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.

 

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Dick Smith on growth; emphatically yes…and no

16 08 2017

tedtrainer

Ted Trainer

Another article by my friend Ted Trainer, originally published at on line opinion……

The problems of population and economic growth have finally come onto the public agenda, and Dick Smith deserves much of the credit…but he doesn’t realise what’s on the other end of the trail he’s tugging.

For fifty years a small number of people have been saying that pursuing population and economic growth on a finite planet is a very silly thing to do. Until recently almost no one has taken any notice. However in the last few years there has emerged a substantial “de-growth” movement, especially in Europe. Dick Smith has been remarkably successful in drawing public attention to the issue in Australia. He has done more for the cause in about three years than the rest of us have managed to achieve in decades. (I published a book on the subject in 1985, which was rejected by 60 publishers…and no one took any notice of it anyway.) Dick’s book (2011) provides an excellent summary of the many powerful reasons why growth is absurd, indeed suicidal.

Image result for dick smith

Dick Smith

The problem with the growth-maniacs, a category which includes just about all respectable economists, is that they do not realise how grossly unsustainable present society is, let alone what the situation will be as we continue to pursue growth. Probably the best single point to put to them is to do with our ecological “footprint”. The World Wildlife Fund puts out a measure of the amount of productive land it takes to provide for each person. For the average Australian it takes 8 ha of to supply our food, water, settlement area and energy. If the 10 billion people we are likely to have on earth soon were each to live like us we’d need 80 billion ha of productive land…but there are only about 8 billion ha of land available on the planet. We Australians are ten times over a level of resource use that could be extended to all people. It’s much the same multiple for most other resources, such as minerals, nitrogen emissions and fish. And yet our top priority is to increase our levels of consumption, production, sales and GDP as fast as possible, with no limit in mind!

The World Wildlife Fund also puts the situation another way. We are now using resources at 1.4 times the rate the planet could provide sustainably. We do this by for example, consuming more timber than grows each year, thereby depleting the stocks. Now if 10 billion people rose to the “living standards” we Australians would have in 2050 given the 3% p.a. economic growth we expect, then every year the amount of producing and consuming going on in the world would be 20 times as great as it is now.

Over-production and over-consumption is the main factor generating all the alarming global problems we face is. Why is there an environmental problem? Because we are taking far more resources from nature, especially habitats, than is sustainable. Why do about 3+ billion people in the Third World wallow in poverty? Primarily because the global economy is a market system and in a market resources go to those who can pay most for them, i.e., the rich. That’s why we in rich countries get almost all the oil, the surpluses produced from Third World soils, the fish caught off their coasts, etc. It’s why “development” in the Third World is mostly only development of what will maximise corporate profit, meaning development of industries to export to us. Why is there so much violent conflict in the world? Primarily because everyone is out to grab as many of the scarce resources as they can. And why is the quality of life in the richest countries falling now, and social cohesion deteriorating? Primarily because increasing material wealth and business turnover has been made the top priority, and this contradicts and drives out social bonding.

Dick has done a great job in presenting this general “limits to growth” analysis of our situation clearly and forcefully, and in getting it onto the public agenda. But I want to now argue that he makes two fundamental mistakes.

The first is his assumption that this society can be reformed; that we can retain it while we remedy the growth fault it has. The central argument in my The Transition to a Sustainable and Just World (2010a) is that consumer-capitalist society cannot be fixed. Many of its elements are very valuable and should be retained, but its most crucial, defining fundamental institutions are so flawed that they have to be scrapped and replaced. Growth is only one of these but a glance at it reveals that this problem cannot be solved without entirely remaking most of the rest of society. Growth is not like a faulty air conditioning unit on a house, which can be replaced or removed while the house goes on functioning more or less as before. It is so integrated into so many structures that if it is dumped those structures will have to be scrapped and replaced.

The most obvious implication of this kind is that in a zero growth economy there can be no interest payments at all. Interest is by nature about growth, getting more wealth back than you lent, and this is not possible unless lending and output and earnings constantly increase. There goes almost the entire financial industry I’m afraid (which recently accounted for over 40% of all profits made.) Banks therefore could only be places which hold savings for safety and which lend money to invest in maintenance of a stable amount of capital stock (and readjustments within it.) There also goes the present way of providing for superannuation and payment for aged care; these can’t be based on investing to make money.

