https://ourfiniteworld.com/2017/01/10/2017-the-year-when-the-world-economy-starts-coming-apart/
2017: The Year When the World Economy Starts Coming Apart
Some people would argue that 2016 was the year that the world economy started to come apart, with the passage of Brexit and the election of Donald Trump. Whether or not the “coming apart” process started in 2016, in my opinion we are going to see many more steps in this direction in 2017. Let me explain a few of the things I see.
[1] Many economies have collapsed in the past. The world economy is very close to the turning point where collapse starts in earnest.
The history of previous civilizations rising and eventually collapsing is well documented.(See, for example, Secular Cycles.)
To start a new cycle, a group of people would find a new way of doing things that allowed more food and energy production (for instance, they might add irrigation, or cut down trees for more land for agriculture). For a while, the economy would expand, but eventually a mismatch would arise between resources and population. Either resources would fall too low (perhaps because of erosion or salt deposits in the soil), or population would rise too high relative to resources, or both.
Even as resources per capita began falling, economies would continue to have overhead expenses, such as the need to pay high-level officials and to fund armies. These overhead costs could not easily be reduced, and might, in fact, grow as the government attempted to work around problems. Collapse occurred because, as resources per capita fell (for example, farms shrank in size), the earnings of workers tended to fall. At the same time, the need for taxes to cover what I am calling overhead expenses tended to grow. Tax rates became too high for workers to earn an adequate living, net of taxes. In some cases, workers succumbed to epidemics because of poor diets. Or governments would collapse, from lack of adequate tax revenue to support them.
Our current economy seems to be following a similar pattern. We first used fossil fuels to allow the population to expand, starting about 1800. Things went fairly well until the 1970s, when oil prices started to spike. Several workarounds (globalization, lower interest rates, and more use of debt) allowed the economy to continue to grow. The period since 1970 might be considered a period of “stagflation.” Now the world economy is growing especially slowly. At the same time, we find ourselves with “overhead” that continues to grow (for example, payments to retirees, and repayment of debt with interest). The pattern of past civilizations suggests that our civilization could also collapse.
Historically, economies have taken many years to collapse; I show a range of 20 to 50 years in Figure 1. We really don’t know if collapse would take that long now. Today, we are dependent on an international financial system, an international trade system, electricity, and the availability of oil to make our vehicles operate. It would seem as if this time collapse could come much more quickly.
With the world economy this close to collapse, some individual countries are even closer to collapse. This is why we can expect to see sharp downturns in the fortunes of some countries. If contagion is not too much of a problem, other countries may continue to do fairly well, even as individual small countries fail.
[2] Figures to be released in 2017 and future years are likely to show that the peak in world coal consumption occurred in 2014. This is important, because it means that countries that depend heavily on coal, such as China and India, can expect to see much slower economic growth, and more financial difficulties.
While reports of international coal production for 2016 are not yet available, news articles and individual country data strongly suggest that world coal production is past its peak. The IEA also reports a substantial drop in coal production for 2016.
Figure 2. World coal consumption. Information through 2015 based on BP 2016 Statistical Review of World Energy data. Estimates for China, US, and India are based on partial year data and news reports. 2016 amount for "other" estimated based on recent trends.
Figure 2. World coal consumption. Information through 2015 based on BP 2016 Statistical Review of World Energy data. Estimates for China, US, and India are based on partial year data and news reports. 2016 amount for “other” estimated based on recent trends.
The reason why coal production is dropping is because of low prices, low profitability for producers, and gluts indicating oversupply. Also, comparisons of coal prices with natural gas prices are inducing switching from coal to natural gas. The problem, as we will see later, is that natural gas prices are also artificially low, compared to the cost of production, So the switch is being made to a different type of fossil fuel, also with an unsustainably low price.
Prices for coal in China have recently risen again, thanks to the closing of a large number of unprofitable coal mines, and a mandatory reduction in hours for other coal mines. Even though prices have risen, production may not rise to match the new prices. One article reports:
. . . coal companies are reportedly reluctant to increase output as a majority of the country’s mines are still losing money and it will take time to recoup losses incurred in recent years.
Also, a person can imagine that it might be difficult to obtain financing, if coal prices have only “sort of” recovered.
I wrote last year about the possibility that coal production was peaking. This is one chart I showed, with data through 2015. Coal is the second most utilized fuel in the world. If its production begins declining, it will be difficult to offset the loss of its use with increased use of other types of fuels.
Figure 3. World per capita energy consumption by fuel, based on BP 2016 SRWE.
Figure 3. World per capita energy consumption by fuel, based on BP 2016 SRWE.
[3] If we assume that coal supplies will continue to shrink, and other production will grow moderately, we can expect total energy consumption to be approximately flat in 2017.
Figure 5. World energy consumption forecast, based on BP Statistical Review of World Energy data through 2015, and author's estimates for 2016 and 2017.
Figure 4. World energy consumption forecast, based on BP Statistical Review of World Energy data through 2015, and author’s estimates for 2016 and 2017.
In a way, this is an optimistic assessment, because we know that efforts are underway to reduce oil production, in order to prop up prices. We are, in effect, assuming either that (a) oil prices won’t really rise, so that oil consumption will grow at a rate similar to that in the recent past or (b) while oil prices will rise significantly to help producers, consumers won’t cut back on their consumption in response to the higher prices.
[4] Because world population is rising, the forecast in Figure 4 suggests that per capita energy consumption is likely to shrink. Shrinking energy consumption per capita puts the world (or individual countries in the world) at the risk of recession.
Figure 5 shows indicated per capita energy consumption, based on Figure 4. It is clear that energy consumption per capita has already started shrinking, and is expected to shrink further. The last time that happened was in the Great Recession of 2007-2009.
Figure 5. World energy consumption per capita based on energy consumption estimates in Figure 4 and UN 2015 Medium Population Growth Forecast.
Figure 5. World energy consumption per capita based on energy consumption estimates in Figure 4 and UN 2015 Medium Population Growth Forecast.
There tends to be a strong correlation between world economic growth and world energy consumption, because energy is required to transform materials into new forms, and to transport goods from one place to another.
In the recent past, the growth in GDP has tended to be a little higher than the growth in the use of energy products. One reason why GDP growth has been a percentage point or two higher than energy consumption growth is because, as economies become richer, citizens can afford to add more services to the mix of goods and services that they purchase (fancier hair cuts and more piano lessons, for example). Production of services tends to use proportionately less energy than creating goods does; as a result, a shift toward a heavier mix of services tends to lead to GDP growth rates that are somewhat higher than the growth in energy consumption.
A second reason why GDP growth has tended to be a little higher than growth in energy consumption is because devices (such as cars, trucks, air conditioners, furnaces, factory machinery) are becoming more efficient. Growth in efficiency occurs if consumers replace old inefficient devices with new more efficient devices. If consumers become less wealthy, they are likely to replace devices less frequently, leading to slower growth in efficiency. Also, as we will discuss later in this post, recently there has been a tendency for fossil fuel prices to remain artificially low. With low prices, there is little financial incentive to replace an old inefficient device with a new, more efficient device. As a result, new purchases may be bigger, offsetting the benefit of efficiency gains (purchasing an SUV to replace a car, for example).
Thus, we cannot expect that the past pattern of GDP growing a little faster than energy consumption will continue. In fact, it is even possible that the leveraging effect will start working the “wrong” way, as low fossil fuel prices induce more fuel use, not less. Perhaps the safest assumption we can make is that GDP growth and energy consumption growth will be equal. In other words, if world energy consumption growth is 0% (as in Figure 4), world GDP growth will also be 0%. This is not something that world leaders would like at all.
The situation we are encountering today seems to be very similar to the falling resources per capita problem that seemed to push early economies toward collapse in [1]. Figure 5 above suggests that, on average, the paychecks of workers in 2017 will tend to purchase fewer goods and services than they did in 2016 and 2015. If governments need higher taxes to fund rising retiree costs and rising subsidies for “renewables,” the loss in the after-tax purchasing power of workers will be even greater than Figure 5 suggests.
[5] Because many countries are in this precarious position of falling resources per capita, we should expect to see a rise in protectionism, and the addition of new tariffs.
Clearly, governments do not want the problem of falling wages (or rather, falling goods that wages can buy) impacting their countries. So the new game becomes, “Push the problem elsewhere.”
In economic language, the world economy is becoming a “Zero-sum” game. Any gain in the production of goods and services by one country is a loss to another country. Thus, it is in each country’s interest to look out for itself. This is a major change from the shift toward globalization we have experienced in recent years. China, as a major exporter of goods, can expect to be especially affected by this changing view.
[6] China can no longer be expected to pull the world economy forward.
China’s economic growth rate is likely to be lower, for many reasons. One reason is the financial problems of coal mines, and the tendency of coal production to continue to shrink, once it starts shrinking. This happens for many reasons, one of them being the difficulty in obtaining loans for expansion, when prices still seem to be somewhat low, and the outlook for the further increases does not appear to be very good.
Another reason why China’s economic growth rate can be expected to fall is the current overbuilt situation with respect to apartment buildings, shopping malls, factories, and coal mines. As a result, there seems to be little need for new buildings and operations of these types. Another reason for slower economic growth is the growing protectionist stance of trade partners. A fourth reason is the fact that many potential buyers of the goods that China is producing are not doing very well economically (with the US being a major exception). These buyers cannot afford to increase their purchases of imports from China.
With these growing headwinds, it is quite possible that China’s total energy consumption in 2017 will shrink. If this happens, there will be downward pressure on world fossil fuel prices. Oil prices may fall, despite production cuts by OPEC and other countries.
China’s slowing economic growth is likely to make its debt problem harder to solve. We should not be too surprised if debt defaults become a more significant problem, or if the yuan falls relative to other currencies.
India, with its recent recall of high denomination currency, as well as its problems with low coal demand, is not likely to be a great deal of help aiding the world economy to grow, either. India is also a much smaller economy than China.
[7] While Item [2] talked about peak coal, there is a very significant chance that we will be hitting peak oil and peak natural gas in 2017 or 2018, as well.
If we look at historical prices, we see that the prices of oil, coal and natural gas tend to rise and fall together.
Figure 6. Prices of oil, call and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.
Figure 6. Prices of oil, coal and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.
The reason that fossil fuel prices tend to rise and fall together is because these prices are tied to “demand” for goods and services in general, such as for new homes, cars, and factories. If wages are rising rapidly, and debt is rising rapidly, it becomes easier for consumers to buy goods such as homes and cars. When this happens, there is more “demand” for the commodities used to make and operate homes and cars. Prices for commodities of many types, including fossil fuels, tend to rise, to enable more production of these items.
Of course, the reverse happens as well. If workers become poorer, or debt levels shrink, it becomes harder to buy homes and cars. In this case, commodity prices, including fossil fuel prices, tend to fall. Thus, the problem we saw above in [2] for coal would be likely to happen for oil and natural gas, as well, because the prices of all of the fossil fuels tend to move together. In fact, we know that current oil prices are too low for oil producers. This is the reason why OPEC and other oil producers have cut back on production. Thus, the problem with overproduction for oil seems to be similar to the overproduction problem for coal, just a bit delayed in timing.
In fact, we also know that US natural gas prices have been very low for several years, suggesting another similar problem. The United States is the single largest producer of natural gas in the world. Its natural gas production hit a peak in mid 2015, and production has since begun to decline. The decline comes as a response to chronically low prices, which make it unprofitable to extract natural gas. This response sounds similar to China’s attempted solution to low coal prices.
Figure 7. US Natural Gas production based on EIA data.
Figure 7. US Natural Gas production based on EIA data.
The problem is fundamentally the fact that consumers cannot afford goods made using fossil fuels of any type, if prices actually rise to the level producers need, which tends to be at least five times the 1999 price level. (Note peak price levels compared to 1999 level on Figure 6.) Wages have not risen by a factor of five since 1999, so paying the prices that fossil fuel producers need for profitability and growing production is out of the question. No amount of added debt can hide this problem. (While this reference is to 1999 prices, the issue really goes back much farther, to prices before the price spikes of the 1970s.)
US natural gas producers also have plans to export natural gas to Europe and elsewhere, as liquefied natural gas (LNG). The hope, of course, is that a large amount of exports will raise US natural gas prices. Also, the hope is that Europeans will be able to afford the high-priced natural gas shipped to them. Unless someone can raise the wages of both Europeans and Americans, I would not count on LNG prices actually rising to the level needed for profitability, and staying at such a high level. Instead, they are likely to bounce up, and quickly drop back again.
[8] Unless oil prices rise very substantially, oil exporters will find themselves exhausting their financial reserves in a very short time (perhaps a year or two). Unfortunately, oil importers cannot withstand higher prices, without going into recession.
We have a no win situation, no matter what happens. This is true with all fossil fuels, but especially with oil, because of its high cost and thus necessarily high price. If oil prices stay at the same level or go down, oil exporters cannot get enough tax revenue, and oil companies in general cannot obtain enough funds to finance the development of new wells and payment of dividends to shareholders. If oil prices do rise by a very large amount for very long, we are likely headed into another major recession, with many debt defaults.
[9] US interest rates are likely to rise in the next year or two, whether or not this result is intended by the Federal reserve.
This issue here is somewhat obscure. The issue has to do with whether the United States can find foreign buyers for its debt, often called US Treasuries, and the interest rates that the US needs to pay on this debt. If buyers are very plentiful, the interest rates paid by he US government can be quite low; if few buyers are available, interest rates must be higher.
Back when Saudi Arabia and other oil exporters were doing well financially, they often bought US Treasuries, as a way to retain the benefit of their new-found wealth, which they did not want to spend immediately. Similarly, when China was doing well as an exporter, it often bought US Treasuries, as a way retaining the wealth it gained from exports, but didn’t yet need for purchases.
When these countries bought US Treasuries, there were several beneficial results:
Interest rates on US Treasuries tended to stay artificially low, because there was a ready market for its debt.
The US could afford to import high-priced oil, because the additional debt needed to buy the oil could easily be sold (to Saudi Arabia and other oil producing nations, no less).
The US dollar tended to stay lower relative to other currencies, making oil more affordable to other countries than it otherwise might be.
Investment in countries outside the US was encouraged, because debt issued by these other countries tended to bear higher interest rates than US debt. Also, relatively low oil prices in these countries (because of the low level of the dollar) tended to make investment profitable in these countries.
The effect of these changes was somewhat similar to the US having its own special Quantitative Easing (QE) program, paid for by some of the counties with trade surpluses, instead of by its central bank. This QE substitute tended to encourage world economic growth, for the reasons mentioned above.
Once the fortunes of the countries that used to buy US Treasuries changes, the pattern of buying of US Treasuries tends to change to selling of US Treasuries. Even not purchasing the same quantity of US Treasuries as in the past becomes an adverse change, if the US has a need to keep issuing US Treasuries as in the past, or if it wants to keep rates low.
Unfortunately, losing this QE substitute tends to reverse the favorable effects noted above. One effect is that the dollar tends to ride higher relative to other currencies, making the US look richer, and other countries poorer. The “catch” is that as the other countries become poorer, it becomes harder for them to repay the debt that they took out earlier, which was denominated in US dollars.
Another problem, as this strange type of QE disappears, is that the interest rates that the US government needs to pay in order to issue new debt start rising. These higher rates tend to affect other rates as well, such as mortgage rates. These higher interest rates act as a drag on the economy, tending to push it toward recession.
Higher interest rates also tend to decrease the value of assets, such as homes, farms, outstanding bonds, and shares of stock. This occurs because fewer buyers can afford to buy these goods, with the new higher interest rates. As a result, stock prices can be expected to fall. Prices of homes and of commercial buildings can also be expected to fall. The value of bonds held by insurance companies and banks becomes lower, if they choose to sell these securities before maturity.
