

This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity, said Karyn Cavanaugh, senior market strategiest at Voya Investment Management. “Earnings discount all the noise…. It’s the best unbiased view of what’s going on in the global economy.” (MarketWatch)

 

As earnings fall, the much watched price-earnings ratio gets more top-heavy, putting pressure on stocks to fall. Thus, on Friday:

 

The willingness of U.S. stock investors to abide price-earnings ratios stretching into three and four digits all but ended Friday as the Nasdaq Composite Index fell to its lowest since October 2014. The … tumble in American equities turned into a full-blown selloff in stocks with the highest valuation. The Nasdaq Internet Index sank 5.2 percent, as Facebook Inc. lost 5.8 percent. (NewsMax)

 

The most significant part of this picture is that tech stocks have finally started making the big drop with the few that have been holding the stock market’s average up being the ones now taking the biggest plunge. Facebook, Amazon, Apple, and Microsoft are all falling fast. LinkedIn is getting “destroyed.” The time at the top is over, which leaves the market with zero levitation. Therefore, it’s no surprise that we saw another major sell-off on Monday.

Said USA Today, Bye, Bye Internet Bubble 2.0,” calling this “the worst start of a year for technology stocks since the Great Recession.

 

Collapse of the petrodollar opening sink holes everywhere

 

It’s no secret that Russia has outlawed trading oil in dollars among its satellite nations and that China and Russia trade in yuan now, not dollars, but Iran is the latest to stick it to the US, announcing that it will no longer trade oil in US dollars either but will sell its oil only for euros. So, we have the gargantyuan and the petroeuro, taking major bites out of the petrodollar now. China and Russia have also been divesting from US treasuries for some time and investing in gold, something I started point out here a few years ago.

All of this means that the US dollar is rapidly ceasing to be the trade currency of the world, and that prized status is the only thing that has made the US national debt manageable over the years, as the high demand for trade dollars guarantees low interest on the most colossal debt in the world because national treasuries and businesses sop up US bonds as a safe way to store trade dollars. The Federal Reserve has become the buyer of last resort for US debt; but it has maxed out.

The move away from the petrodollar is momentous. Losing its status as the reserve currency of the world will take a massive bite out of US superpower status, and that, of course, is exactly what Russia, China and Iran are counting on. With so many countries now trading oil exclusively in non-dollar currencies, one has to wonder how much longer overstretched Saudi Arabia can hold out as an oil supplier that trades oil only in dollars. Most likely they will feel a lot of economic pressure to start trading in other currencies, especially now that US support of Saudi Arabia appears to have weakened.

Iran’s announcement may be why the dollar dropped drastically in value last week. The high value of the dollar makes oil very expensive to other nations, who have to convert their low-valued currency to dollars to buy oil. This is surely another reason the price of oil has been falling, though almost no one talks about it … almost as if the economic geniuses of the world can’t figure this simple relationship out. As nations compete to lower the value of their currency with zero interest policies and quantitative easing, they are burying the petrodollar.

In nations with currencies priced very low compared to the dollar, oil is like an American export — too expensive for people in that nation to afford, causing demand to fall off and, thus, further increasing the problem of oversupply and lowering the price of oil. This creates another big reason for many nations to want to stop trading oil in dollars.

I’ve been reporting on this site for a few years now on this global campaign to kill the petrodollar, and that campaign is finally nearing maturity. For the US, it will mark a horrible transformation in the world, as it will hugely erode US superpower status because it will become much more difficult to finance a massive military machine.

 

The banks that are too-big-to-fail are falling FAST!

 

Deutsch Bank‘s derivative bonds (the kind that caused the Great Recession) are pealing away. The top-tier bonds of Germany’s largest bank have lost about 20% since the start of the year. Investors are fleeing as tumbling profits cause them to doubt the issuer’s ability to support the coupon payments on the bonds. InvestmentWatch reports that “Deutsche Bank is shaking to its foundations” and asks “is a new banking crisis around the corner?” DB stock has fallen off its high last July by 50%.

By how much is Deutsch Bank too big to fall? DB’s exposure to derivatives is over 55-trillion euros. That’s five times more than the GDP of the entire Eurozone or three times the amount of debt the United States has accumulated since it was founded. Its CEO says publicly he’d rather be somewhere else. Looking up at a leaning tower like that, I imagine so.

As DB bleeds red ink from its throat, its cries to the European Central Bank are burbled in blood. DB has warned the central bank that zero-interest-rate policies and quantitative easing are now killing bank stocks, but that didn’t stop giddy ECB president, Murio Draghi, from announcing a lot more easing to come … as much as it takes. As much as it takes to what? Kill all of Europe’s banks now that stimulus is working in reverse with negative interest making new money in reserves expensive to hang on to?

Is the ECB waging war on it major banks, or is it just too dumb to realize that QE is far beyond the high point on the bell curve of diminishing returns to where it is now killing stock values while doing nothing to boost the economy? (Hence, the move to negative interest rates to go to the ultimate extreme of easing because you have to push the accelerator through the floor when returns are diminishing that fast). As ZeroHedge has said, we are now entering a “monetary twilight zone”where …

 

Europe’s largest bank is openly defying central bank policy and demanding an end to easy money. Alas, since tighter monetary policy assures just as much if not more pain, one can’t help but wonder just how the central banks get themselves out of this particular trap they set up for themselves.

 

Credit Suisse reported a loss of 6.4 billion Swiss francs for the fourth quarter of 2015, suffering from its exposure to leveraged loans and bad acquisitions.

 

DoubleLine Capital’s Jeffrey Gundlach said it’s “frightening” to see major financial stocks trading at prices below their financial crisis levels…. “Do you know that Credit Suisse, which is a powerhouse bank, their stock price is lower than it was in the depths of the financial crisis in 2009?” (NewMax)

 

Credit Suisse has announced it will cut 4,000 jobs after posting its first quarterly loss since 2008. The Stoxx Europe 600 Banks Index has also posted its longest string of weekly losses since 2008, having posted six straight weeks of decline. The European Central Bank’s calculus says banks in Europe should be benefiting from QE, but it’s clearly lost all of its mojo or is now  actually more detrimental than good like a megadose of potent medicine. Negative interest rates are particularly taking a toll because banks have to pay interest on their reserves, instead of making interest.