The entire energising mechanism of society would have to be replaced. The present economy is driven by the quest to get richer. This motive is what gets options searched for, risks taken, construction and development underway, etc. The most obvious alternative is for these actions to be come from a collective working out of what society needs, and organising to produce and develop those things cooperatively, but this would involve an utterly different world view and driving mechanism.

The problem of inequality would become acute and would not only demand attention, it would have to be dealt with in an entirely different way. It could no longer be defused by the assumption that “a rising tide will lift all boats”. In the present economy growth helps to legitimise inequality; extreme inequality is not a source of significant discontent because it can be said that economic growth is raising everyone’s “living standards”.

How would we handle unemployment in a zero-growth economy? At present its tendency to increase all the time is offset by the increase in consumption and therefore production. Given that we could produce all we need for idyllic lifestyles with a fraction of the present amount of work done, any move in this direction in the present economy would soon result in most workers becoming unemployed. There would be no way of dealing with this without scrapping the labour market and then rationally and deliberately planning the distribution of the (small amount of) work that needed doing.

Most difficult of all are the cultural implications, usually completely overlooked. If the economy cannot grow then all concern to gain must be abandoned. People would have to be content to work for stable incomes and abandon all interest in getting richer over time. If any scope remains for some to try to get more and more of the stable stock of wealth, then some will succeed and take more than their fair share of it and others will therefore get less…and soon it will end in chaos, or feudalism as the fittest take control. Sorry, but the 500 year misadventure Western culture has had with the quest for limitless individual and national wealth is over. If we have the sense we will realise greed is incompatible with a sustainable and just society. If, as is more likely we won’t, then scarcity will settle things for us. The few super privileged people, including Australians, will no longer be able to get the quantities of resources we are accustomed to, firstly because the resources are dwindling now, and secondly because we are being increasingly outmanoeuvred by the energetic and very hungry Chinese, Indians, Brazilians…

And, a minor point, you will also have to abandon the market system. It is logically incompatible with growth. You go into a market not to exchange things of equal value but to make money, to get the highest price you can, to trade in a way that will make you richer over time. There are “markets” where people don’t try to do this but just exchange the necessities without seeking to increase their wealth over time e.g., in tribal and peasant societies. However these are “subsistence” economies and they do not operate according to market forces. The economies of a zero-growth society would have to be like this. Again, if it remains possible for a few to trade their way to wealth they will end up with most of the pie. This seems to clearly mean that if we are to have a zero-growth economy then we have to work out how to make a satisfactory form of “socialism” work, so that at least the basic decisions about production, distribution and development can be made by society and not left to be determined by what maximises the wealth of individuals and the profits of private corporations competing in the market. Richard Smith (2010) points this out effectively, but some steady-staters, including Herman Daly and Tim Jackson (2009) seem to have difficulty accepting it.

Thus growth is not an isolated element that can be dealt with without remaking most of the rest of society. It is not that this society has a growth economy; it is that this is a growth society.

So in my view Dick has vastly underestimated the magnitude of the changes involved, and gives the impression that consumer-capitalist society can be adjusted, and then we can all go on enjoying high levels of material comfort (he does say we should reduce consumption), travel etc. But the entire socio-economic system we have prohibits the slightest move in this direction; it cannot tolerate slowdown in business turnover (unemployment, bankruptcy, discontent and pressure on governments immediately accelerate), let alone stable levels, let alone reduction to maybe one-fifth of present levels.

This gets us to the second issue on which I think Dick is clearly and importantly mistaken. He believes a zero growth economy can still be a capitalist economy. This is what Tim Jackson says too, in his very valuable critique of the present economy and of the growth commitment. Dick doesn’t offer any explanation or defence for his belief; it is just stated in four sentences. “Capitalism will still be able to thrive in this new system as long as legislation ensures a level playing field. Huge new industries will be created, and vast fortunes are still there to be made by the brave and the innovative.” (p. 173.) “I have no doubt that the dynamism and flexibility of capitalism can adjust to sustainability laws. The profit imperative would be maintained and, as long as there was an equitable base, competition would thrive.” (p. 177.)