Of course, as interest rates fell after 1981, we received the benefit of falling interest rates, in the form of rising asset prices. No one ever stopped to think about how much of the gains in share prices and property values came from falling interest rates.
Figure 8. Ten year treasury interest rates, based on St. Louis Fed data.
Figure 8. Ten year treasury interest rates, based on St. Louis Fed data.
Now, as interest rates rise, we can expect asset prices of many types to start falling, because of lower affordability when monthly payments are based on higher interest rates. This situation presents another “drag” on the economy.
In Conclusion
The situation is indeed very concerning. Many things could set off a crisis:
Rising energy prices of any kind (hurting energy importers), or energy prices that don’t rise (leading to financial problems or collapse of exporters)
Rising interest rates.
Defaulting debt, indirectly the result of slow/negative economic growth and rising interest rates.
International organizations with less and less influence, or that fall apart completely.
Fast changes in relativities of currencies, leading to defaults on derivatives.
Collapsing banks, as debt defaults rise.
Falling asset prices (homes, farms, commercial buildings, stocks and bonds) as interest rates rise, leading to many debt defaults.
Things don’t look too bad right now, but the underlying problems are sufficiently severe that we seem to be headed for a crisis far worse than 2008. The timing is not clear. Things could start falling apart badly in 2017, or alternatively, major problems may be delayed until 2018 or 2019. I hope political leaders can find ways to keep problems away as long as possible, perhaps with more rounds of QE. Our fundamental problem is the fact that neither high nor low energy prices are now able to keep the world economy operating as we would like it to operate. Increased debt can’t seem to fix the problem either.
The laws of physics seem to be behind economic growth. From a physics point of view, our economy is a dissipative structure. Such structures form in “open systems.” In such systems, flows of energy allow structures to temporarily self-organize and grow. Other examples of dissipative structures include ecosystems, all plants and animals, stars, and hurricanes. All of these structures constantly “dissipate” energy. They have finite life spans, before they eventually collapse....
Wednesday, January 11, 2017
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https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.67kl9g3no
Brace for the oil, food and financial crash of 2018
80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy
New scientific research suggests that the world faces an imminent oil crunch, which will trigger another financial crisis.
A report by HSBC shows that contrary to industry mythology, even amidst the glut of unconventional oil and gas, the vast bulk of the world’s oil production has already peaked and is now in decline; while European government scientists show that the value of energy produced by oil has declined by half within just the first 15 years of the 21st century.
The upshot? Welcome to a new age of permanent economic recession driven by ongoing dependence on dirty, expensive, difficult oil... unless we choose a fundamentally different path.
Last September, a few outlets were reporting the counterintuitive findings of a new HSBC research report on global oil supply. Unfortunately, the true implications of the HSBC report were largely misunderstood.
The HSBC research note — prepared for clients of the global bank — found that contrary to concerns about too much oil supply and insufficient demand, the situation was opposite: global oil supply will in coming years be insufficient to sustain rising demand.
Yet the full, striking import of the report, concerning the world’s permanent entry into a new age of global oil decline, was never really explained. The report didn’t just go against the grain of the industry’s hype about ‘peak demand’: it vindicated what is routinely lambasted by the industry as a myth: peak oil — the concurrent peak and decline of global oil production.
The HSBC report you need to read, now
INSURGE intelligence obtained a copy of the report in December 2016, and for the first time we are exclusively publishing the entire report in the public interest.
Read and/or download the full HSBC report by clicking below:
HSBC peak oil report
Headquarted in London, UK, HSBC is the world’s sixth largest bank, holding assets of $2.67 trillion. So when they produce a research report for their clients, we should listen.
Among the report’s most shocking findings is that “81% of the world’s total liquids production is already in decline.”
Between 2016 and 2020, non-OPEC production will be flat due to declines in conventional oil production, even though OPEC will continue to increase production modestly. This means that by 2017, deliverable spare capacity could be as little as 1% of global oil demand.
This heightens the risk of a major global oil supply shock around 2018 which could “significantly affect oil prices.”
The report flatly asserts that peak demand (the idea that demand will stop growing leaving the world awash in too much supply), while certainly a relevant issue due to climate change agreements and disruptive trends in alternative technologies, is not the most imminent challenge:
“Even in a world of slower oil demand growth, we think the biggest long-term challenge is to offset declines in production from mature fields. The scale of this issue is such that in our view rather there could well be a global supply squeeze some time before we are realistically looking at global demand peaking.”
Under the current supply glut driven by rising unconventional production, falling oil prices have damaged industry profitability and led to dramatic cut backs in new investments in production. This, HSBC says, will exacerbate the likelihood of a global oil supply crunch from 2018 onwards.
Four Saudi Arabias, anyone?
The HSBC report examines two main datasets from the International Energy Agency and the University of Uppsala’s Global Energy Systems Programme in Sweden.
The latter, it should be noted, has consistently advocated a global peak oil scenario for many years — the HSBC report confirms the accuracy of this scenario, and shows that the IEA’s data supports it.
The rate and nature of new oil discoveries has declined dramatically over the last few decades, reaching almost negligible levels on a global scale, the report finds. Compare this to the report’s warning that just to keep production flat against increasing decline rates, the world will need to add four Saudi Arabia’s worth of production by 2040. North American production, despite remaining the most promising in terms of potential, will simply not be able to fill this gap.
Business Insider, the Telegraph and other outlets which covered the report last year acknowledged the supply gap, but failed to properly clarify that HSBC’s devastating findings basically forecast the longterm scarcity of cheap oil due to global peak oil, from 2018 to 2040.
The report revises the way it approaches the concept of peak oil — rather than forecasting it as a single global event, the report uses a disaggregated approach focusing on specific regions and producers. Under this analysis, 81% of the world’s oil supply has peaked in production and so now “is post-peak”.
Using a more restrictive definition puts the quantity of global oil that has peaked at 64%. But either way, well over half the world’s global oil supply consists of mature and declining fields whose production is inexorably and irreversibly decreasing:
“If we assumed a decline rate of 5%pa [per year] on global post-peak supply of 74mbd — which is by no means aggressive in our view — it would imply a fall in post-peak supply of c.38mbd by 2030 and c.52mbd out to 2040. In other words, the world would need to find over four times the size of Saudi Arabia just to keep supply flat, before demand growth is taken into account.”
What’s worse is that when demand growth is taken into account — and the report notes that even the most conservative projections forecast a rise in global oil demand by 2040 of more than 8mbd above that of 2015 — then even more oil would be needed to fill the coming supply gap.
But with new discoveries at an all time low and continuing to diminish, the implication is that oil can simply never fill this gap.
Technological innovation exacerbates the problem
Much trumpeted improvements in drilling rates and efficiency will not make things better, because they will only accelerate production in the short term while, therefore, more rapidly depleting existing reserves. In this case, the report concludes:
“… the decline-delaying techniques are only masking what could be significantly higher decline rates in the future.”
This does not mean that peak demand should be dismissed as a serious concern. As Michael Bradshaw, Professor of Global Energy at Warwick University’s Sloan Business School, told me for my previous VICE article, any return to higher oil prices will have major economic consequences.
Price spikes, economic recession
Firstly, oil price spikes would have an immediate recessionary effect on the global economy, by amplifying inflation and leading to higher costs for social activity at all levels, driven by the higher underlying energy costs.
Secondly, even as spikes may temporarily return some oil companies to potential profitability, such higher oil prices will drive consumer incentives to transition to cheaper renewable energy technologies like solar and wind, which are already becoming cost-competitive with fossil fuels.
That means a global oil squeeze could end up having a dramatic impact on continued demand for oil, as twin crises of ‘peak oil’ and ‘peak demand’ end up intensifying and interacting in unfamiliar ways.
The demise of fossil fuels
But the HSBC report’s specific forecasts of global oil supply and demand are part of a wider story of global net energy decline.
A new scientific research paper authored by a team of European government scientists, published on Cornell University’s Arxiv website in October 2016, warns that the global economy has entered a new era of slow and declining growth. This is because the value of energy that can be produced from the world’s fossil fuel resource base is declining inexorably.
The paper – currently under review with an academic journal – was authored by Francesco Meneguzzo, Rosaria Ciriminna, Lorenzo Albanese, Mario Pagliaro, who collectively conduct research on climate change, energy, physics and materials science at the Italian National Research Council (CNR) — Italy’s premier government agency for scientific research.
According to HSBC, oil prices are likely to rise and stabilise for some time around the $75 per barrel mark. But the Italian scientists find that this is still too high to avoid destabilising recessionary effects on the economy.
The Italian study offers a new model combining “the competing dynamics of population and economic growth with oil supply and price,” with a view to evaluate the near-term consequences for global economic growth.
Data from the past 40 years shows that during economic recessions, the oil price tops $60 per barrel, but during economic growth remains below $40 a barrel. This means that prices above $60 will inevitably induce recession.
Therefore, the scientists conclude that to avoid recession, “the oil price should not exceed a threshold located somewhat between $40/b [per barrel] and $50/b, or possibly even lower.”
More broadly, the scientists show that there is a direct correlation between global population growth, economic growth and total energy consumption. As the latter has steadily increased, it has literally fueled the growth of global wealth.
But even so, the paper finds that the world is experiencing:
“… declining average EROIs [Energy Return on Investment] for all fossil fuels; with the EROI of oil having likely halved in the short course of the first 15 years of the 21st century.”
EROI is the total value of energy a resource can generate, calculated by comparing the quantity of energy extracted, to the quantity of energy put in to enable the extraction.
This means that overall, despite total liquids production increasing, as the energy value it generates is declining, the overall costs of extraction are simultaneously increasing.
This is acting as an increasing geophysical brake on global economic growth. And it means the more the economy remains dependent on fossil fuels, the more the economy is tied to the recessionary impact of global net energy decline:
“The chance of future economic growth matching the current trajectory of the human population is inextricably bound to the wide and growing availability of highly concentrated energy sources enjoying broad applicability to energy end uses.”
The problem is that since the 1980s, the share of oil in the global energy mix has declined. To make up for this, economic growth has increasingly had to rely on clever financial instruments based on debt: in effect, the world is borrowing from the future to sustain our present consumption levels.
In an interview, lead author Dr. Francesco Meneguzzo explained:
“Global conventional oil peaked around the year 2005. All the following supply increase was due to unconventional oil exploitation and, since 2009, basically to US shale (tight) oil, which in turn peaked around March, 2015.
What looks like to be even more important, anyway, is the fact that global oil supply has failed to keep the pace with the increase in total energy consumption, which ‘natural’ growth requires to be approximately proportional to population increase, leading to the decline of the oil share in the energy mix. While governments have struggled to fuel their economies with ever increasing energy supply, other sources have steadily replaced oil in the energy mix, such as coal in China. Yet, no other conventional source has proved to be a valuable substitute for oil, hence the need for debt in order to replace the vanishing oil share.”
On a business as usual trajectory, then, the economy can quite literally never recover — unless it transitions to a truly viable new energy source which can substitute for oil.
“In order to avoid the [oil] price affordable by the global economy falling below the extraction cost, debt piling (borrowing from the future) becomes a necessity, yet it is a mere trick to gain some time while hoping for something positive to happen,” said Meneguzzo. “The reality is that debt, basically as a subsitute for oil, does not work to produce real wealth, as apparent for example from the decline of the industry value added as a percentage of GDP.”
Where will this end up?
“Recently, debt has started shrinking, basically because it has failed to generate real wealth. Assuming no meaningful (and fast) transition to renewable energy, the economic growth can only deteriorate further and further.”
Basically, this means, Meneguzzo adds, “delocalizing manufacturing to economies using local, cheaper and dirtier energy sources (such as coal in China) as well as lower wages, further shrinking domestic aggregate demand and fueling a downward spiral of deflation and/or debt.”
Is there a way out? Not within the current trajectory: “Unless that debt is immediately used to exploit renewable sources on a massive scale, along with ‘accessories’ such as storage making them as qualified as oil, social and political derangements, even before an economic crash, look to be unavoidable.”
Crisis convergence
Seen in this broader scientific context, the HSBC global oil supply report provides quite stunning confirmation that for the most part, global oil production is already in post-peak — and that after 2018, this is going to manifest in not simply a global supply shock, but a world in which cheap, high quality fossil fuels is increasingly hard to find.
What will this mean? One possible scenario is that by 2018 or shortly thereafter, the world will face a similar convergence of global crises that occurred a decade earlier.
In this scenario, oil price hikes would have a recessionary affect that destabilises the global debt bubble, which for some years has been higher than pre-2008 crash levels, now at a record $152 trillion.
In 2008, oil price shocks played a key role in creating pre-crisis economic conditions for consumers in which rising living costs helped trigger debt-defaults in housing markets, which rapidly spiralled out of control.
In or shortly after 2018, economic and energy crisis convergence would drive global food prices up, re-generating the contours of the triple crunch we saw ravage the world from 2008 to 2011, the debilitating impacts of which we have yet to recover from.
2018 is likely to be crunch year for another reason. 1 January 2018 is the date when a host of new regulations are set to come in force, which will “constrain lending ability and prompt banks to only advance money to the best borrowers, which could accelerate bankruptcies worldwide,” according to Bloomberg. Other rules to come in play will require banks to stop using their own international risk assessment measures for derivatives trading.
Ironically, the introduction of similar well-intentioned regulation in January 2008 (through Basel II) laid the groundwork to rupture the global financial architecture, making it vulnerable to that year’s banking collapse.
In fact, two years earlier in July 2006, Dr David Martin, an expert on global finance, presciently forecast that Basel II would interact with the debt bubble to convert a collapse of the housing bubble into a global financial conflagaration.
Just a month after that prescient warning, I was told by a former senior Pentagon official with wide-ranging high-level access to the US military, intelligence and financial establishment that a global banking collapse was imminent, and would likely occur in 2008.
My source insisted that the event was bound up with the peak of global conventional oil production about two years earlier (which according to the UK’s former chief government scientist Sir David King did indeed occur around 2005, even though unconventional oil and gas production has offset the conventional decline so far).
Having first outlined my warning of a 2008 global banking collapse in August 2006, I re-articulated the warning in November 2007, citing Dr. Martin’s forecast and my own wider systems analysis at a lecture at Imperial College, London. In that lecture, I specifically predicted that a housing-triggered banking crisis would be sparked in the context of the new era of expensive fossil fuels.
I called it then, and I’m calling it now.
Some time after January 2018, we are seeing the probability of a new crisis convergence in global energy, economic and food systems, similar to what occurred in 2008.
Today, we are all supposed to quietly believe that the economy is in ‘recovery’, when in fact it is merely transitioning through a fundamental global systemic phase-shift in which the unsustainability of prevailing industrial structures are being increasingly laid bare.
The truth is that the cycles of protracted economic crisis are symptomatic of a deeper global systemic process.
One way we can brace ourselves for the next crash is to recognise it for what it is: a symptom of global system failure, and therefore of the inevitable transition to a post-carbon, post-capitalist future.
The future we are stepping into simply doesn’t work the way we are accustomed to....
Brace for the oil, food and financial crash of 2018
80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy
New scientific research suggests that the world faces an imminent oil crunch, which will trigger another financial crisis.
A report by HSBC shows that contrary to industry mythology, even amidst the glut of unconventional oil and gas, the vast bulk of the world’s oil production has already peaked and is now in decline; while European government scientists show that the value of energy produced by oil has declined by half within just the first 15 years of the 21st century.