Banks have rapidly become so troubled that NewsMax ran the following headline “Bank Selloffs Replacing Oil Rout as Stock Market Pressure Point.”  In other words, bank stocks are not just falling; they are falling at a rate that is causing fear contagion to other stocks. It’s not easy these days to beat out oil as a cause of further sell-offs in the stock market.

How quickly we moved from a world of commodity collapse to what now appears to be morphing into a banking collapse like we saw in 2008. Financial stocks overall have lost $350 billion just since 2016 began. Volatility in bank shares has spiked to levels not seen since … well, once again, 2008.

Consider how big the derivatives market is — that new investment vehicle that turned into such a pernicious demon in 2007 and 2008 because they are so complicated almost no one understands what they are buying and because they mix a little toxic debt throughout, like reducing the cancer in one part of the body by spreading its cells evenly everywhere. Instead of learning from the first crash into the Great Recession, we have run full speed into expanding this market. Estimates of the value of derivatives in the market range half a quadrillion dollars to one-and-a-half quadrillion dollars (depending on what you count and whether you go by how much was invested into them or their face value). Either way, that’s a behemoth number of derivatives floating around the world, many of them carrying their own little attachment of metastasizing toxins! (That’s, at least, a thousand trillions! More than ten times the entire GDP of the world.)

Still think 2016 isn’t the Year of the Epocalypse? Well, if you do, the rest of the ride will convince you soon enough. If I were the Fed, I’d be really, really worried that my star-spangled recovery plan was starting to look more like Mothra in flames.

 

The oil spillover

 

But don’t think oil is loosing its shine as a market killer. Another bearish prediction by Citi, now that it has change suits, is to expect “Oilmegeddon.” (Hmm, sounds like something that would be found in an epocalypse to me.)

 

“It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,” the analysts add. “Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon….We should all fear Oilmageddon,” Citi concludes. “Global recession, as we define it, would leave nowhere to hide in equities. Cash wins.” (NewsMax)

 

In the first months of the crash in oil prices, most analysts felt that the only companies that would be seriously hurt would be marginal fracking companies — the speculative little guys jumping into the oil shale. Now that fourth-quarter results are coming in from the world’s largest refineries, we find that isn’t true:

 

British Petroleum kicked off the European oil and gas reporting season with an ugly set of fourth-quarter results. The company reported a sharp drop in earnings for the fourth quarter. It’s own measure of underlying profit dropped 91%.… All of this is a recipe for two things — more cost cutting and more job cuts… What’s worrying for investors is that the first quarter, so far, doesn’t look much better. (MarketWatch)

 

That’s massive. BP has already announced the elimination of 7,000 jobs. Chevron and Shell also saw profit declines. Royal Dutch Shell has announced it will be making 10,000 job cuts.

If that’s how bad things got during the fourth quarter of 2015, imagine how bad they will get this quarter now that oil prices have gone down a lot more. Hence, the talk of “Oilmageddon.”

As if the industry wasn’t already burning up, President Obama is trying to impose a $10 carbon tax on each barrel of oil. At today’s oil prices, that is a 30% tax. At tomorrow’s prices, it may be a 50% tax! One has to wonder how far out of touch economically, a president can get in order to propose a hefty tax like that at a time like this.

Naturally, oil magnate T. Boone Pickens calls it “the dumbest idea ever.” While I have a general hatred for gigantic oil companies, especially since gasoline prices in my area have not dropped much, I have to agree that a $10/barrel carbon tax could cinch the noose around the neck of an already strangle industry.

Maybe that’s the plan. While the tax would hit the end user more, no tax helps an industry thrive.

 

The Epocalypse swallows everything whole

 

The reason the Epocalypse is going to be a far worse bloodbath than the first plunge into the Great Recession is that all of the central banks of the world have, by their own admission now, “exhausted their ammunition” to fight back against another recession. Back at the start of the Fed’s Goliath recovery plan, I posited that we would be falling back into the abyss right at the time when all central banks had exhausted their strength and when all nations had maxed their debt.

Here we are.

Many central banks are already doing negative interest; yet, their economies are still sinking. It appears that more negative interest could actually sink them faster by eroding their banks with internal ulcers. It will certainly require going cashless in order for those banks to start handing the negative interest down to their customers. They have to absorb the cost of negative interest if they cannot loan out their funds fast enough. That’s why some banks are now pleading with their government’s for a cashless solution … so they can prevent their customers from switching to the cash-under-the-mattress exit plan.

The world faces a tsunami of epochal defaults. William White, former economist for the International Bank of Settlements, says,

 

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…. It was always dangerous to rely on central banks to sort out a solvency problem … It is a recipe for disorder, and now we are hitting the limit… It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. (The Telegraph)

 

We have finally reached that time in our decades of astronomical debt-based economic expansion where it is time to pay the piper. We traveled blithely along many decades on currency cushions filled with hot air. In an article titled, “Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before,” The Telegraph says,

 

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling…? Commodity prices have crashed by two thirds since their peaks in 2014…. China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession…. “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before.”

 

Yes, this is the big one. The times we now face are the reason I started writing this blog four+ years ago. The Federal Reserve’s Goliath recovery plan was cloned all over the world for seven years, and for seven years all nations have done nothing to rethink their debt-based economic structures that are now cracking and groaning and falling into … the Epocalypse.





Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

24 07 2015

As oil price collapse to under $50……… by Gail Tverberg, orginally posted here.

Why are commodity prices, including oil prices, lagging? Ultimately, the question comes back to, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because the prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening.

1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, in order to encourage further economic growth. 

Falling interest rates are hugely beneficial for the economy. If interest rates stop dropping, or worse yet, begin to rise, we will lose this very beneficial factor affecting the economy. The economy will tend to grow even less quickly, bringing down commodity prices further. The world economy may even start contracting, as it heads into a deflationary depression.