Following is a sketch of the case that a zero growth economy is totally incompatible with capitalism.

Capitalism is by definition about accumulation, making more money than was invested, in order to invest the surplus to have even more…to invest to get even richer, in a never-ending upward spiral. Obviously this would not be possible in a steady state economy. It would be possible for a few to still own most capital and factories and to live on income from these investments, but they would be more like rentiers or landlords who draw a stable income from their property. They would not be entrepreneurs constantly seeking increasingly profitable investment outlets for ever-increasing amounts of capital.

Herman Daly believes that “productivity” growth would enable capitalism to continue in an economy with stable resource inputs. This is true, but it would be a temporary effect and too limited to enable the system to remain capitalist. The growth rate which the system, and capitalist accumulation, depends on is mostly due to increased production, not productivity growth. Secondly the productivity measure used (by economists who think dollars are the only things that matter) takes into account labour and capital but ignores what is by far the most important factor, i.e., the increasing quantities of cheap energy that have been put into new productive systems. For instance over half a century the apparent productivity of a farmer has increased greatly, but his output per unit of energy used has fallen alarmingly. From here on energy is very likely to become scarce and costly. Ayres (1999) has argued that this will eliminate productivity gains soon (which have been falling in recent years anyway), and indeed is likely to entirely stop GDP growth before long.

Therefore in a steady state economy the scope for continued capitalist accumulation via productivity gains would be very small, and confined to the increases in output per unit of resource inputs that is due to sheer technical advance. There would not be room for more than a tiny class, accumulating greater wealth very gradually until energy costs eliminated even that scope. Meanwhile the majority would see this class taking more of the almost fixed output pie, and therefore would soon see that it made no sense to leave ownership and control of most of the productive machinery in the hands of a few.

But the overwhelmingly important factor disqualifying capitalism has yet to be taken into account. As has been made clear above the need is not just for zero-growth, it is for dramatic reduction in the amount of producing and consuming going on. These must be cut to probably less than one-fifth of the levels typical of a rich country today, because the planet cannot sustain anything like the present levels of producing and consuming, let alone the levels 9 billion people would generate. This means that most productive capacity in rich countries, most factories and mines, will have to be shut down.

I suspect that Dick Smith is like Tim Jackson in identifying capitalism with the private ownership of firms, and in thinking that “socialism” means public ownership. This is a mistake. The issue of ownership is not central; what matters most is the drive to accumulate, which can still be the goal in socialism of the big state variety (“state capitalism”.) In my ideal vision of the future post-capitalist economy most production would take place within (very small) privately owned firms, but there would be no concern to get richer and the economy would be regulated by society via participatory democratic processes.

So I think Dick has seriously underestimated the magnitude of the change that is required by the global predicament and of what would be involved in moving to a zero-growth economy. The core theme detailed in The Transition… is that consumer-capitalist society cannot be fixed. Dick seems to think you can retain it by just reforming the unacceptable growth bit. My first point above is that you can’t just take out that bit and leave the rest more or less intact. In addition you have to deal with the other gigantic faults in this society driving us to destruction, including allowing the market to determine most things, accepting competition rather than cooperation as the basic motive and process, accepting centralisation, globalisation and representative big-state “democracy”, and above all accepting a culture of competitive, individualistic acquisitiveness.

The Transition… argues that an inevitable, dreadful logic becomes apparent if we clearly grasp that our problems are primarily due to grossly unsustainable levels of consumption. There can be no way out other than by transition to mostly small, highly self-sufficient and cooperative local communities and communities which run their own economies to meet local needs from local resources… with no interest whatsoever in gain. They must have the sense to focus on the provision of security and a high quality of life for all via frugal, non-material lifestyles. In this “Simpler Way” vision there can still be (some small scale) international economies, centralised state governments, high-tech industries, and in fact there can be more R and D on important topics than there is now. But there will not be anything like the resources available to sustain present levels of economic activity or individual or national “wealth” measured in dollars.