The upshot? Welcome to a new age of permanent economic recession driven by ongoing dependence on dirty, expensive, difficult oil... unless we choose a fundamentally different path.
Last September, a few outlets were reporting the counterintuitive findings of a new HSBC research report on global oil supply. Unfortunately, the true implications of the HSBC report were largely misunderstood.
The HSBC research note — prepared for clients of the global bank — found that contrary to concerns about too much oil supply and insufficient demand, the situation was opposite: global oil supply will in coming years be insufficient to sustain rising demand.
Yet the full, striking import of the report, concerning the world’s permanent entry into a new age of global oil decline, was never really explained. The report didn’t just go against the grain of the industry’s hype about ‘peak demand’: it vindicated what is routinely lambasted by the industry as a myth: peak oil — the concurrent peak and decline of global oil production.
The HSBC report you need to read, now
INSURGE intelligence obtained a copy of the report in December 2016, and for the first time we are exclusively publishing the entire report in the public interest.
Read and/or download the full HSBC report by clicking below:
HSBC peak oil report
Headquarted in London, UK, HSBC is the world’s sixth largest bank, holding assets of $2.67 trillion. So when they produce a research report for their clients, we should listen.
Among the report’s most shocking findings is that “81% of the world’s total liquids production is already in decline.”
Between 2016 and 2020, non-OPEC production will be flat due to declines in conventional oil production, even though OPEC will continue to increase production modestly. This means that by 2017, deliverable spare capacity could be as little as 1% of global oil demand.
This heightens the risk of a major global oil supply shock around 2018 which could “significantly affect oil prices.”
The report flatly asserts that peak demand (the idea that demand will stop growing leaving the world awash in too much supply), while certainly a relevant issue due to climate change agreements and disruptive trends in alternative technologies, is not the most imminent challenge:
“Even in a world of slower oil demand growth, we think the biggest long-term challenge is to offset declines in production from mature fields. The scale of this issue is such that in our view rather there could well be a global supply squeeze some time before we are realistically looking at global demand peaking.”
Under the current supply glut driven by rising unconventional production, falling oil prices have damaged industry profitability and led to dramatic cut backs in new investments in production. This, HSBC says, will exacerbate the likelihood of a global oil supply crunch from 2018 onwards.
Four Saudi Arabias, anyone?
The HSBC report examines two main datasets from the International Energy Agency and the University of Uppsala’s Global Energy Systems Programme in Sweden.
The latter, it should be noted, has consistently advocated a global peak oil scenario for many years — the HSBC report confirms the accuracy of this scenario, and shows that the IEA’s data supports it.
The rate and nature of new oil discoveries has declined dramatically over the last few decades, reaching almost negligible levels on a global scale, the report finds. Compare this to the report’s warning that just to keep production flat against increasing decline rates, the world will need to add four Saudi Arabia’s worth of production by 2040. North American production, despite remaining the most promising in terms of potential, will simply not be able to fill this gap.
Business Insider, the Telegraph and other outlets which covered the report last year acknowledged the supply gap, but failed to properly clarify that HSBC’s devastating findings basically forecast the longterm scarcity of cheap oil due to global peak oil, from 2018 to 2040.
The report revises the way it approaches the concept of peak oil — rather than forecasting it as a single global event, the report uses a disaggregated approach focusing on specific regions and producers. Under this analysis, 81% of the world’s oil supply has peaked in production and so now “is post-peak”.
Using a more restrictive definition puts the quantity of global oil that has peaked at 64%. But either way, well over half the world’s global oil supply consists of mature and declining fields whose production is inexorably and irreversibly decreasing:
“If we assumed a decline rate of 5%pa [per year] on global post-peak supply of 74mbd — which is by no means aggressive in our view — it would imply a fall in post-peak supply of c.38mbd by 2030 and c.52mbd out to 2040. In other words, the world would need to find over four times the size of Saudi Arabia just to keep supply flat, before demand growth is taken into account.”
What’s worse is that when demand growth is taken into account — and the report notes that even the most conservative projections forecast a rise in global oil demand by 2040 of more than 8mbd above that of 2015 — then even more oil would be needed to fill the coming supply gap.
But with new discoveries at an all time low and continuing to diminish, the implication is that oil can simply never fill this gap.
Technological innovation exacerbates the problem
Much trumpeted improvements in drilling rates and efficiency will not make things better, because they will only accelerate production in the short term while, therefore, more rapidly depleting existing reserves. In this case, the report concludes:
“… the decline-delaying techniques are only masking what could be significantly higher decline rates in the future.”
This does not mean that peak demand should be dismissed as a serious concern. As Michael Bradshaw, Professor of Global Energy at Warwick University’s Sloan Business School, told me for my previous VICE article, any return to higher oil prices will have major economic consequences.
Price spikes, economic recession
Firstly, oil price spikes would have an immediate recessionary effect on the global economy, by amplifying inflation and leading to higher costs for social activity at all levels, driven by the higher underlying energy costs.
Secondly, even as spikes may temporarily return some oil companies to potential profitability, such higher oil prices will drive consumer incentives to transition to cheaper renewable energy technologies like solar and wind, which are already becoming cost-competitive with fossil fuels.
That means a global oil squeeze could end up having a dramatic impact on continued demand for oil, as twin crises of ‘peak oil’ and ‘peak demand’ end up intensifying and interacting in unfamiliar ways.
The demise of fossil fuels
But the HSBC report’s specific forecasts of global oil supply and demand are part of a wider story of global net energy decline.
A new scientific research paper authored by a team of European government scientists, published on Cornell University’s Arxiv website in October 2016, warns that the global economy has entered a new era of slow and declining growth. This is because the value of energy that can be produced from the world’s fossil fuel resource base is declining inexorably.
The paper – currently under review with an academic journal – was authored by Francesco Meneguzzo, Rosaria Ciriminna, Lorenzo Albanese, Mario Pagliaro, who collectively conduct research on climate change, energy, physics and materials science at the Italian National Research Council (CNR) — Italy’s premier government agency for scientific research.
According to HSBC, oil prices are likely to rise and stabilise for some time around the $75 per barrel mark. But the Italian scientists find that this is still too high to avoid destabilising recessionary effects on the economy.
The Italian study offers a new model combining “the competing dynamics of population and economic growth with oil supply and price,” with a view to evaluate the near-term consequences for global economic growth.
Data from the past 40 years shows that during economic recessions, the oil price tops $60 per barrel, but during economic growth remains below $40 a barrel. This means that prices above $60 will inevitably induce recession.
Therefore, the scientists conclude that to avoid recession, “the oil price should not exceed a threshold located somewhat between $40/b [per barrel] and $50/b, or possibly even lower.”
More broadly, the scientists show that there is a direct correlation between global population growth, economic growth and total energy consumption. As the latter has steadily increased, it has literally fueled the growth of global wealth.
But even so, the paper finds that the world is experiencing:
“… declining average EROIs [Energy Return on Investment] for all fossil fuels; with the EROI of oil having likely halved in the short course of the first 15 years of the 21st century.”
EROI is the total value of energy a resource can generate, calculated by comparing the quantity of energy extracted, to the quantity of energy put in to enable the extraction.
This means that overall, despite total liquids production increasing, as the energy value it generates is declining, the overall costs of extraction are simultaneously increasing.
This is acting as an increasing geophysical brake on global economic growth. And it means the more the economy remains dependent on fossil fuels, the more the economy is tied to the recessionary impact of global net energy decline:
“The chance of future economic growth matching the current trajectory of the human population is inextricably bound to the wide and growing availability of highly concentrated energy sources enjoying broad applicability to energy end uses.”
The problem is that since the 1980s, the share of oil in the global energy mix has declined. To make up for this, economic growth has increasingly had to rely on clever financial instruments based on debt: in effect, the world is borrowing from the future to sustain our present consumption levels.
In an interview, lead author Dr. Francesco Meneguzzo explained:
“Global conventional oil peaked around the year 2005. All the following supply increase was due to unconventional oil exploitation and, since 2009, basically to US shale (tight) oil, which in turn peaked around March, 2015.
What looks like to be even more important, anyway, is the fact that global oil supply has failed to keep the pace with the increase in total energy consumption, which ‘natural’ growth requires to be approximately proportional to population increase, leading to the decline of the oil share in the energy mix. While governments have struggled to fuel their economies with ever increasing energy supply, other sources have steadily replaced oil in the energy mix, such as coal in China. Yet, no other conventional source has proved to be a valuable substitute for oil, hence the need for debt in order to replace the vanishing oil share.”
On a business as usual trajectory, then, the economy can quite literally never recover — unless it transitions to a truly viable new energy source which can substitute for oil.
“In order to avoid the [oil] price affordable by the global economy falling below the extraction cost, debt piling (borrowing from the future) becomes a necessity, yet it is a mere trick to gain some time while hoping for something positive to happen,” said Meneguzzo. “The reality is that debt, basically as a subsitute for oil, does not work to produce real wealth, as apparent for example from the decline of the industry value added as a percentage of GDP.”
Where will this end up?
“Recently, debt has started shrinking, basically because it has failed to generate real wealth. Assuming no meaningful (and fast) transition to renewable energy, the economic growth can only deteriorate further and further.”
Basically, this means, Meneguzzo adds, “delocalizing manufacturing to economies using local, cheaper and dirtier energy sources (such as coal in China) as well as lower wages, further shrinking domestic aggregate demand and fueling a downward spiral of deflation and/or debt.”
Is there a way out? Not within the current trajectory: “Unless that debt is immediately used to exploit renewable sources on a massive scale, along with ‘accessories’ such as storage making them as qualified as oil, social and political derangements, even before an economic crash, look to be unavoidable.”
Crisis convergence
Seen in this broader scientific context, the HSBC global oil supply report provides quite stunning confirmation that for the most part, global oil production is already in post-peak — and that after 2018, this is going to manifest in not simply a global supply shock, but a world in which cheap, high quality fossil fuels is increasingly hard to find.
What will this mean? One possible scenario is that by 2018 or shortly thereafter, the world will face a similar convergence of global crises that occurred a decade earlier.
In this scenario, oil price hikes would have a recessionary affect that destabilises the global debt bubble, which for some years has been higher than pre-2008 crash levels, now at a record $152 trillion.
In 2008, oil price shocks played a key role in creating pre-crisis economic conditions for consumers in which rising living costs helped trigger debt-defaults in housing markets, which rapidly spiralled out of control.
In or shortly after 2018, economic and energy crisis convergence would drive global food prices up, re-generating the contours of the triple crunch we saw ravage the world from 2008 to 2011, the debilitating impacts of which we have yet to recover from.
2018 is likely to be crunch year for another reason. 1 January 2018 is the date when a host of new regulations are set to come in force, which will “constrain lending ability and prompt banks to only advance money to the best borrowers, which could accelerate bankruptcies worldwide,” according to Bloomberg. Other rules to come in play will require banks to stop using their own international risk assessment measures for derivatives trading.
Ironically, the introduction of similar well-intentioned regulation in January 2008 (through Basel II) laid the groundwork to rupture the global financial architecture, making it vulnerable to that year’s banking collapse.
In fact, two years earlier in July 2006, Dr David Martin, an expert on global finance, presciently forecast that Basel II would interact with the debt bubble to convert a collapse of the housing bubble into a global financial conflagaration.
Just a month after that prescient warning, I was told by a former senior Pentagon official with wide-ranging high-level access to the US military, intelligence and financial establishment that a global banking collapse was imminent, and would likely occur in 2008.
My source insisted that the event was bound up with the peak of global conventional oil production about two years earlier (which according to the UK’s former chief government scientist Sir David King did indeed occur around 2005, even though unconventional oil and gas production has offset the conventional decline so far).
Having first outlined my warning of a 2008 global banking collapse in August 2006, I re-articulated the warning in November 2007, citing Dr. Martin’s forecast and my own wider systems analysis at a lecture at Imperial College, London. In that lecture, I specifically predicted that a housing-triggered banking crisis would be sparked in the context of the new era of expensive fossil fuels.
I called it then, and I’m calling it now.
Some time after January 2018, we are seeing the probability of a new crisis convergence in global energy, economic and food systems, similar to what occurred in 2008.
Today, we are all supposed to quietly believe that the economy is in ‘recovery’, when in fact it is merely transitioning through a fundamental global systemic phase-shift in which the unsustainability of prevailing industrial structures are being increasingly laid bare.
The truth is that the cycles of protracted economic crisis are symptomatic of a deeper global systemic process.
One way we can brace ourselves for the next crash is to recognise it for what it is: a symptom of global system failure, and therefore of the inevitable transition to a post-carbon, post-capitalist future.
The future we are stepping into simply doesn’t work the way we are accustomed to....
Monday, January 9, 2017
SC139-6
http://kunstler.com/clusterfuck-nation/america-versus-deep-state/
America Versus the Deep State
The bamboozlement of the public is nearly complete. The Deep State has persuaded 80 percent of Americans that all news is propaganda, especially the news emanating from the Deep State’s own intel department. They’re still shooting for 100 percent. The fakest of all “fake news” stories turns out to be… “Russia Hacks Election.” It was reported conclusively Saturday on the front page of The New York Times, a wholly-owned subsidiary of the Deep State:
Putin Led a Complex Cyberattack Scheme to Aid Trump, Report Finds
WASHINGTON — President Vladimir V. Putin of Russia directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report they delivered on Friday to Mr. Trump.
You can be sure that this is now the “official” narrative aimed at the history books, sealing the illegitimacy of Trump’s election. It was served up with no direct proof, only the repeated “assertions” that it was so. In fact, it’s just this repetition of assertions-without-proof that defines propaganda. It can also be interpreted as a declaration of war against an incoming president. The second civil war now takes shape: It begins inside the groaning overgrown apparatus of the government itself. Perhaps after that it spreads to the WalMart parking lots that have become America’s new town square. (WalMart sells pitchforks and patio torches.)
Did the Russians make Hillary Clinton look bad? Or did Hillary Clinton manage to do that herself? The NSA propaganda was designed as a smokescreen to conceal the veracity of the Wikileaks releases. Whoever actually rooted out the DNC and Podesta emails for Wikileaks ought to get the Pulitizer Prize for the outstanding public service of disclosing exactly how dishonest the Hillary operation was.
The story may have climaxed with Trump’s Friday NSA briefing, the heads of the various top intel agencies all assembled in one room to emphasize the solemn authority of the Deep State’s power. Trump worked a nice piece of ju-jitsu afterward, pretending to accept the finding as briefly and hollowly as possible and promising to “look into the matter” after January 20th — when he can tear a new asshole in the NSA. I hope he does. This hulking security apparatus has become a menace to the Republic.
Whether Trump himself is a menace to the Republic remains to be seen. Certainly he is the designated bag-holder for all the economic and financial depravity of several preceding administrations. When the markets blow, do you suppose the Russians will be blamed for that? Did Boris Yeltsin repeal the Glass-Steagall Act? Was Ben Bernanke a puppet of Putin? No, these actions and actors were homegrown American. For more than thirty years, we’ve been borrowing too much money so we can pretend to afford living in a blue-light-special demolition derby. And now we can’t do that anymore. The physics of capital will finally assert itself.
What we’re actually seeing in the current ceremonial between the incoming Trump and the outgoing Obama is the smoldering wreckage of the Democratic Party (which I’m still unhappily enrolled in), and flames spreading into the Republican party — as idiots such as Lindsey Graham and John McCain beat their war drums against Russia. The suave Mr. Obama is exiting the scene on a low wave of hysteria and the oafish Trump rolls in on the cloudscape above, tweeting his tweets from on high, and perhaps it’s a good thing that the American people for the moment cannot tell exactly what the fuck is going on in this country, because from that dismal place there is nowhere to go but in the direction of clarity....