If we look at 10-year US treasury interest rates, there has been a steep fall in rates since 1981.

Figure 1. Chart prepared by St. Louis Fed using data through July 20, 2015.

In fact, almost any kind of interest rates, including interest rates of shorter terms, mortgage interest rates, bank prime loan rates, and Moody’s Seasoned AAA Bonds, show a fairly similar pattern. There is more variability in very short-term interest rates, but the general direction has been down, to the point where interest rates can drop no further.

Declining interest rates stimulate the economy for many reasons:

  • Would-be homeowners find monthly payments are lower, so more people can afford to purchase homes. People already owning homes can afford to “move up” to more expensive homes.
  • Would-be auto owners find monthly payments lower, so more people can afford cars.
  • Employment in the home and auto industries is stimulated, as is employment in home furnishing industries.
  • Employment at colleges and universities grows, as lower interest rates encourage more students to borrow money to attend college.
  • With lower interest rates, businesses can afford to build factories and stores, even when the anticipated rate of return is not very high. The higher demand for autos, homes, home furnishing, and colleges adds to the success of businesses.
  • The low interest rates tend to raise asset prices, including prices of stocks, bonds, homes and farmland, making people feel richer.
  • If housing prices rise sufficiently, homeowners can refinance their mortgages, often at a lower interest rate. With the funds from refinancing, they can remodel, or buy a car, or take a vacation.
  • With low interest rates, the total amount that can be borrowed without interest payments becoming a huge burden rises greatly. This is especially important for governments, since they tend to borrow endlessly, without collateral for their loans.

While this very favorable trend in interest rates has been occurring for years, we don’t know precisely how much impact this stimulus is having on the economy. Instead, the situation is the “new normal.” In some ways, the benefit is like traveling down a hill on a skateboard, and not realizing how much the slope of the hill is affecting the speed of the skateboard. The situation goes on for so long that no one notices the benefit it confers.

If the economy is now moving too slowly, what do we expect to happen when interest rates start rising? Even level interest rates become a problem, if we have become accustomed to the economic boost we get from falling interest rates.

2. The cost of oil extraction tends to rise over time because the cheapest to extract oil is removed first. In fact, this is true for nearly all commodities, including metals. 

If costs always remained the same, we could represent the production of a barrel of oil, or a pound of metal, using the following diagram.

Figure 2

If production is becoming increasingly efficient, then we might represent the situation as follows, where the larger size “box” represents the larger output, using the same inputs.

Figure 3

For oil and for many other commodities, we are experiencing the opposite situation. Instead of becoming increasingly efficient, we are becoming increasingly inefficient (Figure 4). This happens because deeper wells need to be dug, or because we need to use fracking equipment and fracking sand, or because we need to build special refineries to handle the pollution problems of a particular kind of oil. Thus we need more resources to produce the same amount of oil.

Figure 4. Growing inefficiency

Some people might call the situation “diminishing returns,” because the cheap oil has already been extracted, and we need to move on to the more difficult to extract oil. This adds extra steps, and thus extra costs. I have chosen to use the slightly broader term of “increasing inefficiency” because it indicates that the nature of these additional costs is not being restricted.

Very often, new steps need to be added to the process of extraction because wells are deeper, or because refining requires the removal of more pollutants. At times, the higher costs involve changing to a new process that is believed to be more environmentally sound.

Figure 5

The cost of extraction keeps rising, as the cheapest to extract resources become depleted, and as environmental pollution becomes more of a problem.

3. Using more inputs to create the same or smaller output pushes the world economy toward contraction.

Essentially, the problem is that the same quantity of inputs is yielding less and less of the desired final product. For a given quantity of inputs, we are getting more and more intermediate products (such as fracking sand, “scrubbers” for coal-fired power plants, desalination plants for fresh water, and administrators for colleges), but we are not getting as much output in the traditional sense, such as barrels of oil, kilowatts of electricity, gallons of fresh water, or educated young people, ready to join the work force.

We don’t have unlimited inputs. As more and more of our inputs are assigned to creating intermediate products to work around limits we are reaching (including pollution limits), fewer of our resources can go toward producing desired end products. The result is less economic growth. Because of this declining economic growth, there is less demand for commodities. So, prices for commodities tend to drop.

This outcome is to be expected, if increased efficiency is part of what creates economic growth, and what we are experiencing now is the opposite: increased inefficiency.

4. The way workers afford higher commodity costs is primarily through higher wages. At times, higher debt can also be a workaround. If neither of these is available, commodity prices can fall below the cost of production.

If there is a significant increase in the cost of products like houses and cars, this presents a huge challenge to workers. Usually, workers pay for these products using a combination of wages and debt. If costs rise, they either need higher wages, or a debt package that makes the product more affordable–perhaps lower rates, or a longer period for payment.

Commodity costs have been rising very rapidly in the last fifteen years or so. According to a chart prepared by Steven Kopits, some of the major costs of extracting oil began increasing by 10.9% per year, in about 1999.

Figure 6. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is

In fact, the inflation-adjusted prices of almost all energy and metal products tended to rise rapidly during the period 1999 to 2008 (Figure 7). This was a time period when the amount of mortgage debt was increasing rapidly as lenders began offering home loans with low initial interest rates to almost anyone, including those with low credit scores and irregular income. When debt levels began falling in mid-2008 (related in part to defaulting home loans), commodity prices of all types dropped.

Figure 6. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank

Prices then began to rise once Quantitative Easing (QE) was initiated (compare Figures 6 and 7). The use of QE brought down medium-term and long-term interest rates, making it easier for customers to afford homes and cars.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

More recently, prices have fallen again. Thus, we have had two recent times when prices have fallen below the cost of production for many major commodities. Both of these drops occurred after prices had been high, when debt availability was contracting or failing to rise as much as in the past.