I have no doubt that the quality of life in The Simpler Way (see the website, Trainer 2011) would be far higher than it is now in the worsening rat race of late consumer-capitalism. Increasing numbers are coming to grasp all this, for instance within the rapidly emerging Transition Towns movement. We see our task as trying to establish examples of the more sane way in the towns and suburbs where we live while there is time, so that when the petrol gets scarce and large numbers realise that consumer-capitalism will not provide for them, they can come across to join us.

It is great that Dick is saying a zero-growth economy is no threat to capitalism. If he had said it has to be scrapped then he would have been identified as a deluded greenie/commie/anarchist out to wreck society and his growth critique would have been much more easily ignored. What matters at this point in time is getting attention given to the growth absurdity; when the petrol gets scarce they will be a bit more willing to think about whether capitalism is a good idea. Well done Dick!





More Peak Oil bad news…..

15 06 2017

There have been no end of new articles on the demise of the oil industry lately. I’ve been so busy building that it’s only now I can catch up with some blogging, so here’s your lot for the time being.

From the srsroccoreport.com website comes this unbelievable analysis…:

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

Then…….  on ABC TV’s lateline (I’m rarely up late enough to watch it, so this was an omen…) this interview came up. I have to say, I found the whole Qatar thing rather bizarre, but this commentator thinks that Saudi Arabia is already in trouble

http://www.abc.net.au/lateline/content/2016/s4682983.htm

And now Zero Hedge has this to say as well….

Oil Prices Suffer First ‘Death Cross’ Since 2014 Collapse

For the first time since September 2014, after which oil prices collapsed almost 75%, Brent and WTI Crude futures both just flashed a ‘death cross’ signal as the 50-day moving-average crossed below the 200-day moving-average.

The crossover is typically seen a loss of short-term momentum and last occurred in the second half of 2014, when prices collapsed due to oversupply amid surging U.S. shale oil production.

 

As Bloomberg notes, OPEC and its partners will be hoping their efforts to curb output will be enough to support prices and counteract any fears of growing downside risk.

 

However, this morning’s news of “real” OPEC production may raise more doubts about the cartel’s commitment (and going forward, the Qatar debacle won’t help).





What is this ‘Crisis’ of Modernity?

22 01 2017

But why is the economy failing to generate prosperity as in earlier decades?  Is it mainly down to Greenspan and Bernanke’s monetary excesses?  Certainly, the latter has contributed to our contemporary stagnation, but perhaps if we look a little deeper, we might find an additional explanation. As I noted in a Comment of 6 January 2017, the golden era of US economic expansion was the ‘50s and ‘60s – but that era had begun to unravel somewhat, already, with the economic turbulence of the 70s. However, it was not so much Reagan’s fiscal or monetary policies that rescued a deteriorating situation in that earlier moment, but rather, it was plain old good fortune. The last giant oil fields with greater than 30-to-one, ‘energy-return’ on ‘energy-cost’ of exploitation, came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. Those events allowed the USA and the West generally to extend their growth another twenty years.

This week, there has been an avalanche of articles on Limits to Growth, just not titled so……. it’s almost as though the term is getting stuck in people’s throats, and are unable to pronounce them….

acrooke

Alastair Crooke

This article by former British diplomat and MI6 ‘ranking figure’ Alastair Crooke, is an unpublished article I’ve lifted from the Automatic Earth…… as Raul Ilargi succinctly puts it…:

 

His arguments here are very close to much of what the Automatic Earth has been advocating for years [not to mention DTM’s…], both when it comes to our financial crisis and to our energy crisis. Our Primers section is full of articles on these issues written through the years. It’s a good thing other people pick up too on topics like EROEI, and understand you can’t run our modern, complex society on ‘net energy’ as low as what we get from any of our ‘new’ energy sources. It’s just not going to happen.

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

Alastair Crooke: We have an economic crisis – centred on the persistent elusiveness of real growth, rather than just monetised debt masquerading as ‘growth’ – and a political crisis, in which even ‘Davos man’, it seems, according to their own World Economic Forum polls, is anxious; losing his faith in ‘the system’ itself, and casting around for an explanation for what is occurring, or what exactly to do about it. Klaus Schwab, the founder of the WEF at Davos remarked  before this year’s session, “People have become very emotionalized, this silent fear of what the new world will bring, we have populists here and we want to listen …”.