America Versus the Deep State
The bamboozlement of the public is nearly complete. The Deep State has persuaded 80 percent of Americans that all news is propaganda, especially the news emanating from the Deep State’s own intel department. They’re still shooting for 100 percent. The fakest of all “fake news” stories turns out to be… “Russia Hacks Election.” It was reported conclusively Saturday on the front page of The New York Times, a wholly-owned subsidiary of the Deep State:
Putin Led a Complex Cyberattack Scheme to Aid Trump, Report Finds
WASHINGTON — President Vladimir V. Putin of Russia directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report they delivered on Friday to Mr. Trump.
You can be sure that this is now the “official” narrative aimed at the history books, sealing the illegitimacy of Trump’s election. It was served up with no direct proof, only the repeated “assertions” that it was so. In fact, it’s just this repetition of assertions-without-proof that defines propaganda. It can also be interpreted as a declaration of war against an incoming president. The second civil war now takes shape: It begins inside the groaning overgrown apparatus of the government itself. Perhaps after that it spreads to the WalMart parking lots that have become America’s new town square. (WalMart sells pitchforks and patio torches.)
Did the Russians make Hillary Clinton look bad? Or did Hillary Clinton manage to do that herself? The NSA propaganda was designed as a smokescreen to conceal the veracity of the Wikileaks releases. Whoever actually rooted out the DNC and Podesta emails for Wikileaks ought to get the Pulitizer Prize for the outstanding public service of disclosing exactly how dishonest the Hillary operation was.
The story may have climaxed with Trump’s Friday NSA briefing, the heads of the various top intel agencies all assembled in one room to emphasize the solemn authority of the Deep State’s power. Trump worked a nice piece of ju-jitsu afterward, pretending to accept the finding as briefly and hollowly as possible and promising to “look into the matter” after January 20th — when he can tear a new asshole in the NSA. I hope he does. This hulking security apparatus has become a menace to the Republic.
Whether Trump himself is a menace to the Republic remains to be seen. Certainly he is the designated bag-holder for all the economic and financial depravity of several preceding administrations. When the markets blow, do you suppose the Russians will be blamed for that? Did Boris Yeltsin repeal the Glass-Steagall Act? Was Ben Bernanke a puppet of Putin? No, these actions and actors were homegrown American. For more than thirty years, we’ve been borrowing too much money so we can pretend to afford living in a blue-light-special demolition derby. And now we can’t do that anymore. The physics of capital will finally assert itself.
What we’re actually seeing in the current ceremonial between the incoming Trump and the outgoing Obama is the smoldering wreckage of the Democratic Party (which I’m still unhappily enrolled in), and flames spreading into the Republican party — as idiots such as Lindsey Graham and John McCain beat their war drums against Russia. The suave Mr. Obama is exiting the scene on a low wave of hysteria and the oafish Trump rolls in on the cloudscape above, tweeting his tweets from on high, and perhaps it’s a good thing that the American people for the moment cannot tell exactly what the fuck is going on in this country, because from that dismal place there is nowhere to go but in the direction of clarity....
Sunday, January 8, 2017
SC139-5
http://www.blacklistednews.com/This_is_a_coup%3A_the_Homeland_Security_takeover_of_US_elections/56203/0/38/38/Y/M.html
This is a coup: the Homeland Security takeover of US elections
On Friday, the traditional day of the week for quietly releasing big news that will hopefully be ignored by the public—and also obscured by the Fort Lauderdale Airport shooting—the chief of Homeland Security announced that his office will be taking over US elections.
If you can’t see the coup in progress, you need to keep looking until the message comes through.
Read carefully—ABC News reports. My comments are in brackets:
“Citing increasingly sophisticated cyber bad actors and an election infrastructure that’s ‘vital to our national interests’, Homeland Security Secretary Jeh Johnson announced Friday that he’s designating U.S. election systems critical infrastructure…”
[Also known as: “we’re taking over.”]
“’Given the vital role elections play in this country, it is clear that certain systems and assets of election infrastructure meet the definition of critical infrastructure, in fact and in law’,” Johnson said in a statement. He added: ‘Particularly in these times, this designation is simply the right and obvious thing to do’.”
[Also known as: “we’re taking over.”]
“The determination came after months of review and despite opposition from many states worried that the designation would lead to increased federal regulation or oversight on the many decentralized and locally run voting systems across the country. It was announced on the same day a declassified U.S. intelligence report said Russian President Vladimir Putin ‘ordered’ an influence campaign in 2016 aimed at the U.S. presidential election.”
[Also known as: “we needed an excuse, a fake cover story for our takeover, and Russia is it.”]
“Such a change [in who controls the US election process] does not require presidential action [or Congressional approval], and only requires the secretary [of DHS] to first consult with the assistant to the president for homeland security and counterterrorism.”
[Also known as: “this is a coup by the White House.”]
“Johnson said election infrastructure included storage facilities, polling places and vote tabulation locations, plus technology involved in the process, including voter registration databases, voting machines and other systems used to manage the election process and report and display results.”
[Also known as: “We’re taking over every significant aspect of the national election process.”]
“The designation [of US elections as critical infrastructure] allows for information to be withheld from the public when state, local and private partners meet to discuss election infrastructure security — potentially injecting secrecy into an election process that’s traditionally and expressly a transparent process. U.S. officials say such closed door conversations allow for frank discussion that would prevent bad actors from learning about vulnerabilities. DHS would also be able to grant security clearances when appropriate and provide more detailed threat information to states.”
[Also known as: “we can intercede in the election process and determine its outcome without any need to pretend we’re being transparent; only people we approve will know the details of how we run elections; secrecy works.”]
“The Obama administration has proposed international cyber rules for peacetime that would expressly note that countries shouldn’t conduct online activity targeting critical [US] infrastructure, which will now also include election systems.”
[Also known as: “in case there is any doubt, elections systems in America will be property of the federal Executive Branch.”]
This is a coup.
This is equivalent to declaring a national state of emergency, including martial law: the DHS, if it deemed it necessary, could utilize armed agents to enforce the new directive and take over states’ offices that resist.
Election-processes belong to the states. But not anymore.
And of course, with this awesome new power, the DHS could intercede, behind the scenes, in the voting process and rig elections.
There is an additional aligned factor at work in this op: the proposed elimination of the Electoral College—yet another measure designed to “federalize” the election process.
Most people are entirely ignorant of the fact that the Constitution was a pact among states. With reluctance, the independent states agreed to relinquish certain specified powers to the newly created central government, while retaining all other powers.
The Electoral College was, therefore, a natural invention, because the states would maintain crucial influence in determining the outcome of presidential elections. State Electors would cast their presidential votes based on which candidate won in their state.
Eliminating the Electoral College now would add one more layer of federal control over the whole country, and take control from the states. More centralization.
Imagine it. Only the popular vote counts. The states are dumped. And on top of it all, the Dept. of Homeland Security has the power to run the election process as a piece of “critical infrastructure.”
Rigging the vote in New York and California, plus a few other populous states, would decide the election. And in time, no one would think about “New York” or “California” as separate entities—because they wouldn’t be. They would just be “more land and people” that are part of “wholly unified” America.
This is perfect for the “unity politicians” who spout empty rhetoric every chance they get—“we’re all in this together.” As I tirelessly point out, such slogans are nothing less than covert ops, and their goal is roping in as many dullards as possible under a messianic banner of A Better Life for All under a Beneficent Government.
Also known as: we the rulers decree, you the people submit; your survival depends on us; we give and take as we will, and that shall be the whole of the law.
Eventually, why have presidential elections at all? Just allow the DHS to determine which candidate will best serve the needs and desires of the controllers.
It’s cleaner, simpler, and more direct.
It’s a coup.
Will Trump cancel it?
Obama is basically challenging him to do it—which would create one more firestorm in the press directed at Trump.
“See, the new president just stopped the DHS from protecting our sacred free elections. Trump is exhibiting more treasonous cooperation with his Russian masters…he’s leaving the door wide open for their secret invasion against our liberties…”
The timeline is clear. One: Hillary will surely win the election. Two: Trump won the election. Three: Trump won because Russia “hacked the election” in his favor. Four: We must protect our national election process from foreign hacking. Five: Homeland Security must put itself in charge of national elections.
Stay tuned.
A coup just occurred.
This is a coup: the Homeland Security takeover of US elections
On Friday, the traditional day of the week for quietly releasing big news that will hopefully be ignored by the public—and also obscured by the Fort Lauderdale Airport shooting—the chief of Homeland Security announced that his office will be taking over US elections.
If you can’t see the coup in progress, you need to keep looking until the message comes through.
Read carefully—ABC News reports. My comments are in brackets:
“Citing increasingly sophisticated cyber bad actors and an election infrastructure that’s ‘vital to our national interests’, Homeland Security Secretary Jeh Johnson announced Friday that he’s designating U.S. election systems critical infrastructure…”
[Also known as: “we’re taking over.”]
“’Given the vital role elections play in this country, it is clear that certain systems and assets of election infrastructure meet the definition of critical infrastructure, in fact and in law’,” Johnson said in a statement. He added: ‘Particularly in these times, this designation is simply the right and obvious thing to do’.”
[Also known as: “we’re taking over.”]
“The determination came after months of review and despite opposition from many states worried that the designation would lead to increased federal regulation or oversight on the many decentralized and locally run voting systems across the country. It was announced on the same day a declassified U.S. intelligence report said Russian President Vladimir Putin ‘ordered’ an influence campaign in 2016 aimed at the U.S. presidential election.”
[Also known as: “we needed an excuse, a fake cover story for our takeover, and Russia is it.”]
“Such a change [in who controls the US election process] does not require presidential action [or Congressional approval], and only requires the secretary [of DHS] to first consult with the assistant to the president for homeland security and counterterrorism.”
[Also known as: “this is a coup by the White House.”]
“Johnson said election infrastructure included storage facilities, polling places and vote tabulation locations, plus technology involved in the process, including voter registration databases, voting machines and other systems used to manage the election process and report and display results.”
[Also known as: “We’re taking over every significant aspect of the national election process.”]
“The designation [of US elections as critical infrastructure] allows for information to be withheld from the public when state, local and private partners meet to discuss election infrastructure security — potentially injecting secrecy into an election process that’s traditionally and expressly a transparent process. U.S. officials say such closed door conversations allow for frank discussion that would prevent bad actors from learning about vulnerabilities. DHS would also be able to grant security clearances when appropriate and provide more detailed threat information to states.”
[Also known as: “we can intercede in the election process and determine its outcome without any need to pretend we’re being transparent; only people we approve will know the details of how we run elections; secrecy works.”]
“The Obama administration has proposed international cyber rules for peacetime that would expressly note that countries shouldn’t conduct online activity targeting critical [US] infrastructure, which will now also include election systems.”
[Also known as: “in case there is any doubt, elections systems in America will be property of the federal Executive Branch.”]
This is a coup.
This is equivalent to declaring a national state of emergency, including martial law: the DHS, if it deemed it necessary, could utilize armed agents to enforce the new directive and take over states’ offices that resist.
Election-processes belong to the states. But not anymore.
And of course, with this awesome new power, the DHS could intercede, behind the scenes, in the voting process and rig elections.
There is an additional aligned factor at work in this op: the proposed elimination of the Electoral College—yet another measure designed to “federalize” the election process.
Most people are entirely ignorant of the fact that the Constitution was a pact among states. With reluctance, the independent states agreed to relinquish certain specified powers to the newly created central government, while retaining all other powers.
The Electoral College was, therefore, a natural invention, because the states would maintain crucial influence in determining the outcome of presidential elections. State Electors would cast their presidential votes based on which candidate won in their state.
Eliminating the Electoral College now would add one more layer of federal control over the whole country, and take control from the states. More centralization.
Imagine it. Only the popular vote counts. The states are dumped. And on top of it all, the Dept. of Homeland Security has the power to run the election process as a piece of “critical infrastructure.”
Rigging the vote in New York and California, plus a few other populous states, would decide the election. And in time, no one would think about “New York” or “California” as separate entities—because they wouldn’t be. They would just be “more land and people” that are part of “wholly unified” America.
This is perfect for the “unity politicians” who spout empty rhetoric every chance they get—“we’re all in this together.” As I tirelessly point out, such slogans are nothing less than covert ops, and their goal is roping in as many dullards as possible under a messianic banner of A Better Life for All under a Beneficent Government.
Also known as: we the rulers decree, you the people submit; your survival depends on us; we give and take as we will, and that shall be the whole of the law.
Eventually, why have presidential elections at all? Just allow the DHS to determine which candidate will best serve the needs and desires of the controllers.
It’s cleaner, simpler, and more direct.
It’s a coup.
Will Trump cancel it?
Obama is basically challenging him to do it—which would create one more firestorm in the press directed at Trump.
“See, the new president just stopped the DHS from protecting our sacred free elections. Trump is exhibiting more treasonous cooperation with his Russian masters…he’s leaving the door wide open for their secret invasion against our liberties…”
The timeline is clear. One: Hillary will surely win the election. Two: Trump won the election. Three: Trump won because Russia “hacked the election” in his favor. Four: We must protect our national election process from foreign hacking. Five: Homeland Security must put itself in charge of national elections.
Stay tuned.
A coup just occurred.
Monday, January 2, 2017
SC139-4
http://kunstler.com/clusterfuck-nation/forecast-2017-wheels-finally-come-off/
Forecast 2017: The Wheels Finally Come Off
“There is no other endeavor in which men and women of enormous intellectual power have shown total disregard for higher-order reasoning than monetary policy.
American Notes
Apart from all the ill-feeling about the election, one constant ‘out there’ since November 8 is the Ayn Randian rapture that infects the money scene. Wall Street and big business believe that the country has passed through a magic portal into a new age of heroic businessmen-warriors (Trump, Rex T, Mnuchin, Wilbur Ross, et. al.) who will go forth creating untold wealth from super-savvy deal-making that un-does all the self-defeating malarkey of the detested Deep State technocratic regulation regime of recent years. The main signs in the sky, they say, are the virile near-penetration of the Dow Jones 20,000-point maidenhead and the rocket ride of Ole King Dollar to supremacy of the global currency-space.
I hate to pound sleet on this manic parade, but, to put it gently, mob psychology is outrunning both experience and reality. Let’s offer a few hypotheses regarding this supposed coming Trumptopian nirvana.
The current narrative weaves an expectation that manufacturing industry will return to the USA complete with all the 1962-vintage societal benefits of great-paying blue collar jobs, plus an orgy of infrastructure-building. I think both ideas are flawed, even allowing for good intentions. For one thing, most of the factories are either standing in ruin or scraped off the landscape. So, it’s not like we’re going to reactivate some mothballed sleeping giant of productive capacity. New state-of-the-art factories would require an Everest of private capital investment that is simply impossible to manifest in a system that is already leveraged up to its eyeballs. Even if we tried to accomplish it via some kind of main force government central planning and financing — going full-Soviet — there is no conceivable way to raise (borrow) the “money” without altogether destroying the value of our money (inflation), and the banking system with it.
If by some magic any new industrial capacity were built, much of the work in it would be performed by robotics, not brawny men in blue shirts, and certainly not at the equivalent of the old United Auto Workers $35-an-hour assembly line wage. We have not faced the fact that the manufacturing fiesta based on fossil fuels was a one-time thing due to special historical circumstances and will not be repeated. The future of manufacturing in America is frighteningly modest. We’ll actually be lucky if we can make a few vital necessities by means of hydro-electric or direct water power, and that will be about the extent of it. Some of you may recognize this as the World Made By Hand scenario. I’ll stick by that.