5. Part of the problem that we are experiencing is a slow-down in wage growth.

Figure 8 shows that in the United States, growth in per capita wages tends to disappear when oil prices rise above $40 barrel. (Of course, as noted in Point 1, interest rates have been falling since 1981. If it weren’t for this, the cut off for wage growth might even be lower–perhaps even $20 barrel!)

Figure 8. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

There is also a logical reason why we should expect that wages would tend to fall as energy costs rise. How does a manufacturer respond to the much higher cost of one or more of its major inputs? If the manufacturer simply passes the higher cost along, many customers will no longer be able to afford the manufacturer’s or service-provider’s products. If businesses can simply reduce some other costs to offset the rise in the cost in energy products and metals, they might be able to keep most of their customers.

A major area where a manufacturer or service provider can cut costs is in wage expense.  (Note the different types of expenses shown in Figure 5. Wages are a major type of expense for most businesses.)

There are several ways employment costs can be cut:

  1. Shift jobs to lower wage countries overseas.
  2. Use automation to shift some human labor to labor provided by electricity.
  3. Pay workers less. Use “contract workers” or “adjunct faculty” or “interns” who will settle for lower wages.

If a manufacturer decides to shift jobs to China or India, this has the additional advantage of cutting energy costs, since these countries use a lot of coal in their energy mix, and coal is an inexpensive fuel.

Figure 9. United States Percentage of Labor Force Employed, in by St. Louis Federal Reserve.

In fact, we see a drop in the US civilian labor force participation rate (Figure 9) starting at approximately the same time when energy costs and metal costs started to rise. Median inflation-adjusted wages have tended to fall as well in this period. Low wages can be a reason for dropping out of the labor force; it can become too expensive to commute to work and pay day care expenses out of meager wages.

Of course, if wages of workers are not growing and in many cases are actually shrinking, it becomes difficult to sell as many homes, cars, boats, and vacation cruises. These big-ticket items create a significant share of commodity “demand.” If workers are unable to purchase as many of these big-ticket items, demand tends to fall below the (now-inflated) cost of producing these big-ticket items, leading to the lower commodity prices we have seen recently.

6. We are headed in slow motion toward major defaults among commodity producers, including oil producers. 

Quite a few people imagine that if oil prices drop, or if other commodity prices drop, there will be an immediate impact on the output of goods and services.

Figure 10.

Instead, what happens is more of a time-lagged effect (Figure 11).

Figure 11.

Part of the difference lies in the futures markets; companies hold contracts that hold sale prices up for a time, but eventually (often, end of 2015) run out. Part of the difference lies in wells that have already been drilled that keep on producing. Part of the difference lies in the need for businesses to maintain cash flow at all costs, if the price problem is only for a short period. Thus, they will keep parts of the business operating if those parts produce positive cash flow on a going-forward basis, even if they are not profitable considering all costs.

With debt, the big concern is that the oil reserves being used as collateral for loans will drop in value, due to the lower price of oil in the world market. The collateral value of reserves works out to be something like (barrels of oil in reserves x some expected price).

As long as oil is being valued at $100 barrel, the value of the collateral stays close to what was assumed when the loan was taken out. The problem comes when low oil prices gradually work their way through the system and bring down the value of the collateral. This may take a year or more from the initial price drop, because prices are averaged over as much as 12 months, to provide stability to the calculation.

Once the value of the collateral drops below the value of the outstanding loan, the borrowers are in big trouble. They may need to sell some of the other assets they own, to help pay down the loan. Or, they may end up in bankruptcy. The borrowers certainly can’t borrow the additional money they need to keep increasing their production.

When bankruptcy occurs, many follow-on effects can be expected. The banks that made the loans may find themselves in financial difficulty. The oil company may lay off large numbers of workers. The former workers’ lack of wages may affect other businesses in the area, such as car dealerships. The value of homes in the area may drop, causing home mortgages to become “underwater.” All of these effects contribute to still lower demand for commodities of all kinds, including oil.

Because of the time lag problem, the bankruptcy problem is hard to reverse. Oil prices need to stay high for an extended period before lenders will be willing to lend to oil companies again. If it takes, say, five years for oil prices to get up to a level high enough to encourage drilling again, it may take seven years before lenders are willing to lend again.

7. Because many “baby boomers” are retiring now, we are at the beginning of a demographic crunch that has the tendency to push demand down further.

Many workers born in the late 1940s and in the 1950s are retiring now. These workers tend to reduce their own spending, and depend on government programs to pay most of their income. Thus, the retirement of these workers tends to drive up governmental costs at the same time it reduces demand for commodities of all kinds.

Someone needs to pay for the goods and services used by the retirees. Government retirement plans are rarely pre-funded, except with the government’s own debt. Because of this, higher pension payments by governments tend to lead to higher taxes. With higher taxes, workers have less money left to buy homes and cars. Even with pensions, the elderly are never a big market for homes and cars. The overall result is that demand for homes and cars tends to stagnate or decline, holding down the demand for commodities.

8. We are running short of options for fixing our low commodity price problem.

The ideal solution to our low commodity price problem would be to find substitutes that are cheap enough, and could increase in quantity rapidly enough, to power the economy to economic growth. “Cheap enough” would probably mean approximately $20 per barrel for a liquid oil substitute. The price would need to be correspondingly inexpensive for other energy products. Cheap and abundant energy products are needed because oil consumption and energy consumption are highly correlated. If prices are not low, consumers cannot afford them. The economy would react as it does to inefficiency. In other words, it would react as if too much of the output is going into intermediate products, and too little is actually acting to expand the economy.

Figure 12. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

These substitutes would also need to be non-polluting, so that pollution workarounds do not add to costs. These substitutes would need to work in existing vehicles and machinery, so that we do not have to deal with the high cost of transition to new equipment.

Clearly, none of the potential substitutes we are looking at today come anywhere close to meeting cost and scalability requirements. Wind and solar PV can only be built on top of our existing fossil fuel system. All evidence is that they raise total costs, adding to our “Increased Inefficiency” problem, rather than fixing it.