Dmitry Orlov, a Russian who was taken by his parents to the US at an early age, but who has returned regularly to his birthplace, draws on the Russian experience for his book, The Five Stages of Collapse. Orlov suggests that we are not just entering a transient moment of multiple political discontents, but rather that we are already in the early stages of something rather more profound. From his perspective that fuses his American experience with that of post Cold War Russia, he argues, that the five stages would tend to play out in sequence based on the breaching of particular boundaries of consensual faith and trust that groups of human beings vest in the institutions and systems they depend on for daily life. These boundaries run from the least personal (e.g. trust in banks and governments) to the most personal (faith in your local community, neighbours, and kin). It would be hard to avoid the thought – so evident at Davos – that even the elites now accept that Orlov’s first boundary has been breached.

But what is it? What is the deeper economic root to this malaise? The general thrust of Davos was that it was prosperity spread too unfairly that is at the core of the problem. Of course, causality is seldom unitary, or so simple. And no one answer suffices. In earlier Commentaries, I have suggested that global growth is so maddeningly elusive for the elites because the debt-driven ‘growth’ model (if it deserves the name ‘growth’) simply is not working.  Not only is monetary expansion not working, it is actually aggravating the situation: Printing money simply has diluted down the stock of general purchasing power – through the creation of additional new, ‘empty’ money – with the latter being intermediated (i.e. whisked away) into the financial sector, to pump up asset values.

It is time to put away the Keynesian presumed ‘wealth effect’ of high asset prices. It belonged to an earlier era. In fact, high asset prices do trickle down. It is just that they trickle down into into higher cost of living expenditures (through return on capital dictates) for the majority of the population. A population which has seen no increase in their real incomes since 2005 – but which has witnessed higher rents, higher transport costs, higher education costs, higher medical costs; in short, higher prices for everything that has a capital overhead component. QE is eating into peoples’ discretionary income by inflating asset balloons, and is thus depressing growth – not raising it. And zero, and negative interest rates, may be keeping the huge avalanche overhang of debt on ‘life support’, but it is eviscerating savings income, and will do the same to pensions, unless concluded sharpish.

But beyond the spent force of monetary policy, we have noted that developed economies face separate, but equally formidable ‘headwinds’, of a (non-policy and secular) nature, impeding growth – from aging populations in China and the OECD, the winding down of China’s industrial revolution,  and from technical innovation turning job-destructive, rather than job creative as a whole. Connected with this is shrinking world trade.

But why is the economy failing to generate prosperity as in earlier decades?  Is it mainly down to Greenspan and Bernanke’s monetary excesses?  Certainly, the latter has contributed to our contemporary stagnation, but perhaps if we look a little deeper, we might find an additional explanation. As I noted in a Comment of 6 January 2017, the golden era of US economic expansion was the ‘50s and ‘60s – but that era had begun to unravel somewhat, already, with the economic turbulence of the 70s. However, it was not so much Reagan’s fiscal or monetary policies that rescued a deteriorating situation in that earlier moment, but rather, it was plain old good fortune. The last giant oil fields with greater than 30-to-one, ‘energy-return’ on ‘energy-cost’ of exploitation, came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. Those events allowed the USA and the West generally to extend their growth another twenty years.

And, as that bounty tapered down around the year 2000, the system wobbled again, “and the viziers of the Fed ramped up their magical operations, led by the Grand Vizier (or “Maestro”) Alan Greenspan.”  Some other key things happened though, at this point: firstly the cost of crude, which had been remarkably stable, in real terms, over many years, suddenly started its inexorable real-terms ascent.  And from 2001, in the wake of the dot.com ‘bust’, government and other debt began to soar in a sharp trajectory upwards (now reaching $20 trillion). Also, around this time the US abandoned the gold standard, and the petro-dollar was born.