Similarly for “infrastructure” spending touted by the forces of Trump as the coming panacea for economic malaise. I suspect most people assume this means a trillion-dollar stimulus spend on highways and their accessories. Well, that also assumes that we expect another fifty years of Happy Motoring and suburban living. Fuggeddabowdit. We’re in the twilight of motoring anyway you cut it, despite all the chatter about electric cars and “driverless” cars. We won’t have the electric capacity to switch over the Happy Motoring fleet from gasoline. The oil industry itself is already headed for collapse on its sinking energy-return-on-investment. And our problems with money and debt are so severe that the motoring paradigm is more prone to fail on the basis of car loan scarcity and unworthy borrowers before the fueling issues even kick in. Every year, fewer Americans can afford to buy any kind of car — the way they’re used to buying them, on installment loans. The industry has gone the limit to help them — seven-year loans for used cars! — but they have no more room to maneuver. The car financing system is broken. Bear in mind the original suburbanization of America back in the 20th century — along with its accessory automobiles — must be regarded as the greatest misallocation of resources in the history of the world. So, a rebuild of all this stuff would represent more and possibly even greater malinvestment. We could have applied our post-WW2 treasure to building beautiful walkable towns and cities with some capacity for adaptive re-use, but we blew it in order to enjoy life in a one-time demolition derby. Life is tragic. Societies make poor choices sometimes, and then there are consequences.
We also might have been in better shape now if, beginning twenty years ago, we began a major rebuild of our railway infrastructure. But we blew that off, too, and shortly it will be very difficult to get around this geographically large country by any mechanical means. It may be too late now to do anything about that for the financing reasons already touched on — and which I will elaborate on next. The bottom line is that President Donald Trump will be overwhelmed by a sea of financial troubles from the very get-go, and here’s why.
Designated Bag-Holder
The American people have been punked by their own government and their central bank, the Federal Reserve, for years and the jig is now up. In 2017 both will lose their authority and legitimacy, a very grave matter for the survival of this republic.
Insiders surely have seen this coming for a long time. The people running this so-called Deep State of overblown and overgrown institutions probably acted at first with the good intentions of keeping the national lifestyle afloat. But in the end (now approaching) they stooped to too much duplicity and deceit in the desperate attempt to not just preserve the system, but to protect their own reputations and personal perquisites. And now there ought to be some question with the election of 2016 that they have engineered all of this system fragility to blow up on Mr. Trump’s watch, so they can blame him for it. It was going to blow up anyway. But had Hillary Clinton won the election, at least the right gang would have had to take the blame — the people in charge for the past twenty years. Instead, Donald Trump has been elected Designated Bag-Holder.
About That “Big Fat Ugly Bubble” and its Consequences
Part 1: History Lesson
The USA ran out of growth capacity around the turn of the millennium because we ran out of affordable energy to run our techno-industrial economy. It was hard to see this with seemingly plenty of oil available. And, of course, the computer tech fiesta was blossoming, but for all that glitzy stuff to attract dwindling real capital, other old stuff had to go, and did go, and when all was said and done the computers did not generate much wealth or social value. In fact, the diminishing returns and blowback of computer tech were arguably more damaging than beneficial to society and its economy. Look at where the middle class is today. Computer tech gave the magical appearance of growth while actually undermining it.
By affordable energy I mean energy with a greater-than 30-to-one energy-return-on-investment, which is the ratio you need for the kind of life we lead. That’s what the now-ridiculed Peak Oil story was really about: not running out of oil, but not getting enough bang for our bucks pulling the remaining oil out of the earth to maintain our standard of living. I’ll return to this issue in more detail later. But that was what provoked America’s 21st century economic malaise. Everything we’ve done in finance since then has been an attempt to compensate for our fundamental problem with debt — borrowing from the future to maintain our current (unaffordable) standard of living. Our debt has grown ever larger and faster each year, and our methods for managing it have become more desperate and dishonest as that occurred.
The culprit at the center is America’s central bank, the Federal Reserve, which is actually not a government agency as it seems, but a consortium of the nation’s biggest private banks, lately known as Too-Big-To-Fail. The Fed was created in 1913, when the complexities of capital finance were multiplying in step with the complexities of industrial production, which, remember, was a new and evolving phenomenon of human history. Mankind had no prior experience with industrialism. We discovered toward the end of the 19th century — decades of unprecedented industrial growth — that the system’s dynamic produced booms accompanied by very destructive busts. The operations of banking usually outran the cycles of trade, industry, and war that were coloring evolving Modernity. So the Fed was created to smooth out these cycles. It had two basic mandates for this: acting as the lender of last resort between banks during financial panics so that some money would always be available in an emergency; and stabilizing the money supply and prices in the system. The Fed failed spectacularly to smooth out the cycles of boom and bust and to maintain the value of the dollar over time.
Sixteen years after the Fed’s creation, America entered its worst economic downturn ever, the Great Depression, which was only mitigated by the colossal abnormality of World War Two. America emerged from that episode as the last industrial society standing amid everyone else’s smoldering ruins. That gave us an extraordinary advantage in world trade lasting roughly thirty years. That high tide of the era of seeming “normality” — the 1950s and 60s, which the Trumpian-minded might recall as “great” — started unraveling in the 1970s, which was not coincidentally the moment of America’s all-time oil production peak.
In 1977, the Fed was given a third mission of promoting maximum employment with a trick-bag of tools for manipulating the money supply and credit creation that have proven to be fatally mischievous. This new task elevated Fed officials, and especially its chairperson, to the status of viziers — magicians using occult mathematical models and formulas — to cast spells capable of controlling the macro economy the way wizards are thought to control external reality. Their pretenses seemed to work for reasons unrelated to the spells they were learning to cast.
It is still largely unrecognized that America recovered from the financial disorder of the 1970s not because of the charms of “Reaganomics” but for the simple reason that the last giant finds of oil with greater than 30-to-one energy-return-on-investment came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. That allowed the USA and the West generally to extend the techno-industrial fiesta another twenty years. 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, who worked the control rods of interest rates as though the financial system were a great nuclear powered pipe organ that could be revved up and tamped down by a wondrous Fed control panel. This period of Fed spell-casting was characterized by ever more systemically complex finance, growing systemic fragility, pervasive institutionalized accounting fraud, and ever-greater bubbles and busts. Deregulation, especially the 1998 repeal of the Glass-Steagall Act of 1932, sealed America’s financial fate.
Debt was the meat-and-potatoes of the Fed’s wizardry, but the “secret sauce” of Fed magic was fraud, in the form of market interventions, manipulations, regulatory negligence, and just plain systematic lying about the numbers that defined the economy. It amounted to nationalized financial racketeering. Under the consecutive Grand Vizierships of Greenspan and Ben Bernanke, control fraud (using official authority to cover up misconduct) was perfected by banking executives, eventuating in the mortgage securities fiasco of 2008, which took down the housing market and the economy. (That housing market, by the way, was made up mainly of suburban houses, the sine qua non of the greatest misallocation of resources in the history of the world.)
Of course, nobody paid a criminal penalty for any of this misconduct besides the maverick Ponzi artist Bernie Madoff, and a few other small fish. The regulators looked the other way, on orders from their bosses. Unlike the earlier Savings and Loan bank crisis of the late 1980s, none of the leading bank officer perps went to jail. The damage of the 2008 crash was epic and never repaired, only papered over with more debt, more deceit, and more racketeering.
The supposed remedy, the Dodd-Frank Act of 2010, was a cover for continued pervasive fraud and the institutional “capture” of government by the banking industry and its handmaidens, really a fascist melding of banking and government, a swindle machine in which anything goes and nothing matters. The frauds have only been rechanneled since 2008 into college loans, car loans, corporate stock buyback monkey business, currency arbitrage shenanigans, private equity asset-stripping, and the gigantic black box of derivatives trading.
About That “Big Fat Ugly Bubble” and its Consequences
Part 2: 2017, the Year of Living Anxiously
Under Bernanke’s successor, UC-Berkeley Professor Janet Yellen, the emphasis in Fed policy has been an elaborate game of “data-dependent” foot-dragging — a lot of talk with no action — with the data itself largely fraudulent, especially the easily gamed employment and GDP numbers that supposedly determine the rise or fall of interest rate policy. In short, the racketeering continues while the authorities quail in the face of accumulated and now inescapable debt quandaries ever more certain to end in systemic collapse.
Get this: the Fed is completely full of shit. It is terrified of the conditions it has set up and it has no idea what to do next. The “data” that it claims to be so dependent on is arrantly fake. The government’s official unemployment number at Christmas 2016 was 4.6 percent. It’s a compound lie. The 4.6 percent does not include the 95 million people out of the workforce, most of them able-bodied, who have simply run through their unemployment benefits and given up looking for work. Nor does it figure in the fact that roughly 90 percent of the new jobs created are part time jobs, many of them held by people working several jobs (because they have to, to pay the bills). Nor does it detail the quality of the jobs created (minimum wage shit jobs.)
That 4.6 unemployment figure is the main pillar of the Fed’s “data.” They interpret it as meaning the economy is roaring and has their full confidence. They‘re lying about that, of course. They have been touting “the recovery” (from the crash of 2008) continually and heralding a program of “normalizing” interest rates upward for two years. In 2015 they didn’t do anything until the very last Fed meeting of the year when they raised the Fed Funds rate 25 basis point (that’s a measly one-quarter of a percent). They raised, they said, because they were “confident” about the economy. No, that’s not why. They did it because they talked about it all year without doing anything and their credibility was on the line. They also promised four rate hikes altogether in 2016, which they then failed to carry out.
After that December 2015 rate hike, the stock markets tanked 10 percent. By springtime, the markets appeared to be bouncing back, so the Fed started talking about more rate hikes again. They talked it up all year without acting, an impressive act of fakery. The surprise Brexit vote gave them the heebie jeebies. They laid low. Meanwhile, the US election season was on. The Fed denies this, but they did not raise interest rates for eleven months in 2016 solely because they wanted to make the Democratic administration look good heading into the November vote, and they knew the economy was fragile. Once Hillary was nominated they were determined to usher her into the White House on a high tide of fake good economic news.
When she lost the election the stock markets surprised everyone by entering a super-bubblicious Trumpxuberance rally. There is a narrative for that too in the media chatter and it is simpleminded nonsense based on the sheer hope that Trumponomics will be great for business. More on that below.
Roaring stock markets were a secondary pillar of the Fed’s economic world-view. The post-election 2000 point upsurge in the Dow, along with the historically low 4.6 unemployment number, gave the Fed the opportunity on December 15 to do the same thing they did the previous year: cover their asses and preserve some credibility by hiking the Fed Funds rate one-quarter percent. You’d think if they were really confident in the economy — especially given the year–end rally — they would venture to raise by half a percent or more. They are not confident. They are lying with their fingers crossed.
The Fed Funds rate is one thing. As it happens, the Fed does not directly control the interest rates on US treasury bonds, and they have been rising shockingly through the second half of 2016. The crucial ten-year treasury rate has gone up a hundred percent since the summer. Because bond values move inversely to bond rates, the price of treasuries has tanked, inducing trillions of dollars in losses to bond-holders around the world. The bond market is many times larger than the stock markets. Bonds have been in a bull market since the early 1980s and that bull rolled over in mid-2016. A bear market is now on, meaning bond-holders are dumping their bonds. China and Saudi Arabia are among the leading dumpers of US Treasuries because they need the money for one reason or another. They will dump more in 2017 because both countries are in deep economic trouble. Too many bond sellers and not enough buyers in the market drive interest rates up. Rates have a lot room to move up, since they started at near-zero. Accordingly, their value has a long way to fall.
Bonds, of course, represent debt. Total US debt has doubled under President Obama from around ten trillion to twenty trillion dollars (as it doubled under Bush Two from five to ten trillion dollars). The reason, as stated above, is that we don’t produce enough to cover the cost of our national way of life, so we have to borrow continually at ever-greater volume. Every year, the Treasury has to pay interest on all that debt. It’s a lot of money. This year, with interest rates starting out at historically unprecedented lows (not seen ever in recorded history), the Treasury paid over a quarter-trillion dollars in interest. By the way, the government borrows money to make these interest payments too. An interest rate rise of one percent, would drive the annual US debt higher by $190 billion. As the late, great Senator Everett Dirkson (R-Ill) once pungently remarked: “…a billion here, a billion there, sooner or later you’re talking about real money.”
A sharply rising interest rate on the ten-year Treasury bond will thunder through the system. A lot of other basic interest costs are keyed to the ten-year bond rate, especially home mortgages, apartment rentals (landlords hold mortgages), and car payments. When the ten year bond rate goes up, so do mortgage payments. When mortgage rates go up, house prices go down, because fewer people are in a position to buy a house at higher mortgage rates, and rents go up (more competition among people who can’t buy a house). Zero Interest Rate Policy (ZIRP), in force for ten years, has driven house prices back to stratospheric levels. They are now primed to fall, perhaps severely, leaving many homeowners “underwater,” with houses worth way less on the market than the amount of mortgage left to pay off. The re-financing market is dead. Housing starts were already down by a stunning 19 percent in November. Automobile sales are rolling over. Manufacturing and retail sales numbers are down at year end. What’s up: stocks, stocks, stocks.
Yet investors did not execute the usual end-of-year profit-taking in the expectation that Trump would lower the capital gains tax in 2017, so why sell now? You can wait until January 3, 2017 to sell, and then not have to pay tax on your profits until April of 2018. Will investors start dumping in the first trading days of 2017? I think so. And will that selling beget a stampede for the exits? And what will happen if the interest rate on the ten-year bond hits three percent? (It doesn’t have far to go). Or maybe even four percent? What happens is the stock markets go down in the first quarter of 2017. My forecast is 20 percent down on the S & P. That will only be a preview of coming attractions once Trump gets his mitts on the levers of power. A still bigger crash ahead later in the year!
Why Trump Can’t Pull a Reagan
When Reagan came into office in 1981, inflation was raging largely because of the effects of the oil crises of 1973 and 1979, which had produced the “stagflation” that confounded the reigning economists’ models (they knew nothing about the relationship between energy dynamics and capital formation). The Fed Funds rate was almost 20 percent in 1981. It had a lot of room to move down. The national debt was less than one trillion (Reagan eventually ran it up to $2.8 trillion). Reagan was able to endure a sharp recession early in his first term — and voodoo economics got him through all the rest of his tenure, with both inflation and interest “normalizing” — as mentioned earlier, he enjoyed the bonanza of the last great non-OPEC oil discoveries coming on-line during his two terms, which ramped up economic activity and growth.
Today, the US is in a box and Trump comes on the scene with nowhere to move. Too much debt can only be managed if interest rates are kept low. Everybody and his mother around the world is dumping US Treasuries. With a bear market in bonds on, the Fed as buyer of last resort will have to sop up whatever comes on the market to keep the interest rate from rising above three percent on the ten-year, and even that may not prevent it. Trump’s vaunted infrastructure stimulus plan will be impossible to carry out without the Fed monetizing the necessary debt. So stimulus implies bigger deficits, which means more bonded debt that nobody wants to buy. The result will be inflation and accordingly further upward pressure on interest rates. Higher interest rates, in turn, will negatively impact economic activity, lowering tax revenue, inducing larger fiscal imbalances and greater instability.
Trump may never even get the stimulus he seeks. The Republican controlled-congress has vowed not to increase the national debt. How can Trump fulfill his pledge to cut taxes and bring on stimulus without hugely increasing the debt? If there is war over spending between Trump and Congress, Congress is likely to win, since they control the fiscal purse strings. Of course, Donald Trump cannot abide not winning. Hostilities between them may become permanent early in Trump’s term and bring on even more dangerous paralysis of governance.