Other solutions to our current problems seem to be debt based. If we look at recent past history, the story seems to be something such as the following:

Besides adopting QE starting in 2008, governments also ramped up their spending (and debt) during the 2008-2011 period. This spending included road building, which increased the demand for commodities directly, and unemployment insurance payments, which indirectly increased the demand for commodities by giving jobless people money, which they used for food and transportation. China also ramped up its use of debt in the 2008-2009 period, building more factories and homes. The combination of QE, China’s debt, and government debt together brought oil prices back up by 2011, although not to as high a level as in 2008 (Figure 7).

More recently, governments have slowed their growth in spending (and debt), realizing that they are reaching maximum prudent debt levels. China has slowed its debt growth, as pollution from coal has become an increasing problem, and as the need for new homes and new factories has become saturated. Its debt ratios are also becoming very high.

QE continues to be used by some countries, but its benefit seems to be waning, as interest rates are already as low as they can go, and as central banks buy up an increasing share of debt that might be used for loan collateral. The credit generated by QE has allowed questionable investments since the required rate of return on investments funded by low interest rate debt is so low. Some of this debt simply recirculates within the financial system, propping up stock prices and land prices. Some of it has gone toward stock buy-backs. Virtually none of it has added to commodity demand.

What we really need is more high wage jobs. Unfortunately, these jobs need to be supported by the availability of large amounts of very inexpensive energy. It is the lack of inexpensive energy, to match the $20 per barrel oil and very cheap coal upon which the economy has been built that is causing our problems. We don’t really have a way to fix this.

9. It is doubtful that the prices of energy products and metals can be raised again without causing recession.

We are not talking about simply raising oil prices. If the economy is to grow again, demand for all commodities needs to rise to the point where it makes sense to extract more of them. We use both energy products and metals in making all kinds of goods and services. If the price of these products rises, the cost of making virtually any kind of goods or services rises.

Raising the cost of energy products and metals leads to the problem represented by Growing Inefficiency (Figure 4). As we saw in Point 5, wages tend to go down, rather than up, when other costs of production rise because manufacturers try to find ways to hold total costs down.

Lower wages and higher prices are a huge problem. This is why we are headed back into recession if prices rise enough to enable rising long-term production of commodities, including oil.





Commodity Prices Are Cliff-Diving

31 12 2014

headshot

David Stockman

Submitted by David Stockman via Contra Corner blog,

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fuelled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called “malinvestment” and what Warren Buffet once referred to as the “naked swimmers” exposed by a receding tide is now becoming all too apparent.

This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle—–or an example merely of the old adage that high prices are their own best cure.

Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.

Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest.  Accordingly, the chart below which shows that iron ore prices have plunged from $150 per ton in early 2013 to about $65 per ton at present only captures the tail end of the cycle.

Iron Ore- Click to enlarge

What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

Thus, the true free market benchmark for iron ore is the pre-1994 price of about $20-25 per ton. This represented the long-time equilibrium between advancing mining technology and diminishing ore grades available to steel mills in the DM economies.

But as shown below, after Mr. Deng institutionalized export mercantilism and printing press prosperity in the form of China’s red capitalism in the early 1990s, iron ore prices broke orbit and soared to $100 per ton in the second half of the decade and then went parabolic from there. After peaking at $140 per ton on the eve of the financial crisis,China’s mad cap “infrastructure” stimulus boom after 2008 drove the price to a peak of $180 per ton in 2011-2012. To wit, iron ore prices peaked at nearly 9X their historic range.

Post 1994 Commodity Bubble - Click to enlarge

The crucial point is that there was nothing normal, sustainable or economic about the $180 per ton peak. It was a pure deformation of central bank credit expansion and the accompanying false pricing of debt and other forms of long-term capital.

Needless to say, the same thing is true of copper. Its historical benchmarks were in the 60 cents to 100 cents per pound range. Yet after 1994, the global bubble—again led by the enormous credit explosion and currency exchange rate suppression in China and its BRIC satellites—carried the price to  $4 per pound in the eve of the financial crisis, and then to nearly $5 during the peak of China’s post-crisis credit explosion.

Indeed, in the case of copper, not only was the cycle driven by unsustainable construction demand; it was also powered by dodgy forms of financial engineering that turned copper inventories into financing collateral that was sometimes re-hypothecated many times over.

The exact same considerations apply most especially to crude oil. China’s GDP grew from $1 trillion to $9 trillion during the 13 years after the turn of the century. Growth of such enormous proportions is not remotely possible in an honest economy based on productivity, savings, investment and sound money. Likewise, China’s call on the global oil supply system—-which soared by 4X from 3 million bbls/day to nearly 12 million—–is also a drastic aberration; it is a product of runaway credit creation that financed false “demand”.

And that was only the beginning of the aberration. The China engine pulled additional false petroleum demand into the world market equation due to the boom among its suppliers—such as Brazil, Canada and Australia for raw materials and South Korea and Taiwan for  components and parts. Output levels and petroleum consumption in Germany and the US were also goosed by China’s voracious demand for German capital goods and Caterpillar’s heavy machinery, for example.

Accordingly, the crude oil price path shown below reflects the same global monetary supernova. The $20 price in place during the 1990s was no higher in inflation adjusted terms than it had been one century earlier when the mighty Spindletop gusher was discovered in East Texas in 1901. By contrast, the 5X eruption to north of $100 per barrel during this century represents the impact of fiat credit and false capital market prices deforming the entire warp and woof of the global economy.

 

fredgraph

Self-evidently, we are now in the cliff-diving phase, but unlike the bounce after the September 2008 financial crisis, there will be no rebound this time around. That is owing to two reasons.

First, most of the world is at “peak debt”. That is, the ratio of total credit market debt to current national income ranges between 350% and 500% in every major economy; and that is the limit of what can be serviced even at today’s aberrantly low interest rates.

As Milton Friedman famously observed, markets are ultimately not fooled by the money illusion. In this case, the illusion is that today’s sub-economic interest rates will last forever and that debt carrying capacity has been elevated accordingly.