 


Source: Get It. Got It. Good, by Grant Williams

Well, the Hill’s Group, who are seasoned US oil industry engineers, led by B.W. Hill, tell us – following their last two years, or so, of research – that for purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel, by the oil industry (the IOCs) is rapidly trending to zero. Note that we are talking energy-cost of exploration, extraction and transport for the energy-return at final destination. We are not speaking of dollar costs, and we are speaking in aggregate. So why should this be important at all; and what has this to do with spiraling debt creation by the western Central Banks from around 2001?

The importance? Though we sometimes forget it, for we now are so habituated to it, is that energy is the economy.  All of modernity, from industrial output and transportation, to how we live, derives from energy – and oil remains a key element to it.  What we (the globalized industrial world) experienced in that golden era until the 70s, was economic growth fueled by an unprecedented 321% increase in net energy/head.  The peak of 18GJ/head in around 1973 was actually of the order of some 40GJ/head for those who actually has access to oil at the time, which is to say, the industrialised fraction of the global population. The Hill’s Group research  can be summarized visually as below (recall that these are costs expressed in energy, rather than dollars):

 


Source: http://cassandralegacy.blogspot.it/2016/07/some-reflections-on-twilight-of-oil-age.html

[This study was also covered here on Damnthematrix starting here…]

But as Steve St Angelo in the SRSrocco Reports states, the important thing to understand from these energy return on energy cost ratios or EROI, is that a minimum ratio value for a modern society is 20:1 (i.e. the net energy surplus available for GDP growth should be twenty times its cost of extraction). For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be much higher, closer to the 30:1 ratio. Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30:1 some 46 years ago (after 1970):

 


Source: https://srsroccoreport.com/the-coming-breakdown-of-u-s-global-markets-explained-what-most-analysts-missed/

“You will notice two important trends in the chart above. When the U.S. EROI ratio was higher than 30:1, prior to 1970, U.S. public debt did not increase all that much.  However, this changed after 1970, as the EROI continued to decline, public debt increased in an exponential fashion”. (St Angelo).

In short, the question begged by the Hill’s Group research is whether the reason for the explosion of government debt since 1970 is that central bankers (unconsciously), were trying to compensate for the lack of GDP stimulus deriving from the earlier net energy surplus.  In effect, they switched from flagging energy-driven growth, to the new debt-driven growth model.

From a peak net surplus of around 40 GJ  (in 1973), by 2012, the IOCs were beginning to consume more energy per barrel, in their own processes (from oil exploration to transport fuel deliveries at the petrol stations), than that which the barrel would deliver net to the globalized industrial world, in aggregate.  We are now down below 4GJ per head, and dropping fast. (The Hill’s Group)

Is this analysis by the Hill’s Group too reductionist in attributing so much of the era of earlier western material prosperity to the big discoveries of ‘cheap’ oil, and the subsequent elusiveness of growth to the decline in net energy per barrel available for GDP growth?  Are we in deep trouble now that the IOCs use more energy in their own processes, than they are able to deliver net to industrialised world? Maybe so. It is a controversial view, but we can see – in plain dollar terms – some tangible evidence fo rthe Hill’s Groups’ assertions:

 


Source: https://srsroccoreport.com/wp-content/uploads/2016/08/Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends.png

(The top three U.S. oil companies, ExxonMobil, Chevron and ConocoPhillips: Cash from operations less Capex and dividends)

Briefly, what does this all mean? Well, the business model for the big three US IOCs does not look that great: Energy costs of course, are financial costs, too.  In 2016, according to Yahoo Finance, the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt (i.e. to pay for those extraction costs). We have not run out of oil. This is not what the Hill’s Group is saying. Quite the reverse. What they are saying is the surplus energy (at a ratio of now less than 10:1) that derives from the oil that we have been using (after the energy-costs expended in retrieving it) – is now at a point that it can barely support our energy-driven ‘modernity’.  Implicit in this analysis, is that our era of plenty was a one time, once off, event.

They are also saying that this implies that as modernity enters on a more severe energy ‘diet’, less surplus calories for their dollars – barely enough to keep the growth engine idling – then global demand for oil will decline, and the price will fall (quite the opposite of mainstream analysis which sees demand for oil growing. It is a vicious circle. If Hills are correct, a key balance has tipped. We may soon be spending more energy on getting the energy that is required to keep the cogs and wheels of modernity turning, than that same energy delivers in terms of calorie-equivalence.  There is not much that either Mr Trump or the Europeans can do about this – other than seize the entire Persian Gulf.  Transiting to renewables now, is perhaps too little, too late.