Also early in 2017, the Fed will abandon its “dot plot” talk about further interest rate hikes. They may also surrender their credibility in the process. The system can’t take the strain of three interest rate rises in 2017. It may be that Janet Yellen has raised the Fed Funds rate a total of one-half a percent in two years solely to be able to lower them again when the real economy finally tanks under that strain of incessant central bank chicanery. By the second quarter of 2017, following a 20 percent stock dump, the Fed will start making noises about Quantitative Easing 4 (QE), or they will cook up some other program that accomplishes the same thing under a new cockamamie label. More QE (or something like it) will drive the dollar back down and gold back up. The housing market will be in the toilet and the rest of the economy will follow it down the drain. By the end of Trump’s first year in office, there will another, greater, dump in the stock markets after the initial 20 percent drop in the first quarter. America will be great again, all right: we’ll be entering a depression greater than the Great Depression of the 1930s.
Desperate Measures
One of the other big and dark trends of the past year has been the move of governments around the world — and among the economist / necromancers who advise them — to ban cash from the scene in order to herd all citizens into a digital banking system that will allow the authorities to track all financial transactions and suck every possible cent of taxes into national coffers. It would also be an opportunity for the bank-and government cabal to impose negative interest rates (NIRP) on bank accounts so that money herded into the digital system could be surreptitiously “taxed” by charging account holders just for being there (against their will). It’s a little hard to see how that might happen just now in a broad rising rate environment, but it would be the natural accompaniment to banning cash — and renewed aggressive QE (QE forever!) might do the trick.
Harvard economist Kenneth Rogoff literally wrote the book on this (The Curse of Cash; Princeton University Press, 2016), a mendacious argument that cash money merely enables drug dealers and terrorists to operate and has no useful place otherwise in a regular economy. Rogoff appeared to be angling for the Treasury slot in Hillary’s cabinet, and would have fit in perfectly with this totalitarian assault on the public’s financial liberty — but, as we know, Hillary didn’t make it.
Efforts to eliminate cash are already underway around the world. The EU officially discontinued the €500 note from circulation. Ken Rogoff’s Harvard colleague, Larry Summers, was calling for abolition of the $100 bill a year ago. Sweden is successfully herding its people out of fiat krona. India’s Prime Minister Narendra Modi pulled a fast one in November by banning the 1000 and 500 rupee note (worth respectively $14 and $7), and threw India’s economy into a epileptic seizure. The idea was to discipline tax evaders who operate in a cash economy. The catch was that more than 85 percent of India’s economy operates on a cash basis among people too poor to have bank accounts and credit cards — including millions of truck drivers and ordinary laborers. Naturally, the Indian economy froze. Nobody could get paid. Food rotted in stalled trucks. ATM withdrawals were limited to a few day’s walking-around-money. Citizens could not even exchange their 1000 and 500 rupee notes at the banks without going through onerous time-consuming bureaucratic rigmarole, including fingerprinting and the submission of tax records. The process caused discouraging long queues to form at the banks, and was probably designed to discourage the exchange of the 1000 and 500 rupee notes altogether and instead just retire them from circulation — which means a lot of poor people lost the minimal cash savings they had.
It’s hard to see the US government banning cash as clumsily as India did, but they have other ways to herd the multitudes into the black box of all-digital banking. Financial author James Rickards calls this the “Ice-Nine” program, in reference to the isotope of water in Kurt Vonnegut’s sci-fi novel Cat’s Cradle that freezes the world in a horrifying chain reaction. Rickards’ Ice-Nine financial nightmare would include features like freezing bank accounts, bail-ins (confiscation of accounts), limits on ATM withdrawals, and the “gating” of investment funds. Ice-Nine would be invoked in a banking emergency — say, a derivatives “accident” that took out some Too-Big-Too-Fail giant, or really anything that triggered the extreme fault lines in the ultra-fragile system that the world’s money elites have cobbled together to keep the garbage barge of global finance from sinking. In his recent book, The Road to Ruin, Rickards reminds readers that the emergency act signed by Bush Two after 9/11 has remained in effect under Obama, so that America is “just one phone call away from martial law.”
Another method for depriving citizens of their financial liberty would be for the government to declare that retirement accounts had to contain a set percentage of US Treasury paper — once again herding people into a financial corral against their will — in order to prop up the value of bonds and tamp down interest rates. David McAlvany (his excellent podcast here) makes the interesting point that if herding the public into the digital financial corral was a key ingredient to “making America great again,” who could object? — because now you’d be opposing American greatness! Trump inherited a much bigger problem than Barack Obama did in 2009. Obama still had enough soft-soap left in the machine to blow more bubbles. Trump arrives on the scene with the machine out of bubble-blowing mojo. He’ll be overwhelmed by financial disorder in 2017 and then the nation’s focus will turn to a tumultuous political scene
Wild in the Streets
The public is just plain pissed off, and remains pissed off after the Trump Victory. Their anger has been fermenting for decades as their economic prospects dwindled and they began to understand how it all worked against them. The battered middle class might have gotten a temporary thrill from the election, but an awful lot of them are still out of work, or working at the humiliating shit-jobs that replaced their old lost jobs in the old real stuff economy. Worse is coming their way in 2017. Theirs is a true existential crisis.
Even under the most favorable circumstances, a stimulus program would not likely get out of congress until much later in 2017, and I personally doubt that it will get through at all. The so-far-fortunate retirees plugged into pensions represent another potential trouble spot. Pension funds are going bust all over the country from the incapacity to stay solvent in a near-ZIRP environment. In 2016, fissures started to show in places like the Dallas Police and Firemen’s Pension fund, when pensioners’ redemptions were shut down. There are pension funds all over the country floundering from the same conditions, since the Fed took the “fix” out of “fixed income.” In the absence of decent “yield,” the pension funds have been herded into risky stock markets, and if those markets blow up, the pension funds are going to blow with them… and then the pensioners’ lives are going to blow up… and then maybe civil order dissolves around the country.
That may be the moment when President Trump and his militarily-weighted cabinet appointees opt for martial law. What a goddamned mess that will be. There is no civilized country on earth with as many small arms per capita than the USA, and despite the fearsome appearance of militarized police forces, you cannot overstate how much deadly mischief a small number of pissed-off people can make with automatic rifles, rocket-propelled-grenades, Semtex plastic explosive, and other fun stuff. It could morph easily to a literal war on bankers and Wall Street in particular, especially if Ice-Nine goes into effect. Bear in mind that a lot of veterans of the endless Middle East wars belong to this suffering economic class, and they actually have some training in the warrior arts.
Their political counterparts in the Democrat / Prog coastal elite, hardcore Hillary, PC-and-unicorn crowd are moving through their post-election Kubler-Ross Transect-of-Grief from denial to anger too. So both sides are quite pissed off and primed for conflict. The Left will certainly do everything possible to oppose Trump and try to make him look bad, whether it’s in the public interest to do so or not. They will throw every monkey-wrench possible into the machinery of governance, up to and including the (mostly Democratic Party weighted) Federal Reserve hierarchy, whose interest rate “dot plot” could be truly a plot to exact revenge on Trump. Of course, that would blow up in their faces since proportionately the coastal elites own much more stock than the Trumpenlumpenprole red-staters, and they could be wiped out in a significant market crash triggered by rising interest rates. But that’s the thing about political rage: it’s the opposite of rational.
There’s no sign that the Democrat / Progs have recognized that their poisonous identity politics played a significant role in their electoral defeat. They will not abandon that endeavor in 2017. They will double-down on it. And as that happens, the Democratic Party will go the way of the Whigs in 1856 — with a whimper, not a bang. God knows who or what will replace them as a credible opposition to Trumpist crypto-Republicanism, although Trump himself stands a good chance of leading that party to oblivion, too, if my forecast of a big financial blow-up comes to pass....
The Oil Quandary
The reports of Peak Oil’s death are exaggerated, to borrow a gag from Mr. Twain. It’s just been playing out in ways that many of us didn’t quite anticipate and it is still at the heart of our economic predicament — which is that you can’t rationalize an annual debt growth rate of 8 percent if your actual economic growth rate is under 4 percent (paraphrasing Chris Martenson at Peak Prosperity.com).
We haven’t run out of oil, but we have run out of oil that is rationally economical to pull out of the ground. The so-called “shale oil miracle” extended the oil age a few years by debt-financed legerdemain. Yes, we drove US oil production way up, almost back up to the 1970 peak production level around 10 million barrels-a-day (b/d). The trouble was that the companies producing it didn’t make a red cent in the process. They just ran up a huge amount of debt to pursue the shale project. The pursuit was on wholeheartedly beginning around 2006, because 1) the Peak Oil story was scaring folks, including folks in the oil industry, and 2) the market price of crude oil soared after 2004 and shale looked like a possibly winning venture — especially since conventional exploration in recent years was turning up almost nothing of significance.
From 2004 the price of oil skyrocketed from around $40-a-barrel until 2008, when it reached a high point of about $140-a-barrel. Then, of course, the price crashed catastrophically for a year, along with Wall Street and the economy. But, by then, the fracking industry was all ramped up in the Bakken fields of North Dakota and the Eagle Ford range of Texas. Plus the industry was learning some additional new fracking tricks to goose more oil out of the “tight” rock. So they were full of confidence, despite the price crash. Then, in 2009 the oil price turned sharply upward again — with central bank ZIRP and QE and other maneuvers to prop up the economy with more debt at lower interest rates. And the price of oil just climbed and climbed again back into the $110-plus range in 2011, and lingered there until 2015, when it crashed again.
Of course, most of the producers weren’t making any money even at the $110-a-barrel, but they expected improved technology to mitigate that eventually. In the meantime, they just produced too much shale oil and the market was flooded and OPEC got into the act and pumped all-out trying to crash the price further to put the US shale producers out of business, and then nobody made a red cent fracking for shale oil. So, you can see there was a pattern.
The pattern nicely describes the dynamic advanced by Joseph Tainter in his seminal work, The Collapse of Complex Societies: namely that over-investments in complexity lead to diminishing returns. That is, as you keep making your systems extra-hyper-complex, you get less value back for doing it, until you get to the point where there’s no benefit whatsoever, and then the system implodes. And that is exactly what has happened with oil and the economy that was engineered to run on it, and the financial system that evolved to manage the wealth it used to produce.
A few other things happened the past few years on the oil scene. The American oil companies bowed out of Arctic drilling. The Canadian Tar Sands went bust. The overthrow of Muammar Gaddafi choked off Libyan production, which was offset by Iran coming back onto the international market, which was offset by political mischief in Nigeria that choked off production, which was offset by increased Iraqi production, which was offset by the collapse of Venezuela. Most of the world’s oil producers had entered decline anyhow.
Don’t be fooled. The low prices at the gasoline pumps only mean that US oil companies are going broke fast, as are American “consumers.” There’s a basic equation I’ve repeated a few times on this blog: oil over $75-a-barrel destroys industrial economies; oil under $75-a-barrel destroys oil companies. That’s were things stand when the energy return on investment falls to 5-to-1, as is the case with shale oil. Steve St. Angelo over at the SRSRocco Report makes the excellent point that it takes at least 30-to-1 energy return on investment to maintain plain vanilla modern life. Anything below that and parts of the economy have to be sacrificed. Trucking, air travel, commuting, theme park vacations, your job…. It’s just another way of describing the pernicious effects of the diminishing returns of over-investments in complexity.
In the fall of 2016, OPEC members tried again to agree on an oil production output limit, as they have done many time before. Each time, they all managed to cheat in order to sell greater volumes of oil and make more short-term money — a classic Tragedy of the Commons story. Consequently, the price of oil went up to about $53-a-barrel by Christmas 2016. Don’t expect that to last. Unless, of course, there is a geopolitical event somewhere out on the oil scene, most likely in the Middle East, though Venezuela’s economy is approaching total collapse. The forecast here is for oil prices to follow the stock markets down in the first quarter of 2017. A lot of junk bonds in the oil space will default as a result, leading to a general crisis in shale oil investment.
Vagrant Thoughts on Geopolitics
As I write just before New Year’s Eve, President Obama is trying to start World War Three with Russia as a parting gift to the voting public. I’m among the skeptics who think that the “Russia Hacks Election story” is a ruse to divert the public’s attention from the stupendous failure of the Democratic Party to win, as expected. Rather, Wikileaks should get the Pulitzer Prize for revealing so much about the nefarious workings of the Clinton Foundation and the Democratic National Committee.
Regular readers know I didn’t vote for Trump, that I heaped considerable abuse on him in the campaign commentaries. But I didn’t take any comfort in the nostrum about being “better off with the Devil you know (Hillary) than the one you don’t know (Trump).” Both candidates were awful, and the condition of the country is pretty awful as we turn the corner onto 2017. Readers also know from these commentaries and from my books that I expect we will have to make big changes in our living arrangements up ahead as the techno-industrial fiesta winds down. I won’t reiterate the particulars here, but 2017 is the hinge year for that. The strains on global finance are so spectacular that something’s got give. President Trump is sure to be overwhelmed by epic dislocations in markets, currencies, debt, and misguided central bank efforts to hold back the tides of a necessary re-set — a re-set which will see a lot of wealth vanish and a lot of pain inflicted on the losers of wealth, including whole societies.
We have three major European elections to look forward to in 2017: The Netherlands and France in the Spring, and Germany in the fall. Geert Wilders (a member of the Trump Big Hair Club), is virulently against the “Islamisation” of his country. He has campaigned previously to leave the European Union and for the return to the old guilder currency. Should the right-wing Marine LePen win in France, the EU experiment will likely end — she has made express promises to take France out of the EU. Angela Merkel has made herself impressively unpopular by opening the gates to a flood of immigrants fleeing the breakdown zones of the Middle East and Africa. And then, because of the Schengen Agreement (free passage across EU borders), the immigrants were unleashed on the rest of Europe.
Those of us paying attention may have easily lost count of the terror atrocities carried out across Europe by Islamic fanatics. Charlie Hebdo, Bataclan, the Bastille Day truck attack in Nice, the Brussels airport, the Berlin Christmas Market were only the most recent and spectacular. For years, individuals have been stabbed, had their heads cut off, throats cut, been blown up, machine-gunned. Take a look at this comprehensive list going back to 2001. You may be astonished. In that light, it’s pretty hard to keep waving the “diversity” banner, and I sense that Europe has had enough of it. One big question is whether the new European right-wing leaders will actually move as far as mass deportations. I rather think they will.
The UK “Brexit” vote was surprise all right. (I hit a white-tailed deer on the Maine Turnpike at 70mph that June morning, uccchhh, and lived to tell about it.) Now there’s a fair chance that Parliament will find a way to wiggle out of Brexit. Noises are also emanating out of Brussels to the effect that the EU could loosen up some of their rules — e.g. the Schengen Agreement — to induce Britain to stay in the EU. But there are so many other fissures and fragilities in that system that the Brexit may not matter anymore. The European banking system is melting down and there is absolutely no way to rescue it on the macro EU scale. Italy was heading for a banking crackup before Christmas. Deutsche Bank has been whirling around the drain for a couple of years. When the US markets and banks shudder in 2017, Europe will get the vapors. Hence, I’ll forecast breakup of the EU by this time next year.
We’ve come to the pass where “all that is solid melts into air,” in the poetic phrase of old Karl Marx. Marx was referring to the “specter” of communism that loomed over burgeoning industrial society of the mid-19th century, and indeed it turned into quite a world struggle through the century that followed. But now communism is down for the count and we begin to see what is truly melting into air: Modernity itself, this colossal, hulking, grinding, machine of destruction that threatens the global eco-system, and all its sub-systems including the human realms of money and politics.