Not true. Short-term interest rates may be temporarily and artificially pegged at the zero bound by central bankers, but at the end of the day debt carrying capacity is tethered by real economics and normalized costs of money and debt.

Accordingly, the central banks are now pushing on a string.  The credit channel of monetary transmission is over and done. The only remaining effect of the residual level of money printing still underway is that ZIRP enables carry trade gamblers to drive financial asset prices ever higher, thereby setting up another thundering collapse of the financial bubbles being generated for the third time this century by the world’s central banks.

The second reason for no commodity price rebound is the monumental overhang of the malinvestments which have been made, especially since the 2008 crisis. That is obviously what is now pummelling the petroleum sector.

The huge expansion of high cost crude oil capacity—–in the shale patch, tar sands and deep off-shore—-was due to the aberrationally high price of oil and the inordinately cheap cost of capital which were generated during the last two decades by the global central banks. The above price chart for the WTI marker price of crude, for example, is what explains the eruption of shale oil production from 1 million bbls/day prior to the financial crisis to more than 4 million at present., not an alleged technological miracle called “fracking”.

However, the iron ore capacity expansion story is no less cogent. On the eve of the financial crisis, the Big Three miners—-Vale, BHP and Rio—had already doubled their mining capacity from 250 million tons annually at the turn of the century, to 195 million tons per quarter or 780 million tons annually.

Q production

But when prices soared to $180/ton in 2012, investment levels were drastically scaled-up even further. Currently, the Big Three have combined capacity of more than 1.1 billion tons annually that is not only in the investment pipeline, but is actually so far advanced that completion makes more sense than abandonment.  Accordingly, not withstanding the massive over-supply already in the market, several hundred million more tons will compound the surplus and drive prices even closer to the out-of-pocket cash cost of production in the years immediately ahead.

Curent n planned capacity

The above depicted capacity expansion is a quintessential reflection of the manner in which false prices in the capital markets drive excessive and wasteful investment, and cause the crash following the credit driven boom to be all the more destructive. So the cliff-diving price action here is not just another commodity cycle, but instead is a proxy for the fracturing global credit bubble, led by China department.

During the course of its mad scramble to become the world’s export factory and then its greatest infrastructure construction site, China’s expansion of domestic credit broke every historical record and has ultimately landed in the zone of pure financial madness. To wit, during the 14 years since the turn of the century China’s total debt outstanding–including its vast, opaque, wild west shadow banking system—soared from $1 trillion to $25 trillion, and from 1X GDP to upwards of 3X.

But these “leverage ratios” are actually far more dangerous and unstable than the pure numbers suggest because the denominator—national income or GDP—-has been erected on an unsustainable frenzy of fixed asset investment. Accordingly, China’s so-called GDP of $9 trillion contains a huge component of one-time spending that will disappear in the years ahead, but which will leave behind enormous economic waste and monumental over-investment that will result in sub-economic returns and write-offs for years to come. Stated differently, China’s true total debt ratio is much higher than 3X currently reported due to the unsustainable bloat in its reported national income.

Nearly every year since 2008, in fact, fixed asset investment in public infrastructure, housing and domestic industry has amounted to nearly 50% of GDP. But that’s not just a case of extreme of growth enthusiasm, as the Wall Street bulls would have you believe. It’s actually indicative of an economy of 1.3 billion people who have gone mad digging, building, borrowing and speculating.

Nowhere is this more evident than in China’s vastly overbuilt steel industry, where capacity has soared from about 100 million tons in 1995 to upwards of 1.2 billion tons today. Again, this 12X growth in less than two decades is not just red capitalism getting rambunctious; its actually an economically cancerous deformation that will eventually dislocate the entire global economy.  Stated differently, the 1 billion ton growth of China’s steel industry since 1995 represents 2X the entire capacity of the global steel industry at the time; 7X the size of Japan’s then world champion steel industry; and 10X the then size of the US industry.

Already, the evidence of a thundering break-down of China’s steel industry is gathering momentum. Capacity utilization has fallen from 95% in 2001 to 75% last year, and will eventually plunge toward 60%, resulting in upwards of a half billion tons of excess capacity. Likewise, even the manipulated and massaged financial results from China big steel companies have begin to sharply deteriorate. Profits have dropped from $80-100 billion RMB annually to 20 billion in 2013, and are now in the red; and the reported aggregate leverage ratio of the industry has soared to in excess of 70%.

But these are just mild intimations of what is coming. The hidden truth of the matter is that China would be lucky to have even 500 million tons of annual “sell-through” demand for steel to be used in production of cars, appliances, industrial machinery and for normal replacement cycles of long-lived capital assets like office towers, ships, shopping malls, highways, airports and rails.  Stated differently, upwards of 50% of the 800 million tons of steel produced by China in 2013 likely went into one-time demand from the frenzy in infrastructure spending.

Indeed, the deformations are so extreme that on the margin China’s steel industry has been chasing its own tail like some stumbling, fevered dragon. Thus, demand for plate steel to build dry bulk carriers has soared, but the underlying demand for new bulk carrier capacity was, ironically, driven by bloated demand for the iron ore needed to make the steel to build China’s empty apartments and office towers and unused airports, highways and rails.

In short, when the credit and building frenzy stops, China will be drowning in excess steel capacity and will try to export its way out— flooding the world with cheap steel. A trade crisis will soon ensue, and we will shortly have the kind of globalized import quota system that was imposed on Japan in the early 1980s. Needless to say, the latter may stabilize steel prices at levels far below current quotes, but it will also mean a drastic cutback in global steel production and iron ore demand.

And that gets to the core component of the deformation arising from central bank fueled credit expansion and the drastic worldwide repression of interest rates and cost of capital. The 12X expansion of China’s steel industry was accompanied by an even more fantastic expansion of iron ore production, processing, transportation, port and ocean shipping capacity.