And America and Europe, no longer have the balance sheet ‘room’, for much further fiscal or monetary stimulus; and, in any event, the efficacy of such measures as drivers of ‘real economy’ growth, is open to question. It may mitigate the problem, but not solve it. No, the headwinds of net energy per barrel trending to zero, plus the other ‘secular’ dynamics mentioned above (demography, China slowing and technology turning job-destructive), form a formidable impediment – and therefore a huge political time bomb.

Back to Davos, and the question of ‘what to do’. Jamie Dimon, the CEO of  JPMorgan Chase, warned  that Europe needs to address disagreements spurring the rise of nationalist leaders. Dimon said he hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region, “the euro zone may not survive”. “The bottom line is the region must become more competitive, Dimon said, which in simple economic terms means accept even lower wages. It also means major political overhauls: “I say this out of respect for the European people, but they’re going to have to change,” he said. “They may be forced by politics, they may be forced by new leadership.”

A race to the bottom in pay levels?  Italy should undercut Romanian salaries?  Maybe Chinese pay scales, too? This is politically naïve, and the globalist Establishment has only itself to blame for their conviction that there are no real options – save to divert more of the diminished prosperity towards the middle classes (Christine Lagarde), and to impose further austerity (Dimon). As we have tried to show, the era of prosperity for all, began to waver in the 70s in America, and started its more serious stall from 2001 onwards. The Establishment approach to this faltering of growth has been to kick the can down the road: ‘extend and pretend’ – monetised debt, zero, or negative, interest rates and the unceasing refrain that ‘recovery’ is around the corner.

It is precisely their ‘kicking the can’ of inflated asset values, reaching into every corner of life, hiking the cost of living, that has contributed to making Europe the leveraged, ‘high cost’, uncompetitive environment, that it now is.  There is no practical way for Italians, for example, to compete with ‘low cost’ East Europe, or  Asia, through a devaluation of the internal Italian price level without provoking major political push-back.  This is the price of ‘extend and pretend’.

It has been claimed at Davos that the much derided ‘populists’ provide no real solutions. But, crucially, they do offer, firstly, the hope for ‘regime change’ – and, who knows, enough Europeans may be willing to take a punt on leaving the Euro, and accepting the consequences, whatever they may be. Would they be worse off? No one really knows. But at least the ‘populists’ can claim, secondly, that such a dramatic act would serve to escape from the suffocation of the status quo. ‘Davos man’ and woman disdain this particular appeal of ‘the populists’ at their peril.





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.

 

 

DavidHaggith-269x300

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.





Debt Inequality and Crisis

25 05 2015

When the economic history of our epoch is written, three key phenomena will feature: a period of tranquility giving way suddenly to crisis, rising inequality, and rising private debt. Using my model of Minsky’s Financial Instability Hypothesis, I show that these three phenomena are all related. There is a direct link between rising debt, rising inequality, and the crisis itself. The key to reducing inequality and ending economic stagnation is to reduce private debt through “Quantitative Easing for the Public” or a “Modern Debt Jubilee”. This is the keynote speech Steve Keen gave to the #IEEP conference in Pula, Croatia on May 23rd 2015

Now I still find economics mind numbing…  but Steve Keen’s 3D modelling and his live modelling during this talk is fascinating, even if the algorithms he uses are not for the faint hearted.





A Roadmap For The Land Access

22 04 2015

Another gem….  this one’s from William Horvath’s blog, and really resonates with me because I am constantly asked how our younger generations can ever duplicate our efforts on their own piece of heaven.  We baby boomers have really cleaned up, and it’s entirely at the expense of our kids….. so what are they to do?  I have reached the conclusion that only we with the wealth (such as it might be…) will have to assist in ensuring our kids do have a future, natural catastrophes aside of course, some things are out of our control, maybe even out of control altogether….  Anyhow, read on and see what William thinks.