The idea that Modernity itself might go down is inconceivable to those in thrall to the Religion of Progress, which declares that the world (and life in it) only gets better and better every year. This would appear demonstrably untrue, just in the visible damage to the landscape and the living things that struggle to dwell there. The most obvious problem with Modernity has been human population overshoot. The truth is, we’re not going to do a darn thing about it. There won’t be any policy or protocol, despite the good intentions of the groups inveighing against it. It will just go on… until it can’t, to paraphrase the late Herb Stein. Of course, people still have sex under conditions of hardship, so the population may plateau for a while until we are well into the long emergency. But the usual suspects of starvation, disease, and war are all still out there, doing their thing, and will only ramp up their operations.
The reason the Middle East and North Africa are melting down most conspicuously is because they are geographically among the places least well endowed for supporting the swollen populations they acquired over the past two hundred years. Iraq, Syria, the whole Arabian peninsula. Egypt, Libya, et. al. are all deserts artificially supported by the perquisites of Modernity: cheap energy, fertilizers made from that, irrigation, money derived from it, and continuing life-support subsidies from even wealthier modern nations outside the region. In recent years that life-support has flipped into deadly violence imposed from both within and without, as homegrown Sunni ad Shiite vie for supremacy and their puppeteers in the First World rush in with bombers, rockets, and small arms to “help.”
Iraq and Libya were already goners in 2016. They’ll never be politically stable again in the modern sense. Egypt is still headed down the drain despite the grip of General al-Sisi and his army. In all these places the “youth bulge” has no prospects for earning a living or supporting a family. The young men, especially, put their energy into Jihad, revolution, and civil war because there’s nothing else to do. Making war may be thrilling, but it won’t lead to a better future because those benefits of Modernity are running out and there’s nothing to replace them.
Syria is the current goner-du-jour. Whatever it ends up being, either under Assad or someone else, it will not be stable the way it was. The USA ended up arming and funding the Sunni Salafist “bad guys” there because they opposed Shiite Iran and its regional proxy Hezbollah plus Assad. Russia eventually came in on that side on the theory that another failed state is not in the world’s interests. President Obama blinked after he drew his infamous “line in the sand” years ago and now America is too spooked to act directly. In fact, the Russians and Assad have the best chance of restoring a semblance of order, but America’s support for the “moderate” Salafists will necessarily keep undermining that. In the meantime, all this activity has sparked a demographic emergency as refugees flee the country for Europe and elsewhere, creating greater tensions where they land. Trump could stop the flow of US arms to our favored maniacs in Syria. He may see the practical benefit of letting Russia be the policeman on the beat there, and maybe he can sort out the underlying competing interest between the Russian-sponsored gas pipeline proposed to cross Syria and the American-sponsored one — a dynamic underlying all the mayhem there — and make some kind of “deal.” Or maybe he’ll just fuck it up even more.
The situation will grow increasingly acute in Saudi Arabia, where population growth outstrips the ability of oil production to pay for it. Their old “elephant” oil fields are aging out and they know quite well that they cannot depend on oil wealth many decades ahead. The trouble is, they have no realistic replacement for it, despite noises about creating other industries. The truth is, the country was cursed by its oil. It grew its population too much too fast in one of the most inhospitable corners of the globe, and it will take only a modest decline in oil income to destabilize the place altogether. To buffer that, Saudi leaders plan an IPO for shares in Saudi Aramaco — which was originally composed of American and western oil companies nationalized decades ago. That may get them a few hundred billion or so in walking-around money that won’t last very long considering that just about everybody in the nation is on the dole.
The big news in that corner of the world last year was the collapse of Yemen, which occupies a big slab on Saudi Arabia’s southern border. That poor-ass country is the latest Middle East basket-case and Saudi military operations there continue to date, using airplanes and weapons supplied by Uncle Sam — just another case of feeding Jihadist wrath.
Make no mistake — as our Presidents like to say — all these countries are heading back to the Middle Ages economically, maybe even further beyond. Their culture is still basically medieval. The main point is that Modernity inflated them and now Modernity is over and they’re either going to pop or deflate. One wild card for now is what effect climate change may have in ME/NA. If the trend is hotter, then that’s not good news for a region so poorly watered and so hot that air conditioning is mandatory for the pampered urban elites. Last one out, please turn off the lights.
Then there’s Turkey, for decades known as “the sick man of Europe.” Now, of course, it can’t even get into Europe, the EU, that is, and it’s probably too late to sweat that anyway. Back when it was “sick” it was quiet at least. You barely heard a peep from the fucker through the entire cold war and beyond. But now that the countries on its border are breaking down, things have understandably livened up in Turkey. It was, until World War One, the very seat of the Islamic Caliphate, and it controlled much of the territory now occupied by the nations creatively carved out of the Sykes-Picot Agreement. Turkey is still a power in the region, with a lot of well-watered, habitable territory and a GDP half the size of Italy’s, though shrinking. Its current president, Recep Tayyip Erdogan, has shown twinges of megalomania in recent years, no doubt in fear of the radical Islam epidemic so close at hand. Lately, Kurdish extremists have been planting bombs around the country, too. Turkey has a lot to be paranoid about and Erdogan wants to change the constitution so he can act the strongman without a wimpy, pain-in-the-ass parliament weighing him down. He endured a coup last summer and came out of with consolidated power. But he’s capable of making another bonehead move like shooting down a Russian jet (2015). Meanwhile, Turkey’s currency is collapsing. The population is over 80 million. In the event of serious political upheaval, how many of them will try to flee to Europe?
Russia? It’s apparently stable. We hear no end of complaints about “Putin the Thug,” but in this time of altered reality and disinformation fog, it’s honestly impossible to tell what the fuck the score is. Has he bumped off some journalists? So they say. But, not to get to baroque about it, consider the impressive trail of dead bodies said to be left in the wake of Bill and Hillary. That story was so toxic that Google squashed searches for it during the election campaign. Putin seems to me, at worst, a competent and capable Czar, in a country that likes to be ruled by them. That’s their prerogative. He’s hugely popular, anyway, and it’s one of the unsung miracles of recent times that Russia transitioned out of the fiasco of communism into a pretty much normal modern society, with shopping, movies, tourism travel, and everything. The Russian people may look back at these decades as a golden age. They’ve been punished by Western sanctions for a few years now, but it has prompted them to promote their own version of a SWIFT Code for international banking transactions, and their own counterpart to the EU, the Eurasian Customs Union, and to manufacture some products of their own (import replacement).
Personally, I think the meme of “Russian aggression” is not born out by actual recent geopolitical reality. They are castigated constantly for wanting to march back into the Baltic States, Ukraine, and other former Soviet territories. Ukraine was made a basket case with direct American assistance. (Remember Deputy Secretary of State Victoria Nuland: “Fuck the EU!”) Ukraine was rendered an instant failed state. As far as I could tell, the last thing Russia wanted was to take on Ukraine as an economic dependent. Same for the Baltic States. They need to subsidize these places like they need a hole in the head. Russia’s 2015 annexation of the Crimea was a special case, since it had been part of Russia one way or another for most of the past 200 years, except for the period after Khrushchev gifted it to his homeboys in Ukraine around 1957. Anyway, the Crimea was the site of Russia’s only warm-water naval ports. They’d rented it from Ukraine before the US pranged the country. The Crimean inhabitants voted to join Russia (why do we assume that was not sincere?).
Finally, as renowned Russologist Stephen Cohen has said, wouldn’t it make sense for the US and Russia to drop all this antagonism nonsense and make common cause against the real threat of our time: Islamic Jihad? How many Westerners has Russia killed or harmed the past twenty years compared to the forces of Jihad? The tensions in Syria are admittedly complex, but why are we making them worse while Russia attempts to stabilize the joint? Perhaps The Donald can start there….
As I write, Mr. Putin just announced that his country would not take any reciprocal action against American diplomats in retribution for Mr. Obama’s fugue of punishments meted out last week for the still-unproven “Russia Hacks Election” story. Personally, I’m content to wait three weeks and see if relations improve after Mr. Obama departs the Oval Office.
Finally, there’s China. I’m among those who believe China is running the most farkakta banking system on God’s green earth. We should not be surprised if it implodes in 2017, and does so pretty badly, in a way that might shake the foundations of the entire banking system. On that note, I confess that I have run out of forecast mojo for the year, and anyway this bulletin in long enough. If you’ve gotten this far, I commend and admire you hugely for your remarkable patience. Have a happy 2017 everybody, and don’t let our Trumpadelic president get you down.
Forecast 2017: The Wheels Finally Come Off
“There is no other endeavor in which men and women of enormous intellectual power have shown total disregard for higher-order reasoning than monetary policy.
American Notes
Apart from all the ill-feeling about the election, one constant ‘out there’ since November 8 is the Ayn Randian rapture that infects the money scene. Wall Street and big business believe that the country has passed through a magic portal into a new age of heroic businessmen-warriors (Trump, Rex T, Mnuchin, Wilbur Ross, et. al.) who will go forth creating untold wealth from super-savvy deal-making that un-does all the self-defeating malarkey of the detested Deep State technocratic regulation regime of recent years. The main signs in the sky, they say, are the virile near-penetration of the Dow Jones 20,000-point maidenhead and the rocket ride of Ole King Dollar to supremacy of the global currency-space.
I hate to pound sleet on this manic parade, but, to put it gently, mob psychology is outrunning both experience and reality. Let’s offer a few hypotheses regarding this supposed coming Trumptopian nirvana.
The current narrative weaves an expectation that manufacturing industry will return to the USA complete with all the 1962-vintage societal benefits of great-paying blue collar jobs, plus an orgy of infrastructure-building. I think both ideas are flawed, even allowing for good intentions. For one thing, most of the factories are either standing in ruin or scraped off the landscape. So, it’s not like we’re going to reactivate some mothballed sleeping giant of productive capacity. New state-of-the-art factories would require an Everest of private capital investment that is simply impossible to manifest in a system that is already leveraged up to its eyeballs. Even if we tried to accomplish it via some kind of main force government central planning and financing — going full-Soviet — there is no conceivable way to raise (borrow) the “money” without altogether destroying the value of our money (inflation), and the banking system with it.
If by some magic any new industrial capacity were built, much of the work in it would be performed by robotics, not brawny men in blue shirts, and certainly not at the equivalent of the old United Auto Workers $35-an-hour assembly line wage. We have not faced the fact that the manufacturing fiesta based on fossil fuels was a one-time thing due to special historical circumstances and will not be repeated. The future of manufacturing in America is frighteningly modest. We’ll actually be lucky if we can make a few vital necessities by means of hydro-electric or direct water power, and that will be about the extent of it. Some of you may recognize this as the World Made By Hand scenario. I’ll stick by that.
Similarly for “infrastructure” spending touted by the forces of Trump as the coming panacea for economic malaise. I suspect most people assume this means a trillion-dollar stimulus spend on highways and their accessories. Well, that also assumes that we expect another fifty years of Happy Motoring and suburban living. Fuggeddabowdit. We’re in the twilight of motoring anyway you cut it, despite all the chatter about electric cars and “driverless” cars. We won’t have the electric capacity to switch over the Happy Motoring fleet from gasoline. The oil industry itself is already headed for collapse on its sinking energy-return-on-investment. And our problems with money and debt are so severe that the motoring paradigm is more prone to fail on the basis of car loan scarcity and unworthy borrowers before the fueling issues even kick in. Every year, fewer Americans can afford to buy any kind of car — the way they’re used to buying them, on installment loans. The industry has gone the limit to help them — seven-year loans for used cars! — but they have no more room to maneuver. The car financing system is broken. Bear in mind the original suburbanization of America back in the 20th century — along with its accessory automobiles — must be regarded as the greatest misallocation of resources in the history of the world. So, a rebuild of all this stuff would represent more and possibly even greater malinvestment. We could have applied our post-WW2 treasure to building beautiful walkable towns and cities with some capacity for adaptive re-use, but we blew it in order to enjoy life in a one-time demolition derby. Life is tragic. Societies make poor choices sometimes, and then there are consequences.
We also might have been in better shape now if, beginning twenty years ago, we began a major rebuild of our railway infrastructure. But we blew that off, too, and shortly it will be very difficult to get around this geographically large country by any mechanical means. It may be too late now to do anything about that for the financing reasons already touched on — and which I will elaborate on next. The bottom line is that President Donald Trump will be overwhelmed by a sea of financial troubles from the very get-go, and here’s why.
Designated Bag-Holder
The American people have been punked by their own government and their central bank, the Federal Reserve, for years and the jig is now up. In 2017 both will lose their authority and legitimacy, a very grave matter for the survival of this republic.
Insiders surely have seen this coming for a long time. The people running this so-called Deep State of overblown and overgrown institutions probably acted at first with the good intentions of keeping the national lifestyle afloat. But in the end (now approaching) they stooped to too much duplicity and deceit in the desperate attempt to not just preserve the system, but to protect their own reputations and personal perquisites. And now there ought to be some question with the election of 2016 that they have engineered all of this system fragility to blow up on Mr. Trump’s watch, so they can blame him for it. It was going to blow up anyway. But had Hillary Clinton won the election, at least the right gang would have had to take the blame — the people in charge for the past twenty years. Instead, Donald Trump has been elected Designated Bag-Holder.
About That “Big Fat Ugly Bubble” and its Consequences
Part 1: History Lesson
The USA ran out of growth capacity around the turn of the millennium because we ran out of affordable energy to run our techno-industrial economy. It was hard to see this with seemingly plenty of oil available. And, of course, the computer tech fiesta was blossoming, but for all that glitzy stuff to attract dwindling real capital, other old stuff had to go, and did go, and when all was said and done the computers did not generate much wealth or social value. In fact, the diminishing returns and blowback of computer tech were arguably more damaging than beneficial to society and its economy. Look at where the middle class is today. Computer tech gave the magical appearance of growth while actually undermining it.
By affordable energy I mean energy with a greater-than 30-to-one energy-return-on-investment, which is the ratio you need for the kind of life we lead. That’s what the now-ridiculed Peak Oil story was really about: not running out of oil, but not getting enough bang for our bucks pulling the remaining oil out of the earth to maintain our standard of living. I’ll return to this issue in more detail later. But that was what provoked America’s 21st century economic malaise. Everything we’ve done in finance since then has been an attempt to compensate for our fundamental problem with debt — borrowing from the future to maintain our current (unaffordable) standard of living. Our debt has grown ever larger and faster each year, and our methods for managing it have become more desperate and dishonest as that occurred.
The culprit at the center is America’s central bank, the Federal Reserve, which is actually not a government agency as it seems, but a consortium of the nation’s biggest private banks, lately known as Too-Big-To-Fail. The Fed was created in 1913, when the complexities of capital finance were multiplying in step with the complexities of industrial production, which, remember, was a new and evolving phenomenon of human history. Mankind had no prior experience with industrialism. We discovered toward the end of the 19th century — decades of unprecedented industrial growth — that the system’s dynamic produced booms accompanied by very destructive busts. The operations of banking usually outran the cycles of trade, industry, and war that were coloring evolving Modernity. So the Fed was created to smooth out these cycles. It had two basic mandates for this: acting as the lender of last resort between banks during financial panics so that some money would always be available in an emergency; and stabilizing the money supply and prices in the system. The Fed failed spectacularly to smooth out the cycles of boom and bust and to maintain the value of the dollar over time.
