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https://kunstler.com/clusterfuck-nation/forecast-2020-whirling-and-swirlin/

Forecast 2020 — Whirlin’ and Swirlin’

....Economy and Its Accessories

The shale oil “miracle” was a financial stunt using debt to provide the illusion that the nation’s energy supply was safe and assured long-term. It’s been an impressive stunt, for sure, with production nearing 13 million barrels-a-day now, but it is foundering on its Ponzi business model — the producers just can’t make money at it, and they’ve spent ten years proving that it’s a foolish play for investors. The result will be dwindling investment in an endeavor that requires constant re-investment. Which means that 2020 is the year that shale oil de-miracle-izes and production falls. The bankruptcies have only just begun.

The economy is really just a function of energy inputs, and these must be inputs that make economic sense — that don’t cost more than whatever they return. All our banking and finance arrangements depend on that. If energy inputs decline, or the cost in energy exceeds the value of net energy you get, then debts of every kind can no longer be repaid and the whole system implodes. From there the question is whether collapse is slow or fast. My guess is that it may start slowly and then accelerate rapidly to critical — and the process has already begun.

As a result of this energy dynamic, we’re seeing a generalized contraction in economic activity and growth worldwide, expressed in standards of living that will fall going forward. The effects in America are already obvious and discouraging: the struggling middle-class, people living paycheck-to-paycheck, people unable to buy cars or pay to fix them. The hope was that America might reindustrialize (some version of MAGA) while the “emerging” economies kept producing stuff as the “engines” of the global economy: China, India, Korea, Brazil, Mexico and others. These places saw standards of living rise dramatically the past thirty years. Reversing that trend will be a trauma. These emerging economies are topping off and heading down because of the same basic energy dynamics which affect the whole world: running out of affordable energy, oil especially. The likely result will be political instability within China, and the rest — already manifest — and some of that disorder may be projected outward at economic rivals.

Europe has experienced plenty of blowback from its contracting standard-of-living as expressed in the Yellow Vest disruptions in France, the Brexit nervous breakdown, the gathering power of nationalist political movements in many nations, and the ongoing refugee crisis (largely economic refugees from failing third world places). The European banks, led by the sickest of them all, Deutsche Bank, suffer from a crushing burden of bad derivative obligations that are liable to sink them in 2020, and then there will be a scramble for survival in Euroland, with the recent refugees caught in the middle. I think we will see the first attempts to expel them as financial chaos spreads, violence erupts, and nationalism rises.

The “solution” to the quandary of contraction since 2008 has been for central banks to “create” mountains of fresh “money” to provide the illusion that debts can be repaid (and fresh loans generated) when reality clearly refutes that. All that money “printing” has only deformed banking relations and the behavior of markets — the most obvious symptoms being asset inflation (stocks, bonds, real estate), the quashing of price discovery (the chief function of markets), and zero interest rates (which makes the operations of banking insane).

The bankers will continue to do “whatever it takes” to try to keep the game going, but they’ve run out of actual mojo to get it done. Interest rates can barely go any lower. The amount of money “printing” needed to sustain the illusion of a functioning, rational system grows ever larger. In the six weeks just before-and-after Christmas, the Federal Reserve is expected to pump $500 billion into the banks to stabilize asset prices. How long can they keep doing that?

Eventually, either asset prices fall (perhaps crash), or the increasingly desperate measures needed to prop them up will degrade the value of money itself. The catch is, that might not happen everywhere at once. For instance, China’s banking system, like Europe’s, is ripe for a convulsion, which would send money fleeing for perceived safety (while it can) into America’s markets, temporarily pumping up the Dow, the S & P, and US Treasury bonds even while other big nations crash. But US banks have the same disease and those birds of disorder will eventually roost here, too.

Also, the method of distributing fresh central bank money-from-thin-air will likely change going forward. The public will surely revolt at another bankster bailout. Instead, the folks-in-charge will turn to “Peoples’ QE,” otherwise known as “helicopter money” (as in dropping cash from choppers), or Modern Monetary Theory (MMT — print money until the cows come home), featuring “Guaranteed Basic Income.” The tensions in the contraction trap we’re in are such that disequilibrium in the debt markets can only play out in a hard default or a softer attempt to inflate currencies. Inflation could keep stock markets afloat and allow continued debt repayment (“servicing”) in currencies of declining value — a process that is never really manageable in history, always gets out-of-hand, and leads quickly to political mayhem. Remember, there are two ways of going broke: having no money, and having plenty of money that is worthless.

The elements of this financial psychodrama will meld into the US election politics of 2020 as the Left turns to increasingly promises of “free” money and “free” services (medicine, education) to panicked voters who can no longer afford the American Dream standard-of-living. Tremors emanating from the seized-up Repo markets (Repo = repurchase of collateral for overnight loans) the past three months suggest that some major US banks and insurance companies have entered their own zones of criticality. I’m doubtful that any ploy can fend off major financial instability before the end of 2020, but if the US does become a refuge for money from elsewhere in the world, that could stave off the arrival of crisis until summer.

The idea that a roaring stock market signifies a “great” economy is especially fallacious with all the ongoing market interventions and manipulations of the past decade. All it really signifies is how swindles, frauds, and rackets have taken the place of the industrial production of yesteryear, and that’s not a very sound basis for an economy. I don’t think there are any real prospects of getting back to the industrial might of yore. We’ll surely have to make things in the times ahead, and produce our bread by some means, but it’ll be a very different model of production, at a much more modest scale. When standards-of-living fall, they’ll eventually land somewhere. We just don’t know where that landing place is yet.....