On the one hand, capacity could not grow at the breakneck speed of China’s initial ramp in steel production—so prices soared. And again, not just in the range of traditional cyclical amplitudes. As indicated above, prices rose from $20 per ton in the early 1990s to $180 per ton by 2012—meaning that vast windfall rents were earned on the difference between low cash costs on existing or recently constructed iron ore capacity and the soaring prices in spot and contract markets.

The reality of truly obscene current profits and the propaganda about endless growth in the miracle of red capitalism, combined with the cheap debt available in global capital markets, resulted in an explosion of iron ore mining capacity like the world has never before witnessed in any mineral industry.

Stated differently, the Big Three miners would never have expanded their capacity from 250 million tons to 1.1 billion tons in an honest free market. Nor would they have posted such egregious financial trends as have occurred over the past decade. To wit, even as the global iron ore (and also copper) boom gather steam in the run-up to the financial crisis, the three miners spent $55 billion on CapEx during the four years ending in 2007.

By contrast, during the four most recent years they spent 3.2X more or $175 billion. Not surprisingly, the residue on their balance sheets is unmistakable. Their combined debt went from about $12 billion in 2004 to more than $90 billion at present.

But now, prices will be driven down to the lowest marginal cost of supply, meaning that Big Three EBITDA will violently collapse, causing leverage ratios to soar and new CapEx to be drastically downsized. In turn, Caterpillar’s order book will take a giant hit, and so will its supply chain running all the way back to Peoria.

 

So the collapse of the mother of all commodity bubbles is virtually baked into the cake. As one industry CEO recently acknowledged, his company’s truly variable, cash cost of production is about $20 per ton and he will not hesitate to keep producing for positive variable profit. That means iron ore prices will also plunge far below the current $66 per ton quote now extant in the market.

In short, when the classical Austrians talked about “malinvestment” the pending disasters in the global steel and iron ore industries (and also mining equipment and other supplier industries) are what they had in mind. Except none of them could have imagined the fevered and irrational magnitudes of the deformations that have resulted from the actions of the mad money printers who now run the world’s central banks.





2015: what is in store?

27 12 2014

2014 is as good as over; while most people look back on the past year for world shaking events, achievements, and which celebrity got divorced, I as usual look to the future…. and 2015 could be the decisive year for Western Civilisation, not that some people ever notice mind you.

Christmas has a habit of bringing people nearer to you that you might not otherwise associate with.  Since losing faith in humanity many years ago, I’m very choosy about whom I associate with, because people more often than not just depress me with their absolute lack of foresight.  One such person who shall remain nameless proudly told me on Boxing Day about how he was going to demolish the house he’s lived in most of his life to build a two story 400 m² 6 bedroom McMansion with three phase airconditioning…… his excitement was palpable, and frankly I don’t even understand why he was showing his plans off to me, I was totally underwhelmed and it took all of my self control to not tell him what I thought of his stupid plans.  Just to make matters worse, the building company he’s planning to use is American based, so the profits won’t even stay here in Australia.  When I sarcastically mentioned that his 50 inch TV would be too small for such a house…. he agreed!  I asked him if he realised that by having three phase power he would get a triple bill, likely attached to the three service fees I would guess such a connection would entail.  It never occurred to him of course, ignorance is bliss…  Be blowed if I would pay the utility $225 a quarter even before using a single one of their electrons.  He had no idea of what I was talking about, and I can see him copping quarterly bills well in excess of $1000 in this idiotic plan.

What does this have to do with 2015?  Well folks, it’s just amazing how many of the bloggers I follow are predicting this current oil price crash is the beginning of the deflationary spiral Nicole Foss has been predicting for years….  commenting on a recent post by her writing partner Ilargi, Nicole wrote on Facebook:

We’ve been saying this would happen for a long time, that oil prices would drop as demand falls on a move into economic depression. A temporary supply glut opens up, price support evaporates, prices fall to those of the lowest cost producer and all the expensive and complex production goes out of business. No one invests in exploration or drilling or production, or probably even maintenance, for years, meaning that supply will follow demand to the downside over time. Any kind of economic recovery way down the line will then be energy supply-constrained. First financial crisis buys you time in terms of peak oil, because you burn through remaining high energy profit ratio energy sources less quickly, but then it aggravates the situation later, but collapsing supply more quickly. We are headed into a much lower energy future, and that means life is going to change.

So you see why I think my non blood relation’s timing is way off!  He of course is not the least bit interested in anything I have to say, I even discovered yesterday that he has completely disconnected me from his cyber existence, my grim readings obviously clashing with his future expectations.  Buoyed by statements like “I can’t really overcapitalise in my suburb” and “property values can only go up where I live”, he was justifying everything in his own blissfully unaware mind that life was going to change alright, only it would be for the better.  What’s a deflationary spiral he may well have asked, should he even have known to ask such a question…  And stuff his three children’s future climate too!  Ah well, you can’t save everybody, especially when they are unwilling to help themselves.

If the global economy unravels, then unemployment, underemployment, and fear will combine to reduce consumption.  Investment and GDP will decline.  The economy will deflate.  Just like the 1930s.  And Australia will not fare anywhere near as well this time as it did after GFC MkI when commodity prices were still high and Chinese demand was strong.

If the world economy deflates, fixed asset values will decline.  Rental properties are especially vulnerable.  Stagnant incomes, increasing unemployment, and credit card debt guarantee consumers will prioritize spending decisions based on urgent need: food, fuel, and then rent (or mortgage payments).  This last Christmas binge could be the last.  In periods of declining economic activity, rental property owners (houses, apartment buildings, supermarkets and so on) face potential bankruptcy because of higher vacancy rates.  It will also become increasingly difficult for rents to keep up with maintenance costs.

Meanwhile, over at Zero Hedge, Tyler Durden wrote:

One key indicator of deflation that seems to be even more worrisome to investors, however, is global commodity prices and what commodity price weakness suggests for demand. Copper fell over 12% in 2014, largely due to slumping demand in China and other industrial economies. Natural gas prices have fallen more than 12% this year. And oil prices have fallen by over 40% due to a glut of new supply and weak demand growth in many developing economies. The International Energy Agency has cut its estimates for demand for crude five times in the past six months, The Wall Street Journal reports.

The negative impact on incomes due to the decline in oil prices is a global issue, with nations such as Russia, Nigeria and Venezuela in visible financial distress.  The price of the Russian Ruble has declined in tandem with oil prices, raising concerns about whether Russia will be able to service its hard currency debt.  But the decline in oil prices is more than just a supply phenomenon.  The lack of growth in the demand for oil, coupled with rising supplies in the U.S. and elsewhere, has raised concerns about the overall health of the global economy.

We believe that the weakness in U.S. equity and debt markets stems from a more fundamental problem than concerns about future growth, namely that investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers.  This concern is evidenced by weakness in the equity market valuations of lenders with exposure to the oil sector as well as the recent changes in the relative position of spreads in the U.S.bond markets.

Click the link below to access the full copy of the note.  Free registration is required. https://www.krollbondratings.com/show_report/1815

For an economy reliant on numbers coming from the commodity sectors (while all the other sectors are doing very poorly), Australia’s near term future looks a bit grim.  Especially as we have a government whose only economic theory is to blame the one they just replaced for all its woes and get as many people on the dole queues as fast as possible.  Then we have this:

The Dow - 1999 To The Present

Hmmmm  don’t crashes occur in seven year cycles?  Watch this space….





Why we are still screwed….. Thorium or no Thorium!

26 04 2014

Kirk Sorensen

Kirk Sorensen

I recently had the pleasure of my son the physicist’s presence while my back was doing its thing and disallowing me from doing anything worthwhile….  Discussing our predicaments with this young man’s alert mind is very satisfying, even inspiring at times… what he has learned at University is truly fascinating.  Somehow we got on the subject of Thorium, which he seems to believe may have a future, as long as we can get around the extremely corrosive effects of Fluorine, an element bonded to the Thorium as Thorium Tetrafluoride.  Alex tells me the Chinese and Indians are onto the solutions….. time will tell.

I relayed my concerns to him that ‘unlimited energy’ might also result in ‘unlimited damage’, something he had not considered, but then rebutted by saying it could also result in ‘unlimited damage repair’, something I hadn’t thought about..!

Anyhow, to cut to the chase, no sooner had Alex left our place, along comes this (two hour – 400MB!) movie in my busy in-tray.  It’s way too long methinks, but I recommend you view the first half hour – after which you’ll “get it”, and then the last forty or so minutes which I thought were actually the best bits….. you will not believe your ears and eyes on the total idiocy that is occurring with regards to rare earths…….  One thing I found amazing was that he actually believes the powerful and the rich only oppressed the masses before ‘the enlightenment’ of the current era.  Exactly what does he think is currently going on..?  This segment also makes fleeting mention of the cost of employment….  which is why I believe we need to abandon money as we known it.  The very reason we have so much nuclear waste, this film claims, is down to money… it is simply uneconomical to deal it.  We must stop measuring the ‘worth’ of things in money, and return to the days when money was exclusively used for trading, and nothing else.

When I was young, I remember being promised energy so limitless and so cheap, no one would have to work.  Instead, we now have a government wanting to raise the pension age to 70 and enslave every last one of us to meaningless, unsustainable, and unsatisfying work.  The Matrix is alive and well in Joe Hockey..!  I don’t know how many times I have said that the Matrix need a reboot, but this film has more than convinced me I am right…..

I have to say, Kirk Sorensen is very convincing.  It’s a pity the film is so repetitive and so focused on Sorensen who is obviously passionate about the concept.  He makes all the right noises; we have to stop using fossil fuels, and renewables won’t cut the mustard, both of which I utterly agree with.  And the idea of actually removing CO2 from the air and turning it back into liquid fuel like petrol/gasoline and diesel certainly has appeal.  Though one aspect (CO2 extraction) is remedial, while the other (unlimited amounts of liquid fuel) could potentially see the deforestation of the Amazon through to its disastrous finale…….  There are even people apparently working on Thorium powered cars which they claim could run for a hundred years on 8 grams of Thorium, thereby totally bypassing making liquid fuel and/or storage batteries..!  Not even my son, however, believes that will ever actually happen…. that will have to be another discussion next time he visits.

jensenhedges_160I’ve been downloading loads of podcasts lately, which I listen to in my car (which has a far superior sound to my laptop!).  One in particular I found really compelling.  Derrick Jensen and Chris Hedges discuss What is it going to take for concerned and engaged citizens to finally feel as though some crucial threshold has been crossed—that our nation’s political system and the global corporate culture it both serves and feeds into will never represent them or serve their needs? Continuing along that line, what’s to be done once that realization has hit home, as it has for authors Chris Hedges and Derrick Jensen? Both Hedges and Jensen offer their ideas in this July 5 interview with Mount Royal University professor Michael Truscello.

As it happened, I listened to it almost immediately after watching the Thorium doco….. and between the last forty minutes of the latter and the discussion between Jensen and Hedges, I came away utterly convinced that Thorium will never stop collapse from happening.  It’s simply too late for solutions, and worse, the very people who are in charge of the Matrix are against applying solutions, whether they are Thorium or not, because such solutions removes their power and makes them poorer.  By the time we the people wrest this power and wealth from the owners of the Matrix, if ever, to redirect it to forming the new sustainable world we all crave…… the world will be in such a mess that instigating any remedial action will not be possible.

I thought the concept of the corporate world turning everything into commodities, from people to the natural world, particularly compelling.  Nothing gets done unless there’s money to be made, and frankly, Thorium is far too efficient (Sorensen claims 1 million times more efficient than fossil fuels!) for them to make profits from such an energy source!

Sorensen himself, unknowingly touches on this in the last forty minutes of his film.  He would, of course, be totally unawares of the issues we discuss here on DTM….  such is the power of specialisation.  Ask him where his money comes from, and I’m almost certain he would not have a clue.  Hopium rules…..

On a lighter note…… you may get a laugh over this;  I sure did!  Enjoy your weekend.