Sixteen years after the Fed’s creation, America entered its worst economic downturn ever, the Great Depression, which was only mitigated by the colossal abnormality of World War Two. America emerged from that episode as the last industrial society standing amid everyone else’s smoldering ruins. That gave us an extraordinary advantage in world trade lasting roughly thirty years. That high tide of the era of seeming “normality” — the 1950s and 60s, which the Trumpian-minded might recall as “great” — started unraveling in the 1970s, which was not coincidentally the moment of America’s all-time oil production peak.
In 1977, the Fed was given a third mission of promoting maximum employment with a trick-bag of tools for manipulating the money supply and credit creation that have proven to be fatally mischievous. This new task elevated Fed officials, and especially its chairperson, to the status of viziers — magicians using occult mathematical models and formulas — to cast spells capable of controlling the macro economy the way wizards are thought to control external reality. Their pretenses seemed to work for reasons unrelated to the spells they were learning to cast.
It is still largely unrecognized that America recovered from the financial disorder of the 1970s not because of the charms of “Reaganomics” but for the simple reason that the last giant finds of oil with greater than 30-to-one energy-return-on-investment came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. That allowed the USA and the West generally to extend the techno-industrial fiesta another twenty years. 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, who worked the control rods of interest rates as though the financial system were a great nuclear powered pipe organ that could be revved up and tamped down by a wondrous Fed control panel. This period of Fed spell-casting was characterized by ever more systemically complex finance, growing systemic fragility, pervasive institutionalized accounting fraud, and ever-greater bubbles and busts. Deregulation, especially the 1998 repeal of the Glass-Steagall Act of 1932, sealed America’s financial fate.
Debt was the meat-and-potatoes of the Fed’s wizardry, but the “secret sauce” of Fed magic was fraud, in the form of market interventions, manipulations, regulatory negligence, and just plain systematic lying about the numbers that defined the economy. It amounted to nationalized financial racketeering. Under the consecutive Grand Vizierships of Greenspan and Ben Bernanke, control fraud (using official authority to cover up misconduct) was perfected by banking executives, eventuating in the mortgage securities fiasco of 2008, which took down the housing market and the economy. (That housing market, by the way, was made up mainly of suburban houses, the sine qua non of the greatest misallocation of resources in the history of the world.)
Of course, nobody paid a criminal penalty for any of this misconduct besides the maverick Ponzi artist Bernie Madoff, and a few other small fish. The regulators looked the other way, on orders from their bosses. Unlike the earlier Savings and Loan bank crisis of the late 1980s, none of the leading bank officer perps went to jail. The damage of the 2008 crash was epic and never repaired, only papered over with more debt, more deceit, and more racketeering.
The supposed remedy, the Dodd-Frank Act of 2010, was a cover for continued pervasive fraud and the institutional “capture” of government by the banking industry and its handmaidens, really a fascist melding of banking and government, a swindle machine in which anything goes and nothing matters. The frauds have only been rechanneled since 2008 into college loans, car loans, corporate stock buyback monkey business, currency arbitrage shenanigans, private equity asset-stripping, and the gigantic black box of derivatives trading.
About That “Big Fat Ugly Bubble” and its Consequences
Part 2: 2017, the Year of Living Anxiously
Under Bernanke’s successor, UC-Berkeley Professor Janet Yellen, the emphasis in Fed policy has been an elaborate game of “data-dependent” foot-dragging — a lot of talk with no action — with the data itself largely fraudulent, especially the easily gamed employment and GDP numbers that supposedly determine the rise or fall of interest rate policy. In short, the racketeering continues while the authorities quail in the face of accumulated and now inescapable debt quandaries ever more certain to end in systemic collapse.
Get this: the Fed is completely full of shit. It is terrified of the conditions it has set up and it has no idea what to do next. The “data” that it claims to be so dependent on is arrantly fake. The government’s official unemployment number at Christmas 2016 was 4.6 percent. It’s a compound lie. The 4.6 percent does not include the 95 million people out of the workforce, most of them able-bodied, who have simply run through their unemployment benefits and given up looking for work. Nor does it figure in the fact that roughly 90 percent of the new jobs created are part time jobs, many of them held by people working several jobs (because they have to, to pay the bills). Nor does it detail the quality of the jobs created (minimum wage shit jobs.)
That 4.6 unemployment figure is the main pillar of the Fed’s “data.” They interpret it as meaning the economy is roaring and has their full confidence. They‘re lying about that, of course. They have been touting “the recovery” (from the crash of 2008) continually and heralding a program of “normalizing” interest rates upward for two years. In 2015 they didn’t do anything until the very last Fed meeting of the year when they raised the Fed Funds rate 25 basis point (that’s a measly one-quarter of a percent). They raised, they said, because they were “confident” about the economy. No, that’s not why. They did it because they talked about it all year without doing anything and their credibility was on the line. They also promised four rate hikes altogether in 2016, which they then failed to carry out.
After that December 2015 rate hike, the stock markets tanked 10 percent. By springtime, the markets appeared to be bouncing back, so the Fed started talking about more rate hikes again. They talked it up all year without acting, an impressive act of fakery. The surprise Brexit vote gave them the heebie jeebies. They laid low. Meanwhile, the US election season was on. The Fed denies this, but they did not raise interest rates for eleven months in 2016 solely because they wanted to make the Democratic administration look good heading into the November vote, and they knew the economy was fragile. Once Hillary was nominated they were determined to usher her into the White House on a high tide of fake good economic news.
When she lost the election the stock markets surprised everyone by entering a super-bubblicious Trumpxuberance rally. There is a narrative for that too in the media chatter and it is simpleminded nonsense based on the sheer hope that Trumponomics will be great for business. More on that below.
Roaring stock markets were a secondary pillar of the Fed’s economic world-view. The post-election 2000 point upsurge in the Dow, along with the historically low 4.6 unemployment number, gave the Fed the opportunity on December 15 to do the same thing they did the previous year: cover their asses and preserve some credibility by hiking the Fed Funds rate one-quarter percent. You’d think if they were really confident in the economy — especially given the year–end rally — they would venture to raise by half a percent or more. They are not confident. They are lying with their fingers crossed.
The Fed Funds rate is one thing. As it happens, the Fed does not directly control the interest rates on US treasury bonds, and they have been rising shockingly through the second half of 2016. The crucial ten-year treasury rate has gone up a hundred percent since the summer. Because bond values move inversely to bond rates, the price of treasuries has tanked, inducing trillions of dollars in losses to bond-holders around the world. The bond market is many times larger than the stock markets. Bonds have been in a bull market since the early 1980s and that bull rolled over in mid-2016. A bear market is now on, meaning bond-holders are dumping their bonds. China and Saudi Arabia are among the leading dumpers of US Treasuries because they need the money for one reason or another. They will dump more in 2017 because both countries are in deep economic trouble. Too many bond sellers and not enough buyers in the market drive interest rates up. Rates have a lot room to move up, since they started at near-zero. Accordingly, their value has a long way to fall.
Bonds, of course, represent debt. Total US debt has doubled under President Obama from around ten trillion to twenty trillion dollars (as it doubled under Bush Two from five to ten trillion dollars). The reason, as stated above, is that we don’t produce enough to cover the cost of our national way of life, so we have to borrow continually at ever-greater volume. Every year, the Treasury has to pay interest on all that debt. It’s a lot of money. This year, with interest rates starting out at historically unprecedented lows (not seen ever in recorded history), the Treasury paid over a quarter-trillion dollars in interest. By the way, the government borrows money to make these interest payments too. An interest rate rise of one percent, would drive the annual US debt higher by $190 billion. As the late, great Senator Everett Dirkson (R-Ill) once pungently remarked: “…a billion here, a billion there, sooner or later you’re talking about real money.”
A sharply rising interest rate on the ten-year Treasury bond will thunder through the system. A lot of other basic interest costs are keyed to the ten-year bond rate, especially home mortgages, apartment rentals (landlords hold mortgages), and car payments. When the ten year bond rate goes up, so do mortgage payments. When mortgage rates go up, house prices go down, because fewer people are in a position to buy a house at higher mortgage rates, and rents go up (more competition among people who can’t buy a house). Zero Interest Rate Policy (ZIRP), in force for ten years, has driven house prices back to stratospheric levels. They are now primed to fall, perhaps severely, leaving many homeowners “underwater,” with houses worth way less on the market than the amount of mortgage left to pay off. The re-financing market is dead. Housing starts were already down by a stunning 19 percent in November. Automobile sales are rolling over. Manufacturing and retail sales numbers are down at year end. What’s up: stocks, stocks, stocks.
Yet investors did not execute the usual end-of-year profit-taking in the expectation that Trump would lower the capital gains tax in 2017, so why sell now? You can wait until January 3, 2017 to sell, and then not have to pay tax on your profits until April of 2018. Will investors start dumping in the first trading days of 2017? I think so. And will that selling beget a stampede for the exits? And what will happen if the interest rate on the ten-year bond hits three percent? (It doesn’t have far to go). Or maybe even four percent? What happens is the stock markets go down in the first quarter of 2017. My forecast is 20 percent down on the S & P. That will only be a preview of coming attractions once Trump gets his mitts on the levers of power. A still bigger crash ahead later in the year!
Why Trump Can’t Pull a Reagan
When Reagan came into office in 1981, inflation was raging largely because of the effects of the oil crises of 1973 and 1979, which had produced the “stagflation” that confounded the reigning economists’ models (they knew nothing about the relationship between energy dynamics and capital formation). The Fed Funds rate was almost 20 percent in 1981. It had a lot of room to move down. The national debt was less than one trillion (Reagan eventually ran it up to $2.8 trillion). Reagan was able to endure a sharp recession early in his first term — and voodoo economics got him through all the rest of his tenure, with both inflation and interest “normalizing” — as mentioned earlier, he enjoyed the bonanza of the last great non-OPEC oil discoveries coming on-line during his two terms, which ramped up economic activity and growth.
Today, the US is in a box and Trump comes on the scene with nowhere to move. Too much debt can only be managed if interest rates are kept low. Everybody and his mother around the world is dumping US Treasuries. With a bear market in bonds on, the Fed as buyer of last resort will have to sop up whatever comes on the market to keep the interest rate from rising above three percent on the ten-year, and even that may not prevent it. Trump’s vaunted infrastructure stimulus plan will be impossible to carry out without the Fed monetizing the necessary debt. So stimulus implies bigger deficits, which means more bonded debt that nobody wants to buy. The result will be inflation and accordingly further upward pressure on interest rates. Higher interest rates, in turn, will negatively impact economic activity, lowering tax revenue, inducing larger fiscal imbalances and greater instability.
Trump may never even get the stimulus he seeks. The Republican controlled-congress has vowed not to increase the national debt. How can Trump fulfill his pledge to cut taxes and bring on stimulus without hugely increasing the debt? If there is war over spending between Trump and Congress, Congress is likely to win, since they control the fiscal purse strings. Of course, Donald Trump cannot abide not winning. Hostilities between them may become permanent early in Trump’s term and bring on even more dangerous paralysis of governance.
Also early in 2017, the Fed will abandon its “dot plot” talk about further interest rate hikes. They may also surrender their credibility in the process. The system can’t take the strain of three interest rate rises in 2017. It may be that Janet Yellen has raised the Fed Funds rate a total of one-half a percent in two years solely to be able to lower them again when the real economy finally tanks under that strain of incessant central bank chicanery. By the second quarter of 2017, following a 20 percent stock dump, the Fed will start making noises about Quantitative Easing 4 (QE), or they will cook up some other program that accomplishes the same thing under a new cockamamie label. More QE (or something like it) will drive the dollar back down and gold back up. The housing market will be in the toilet and the rest of the economy will follow it down the drain. By the end of Trump’s first year in office, there will another, greater, dump in the stock markets after the initial 20 percent drop in the first quarter. America will be great again, all right: we’ll be entering a depression greater than the Great Depression of the 1930s.
Desperate Measures
One of the other big and dark trends of the past year has been the move of governments around the world — and among the economist / necromancers who advise them — to ban cash from the scene in order to herd all citizens into a digital banking system that will allow the authorities to track all financial transactions and suck every possible cent of taxes into national coffers. It would also be an opportunity for the bank-and government cabal to impose negative interest rates (NIRP) on bank accounts so that money herded into the digital system could be surreptitiously “taxed” by charging account holders just for being there (against their will). It’s a little hard to see how that might happen just now in a broad rising rate environment, but it would be the natural accompaniment to banning cash — and renewed aggressive QE (QE forever!) might do the trick.
Harvard economist Kenneth Rogoff literally wrote the book on this (The Curse of Cash; Princeton University Press, 2016), a mendacious argument that cash money merely enables drug dealers and terrorists to operate and has no useful place otherwise in a regular economy. Rogoff appeared to be angling for the Treasury slot in Hillary’s cabinet, and would have fit in perfectly with this totalitarian assault on the public’s financial liberty — but, as we know, Hillary didn’t make it.
Efforts to eliminate cash are already underway around the world. The EU officially discontinued the €500 note from circulation. Ken Rogoff’s Harvard colleague, Larry Summers, was calling for abolition of the $100 bill a year ago. Sweden is successfully herding its people out of fiat krona. India’s Prime Minister Narendra Modi pulled a fast one in November by banning the 1000 and 500 rupee note (worth respectively $14 and $7), and threw India’s economy into a epileptic seizure. The idea was to discipline tax evaders who operate in a cash economy. The catch was that more than 85 percent of India’s economy operates on a cash basis among people too poor to have bank accounts and credit cards — including millions of truck drivers and ordinary laborers. Naturally, the Indian economy froze. Nobody could get paid. Food rotted in stalled trucks. ATM withdrawals were limited to a few day’s walking-around-money. Citizens could not even exchange their 1000 and 500 rupee notes at the banks without going through onerous time-consuming bureaucratic rigmarole, including fingerprinting and the submission of tax records. The process caused discouraging long queues to form at the banks, and was probably designed to discourage the exchange of the 1000 and 500 rupee notes altogether and instead just retire them from circulation — which means a lot of poor people lost the minimal cash savings they had.
It’s hard to see the US government banning cash as clumsily as India did, but they have other ways to herd the multitudes into the black box of all-digital banking. Financial author James Rickards calls this the “Ice-Nine” program, in reference to the isotope of water in Kurt Vonnegut’s sci-fi novel Cat’s Cradle that freezes the world in a horrifying chain reaction. Rickards’ Ice-Nine financial nightmare would include features like freezing bank accounts, bail-ins (confiscation of accounts), limits on ATM withdrawals, and the “gating” of investment funds. Ice-Nine would be invoked in a banking emergency — say, a derivatives “accident” that took out some Too-Big-Too-Fail giant, or really anything that triggered the extreme fault lines in the ultra-fragile system that the world’s money elites have cobbled together to keep the garbage barge of global finance from sinking. In his recent book, The Road to Ruin, Rickards reminds readers that the emergency act signed by Bush Two after 9/11 has remained in effect under Obama, so that America is “just one phone call away from martial law.”
Another method for depriving citizens of their financial liberty would be for the government to declare that retirement accounts had to contain a set percentage of US Treasury paper — once again herding people into a financial corral against their will — in order to prop up the value of bonds and tamp down interest rates. David McAlvany (his excellent podcast here) makes the interesting point that if herding the public into the digital financial corral was a key ingredient to “making America great again,” who could object? — because now you’d be opposing American greatness! Trump inherited a much bigger problem than Barack Obama did in 2009. Obama still had enough soft-soap left in the machine to blow more bubbles. Trump arrives on the scene with the machine out of bubble-blowing mojo. He’ll be overwhelmed by financial disorder in 2017 and then the nation’s focus will turn to a tumultuous political scene
Wild in the Streets
The public is just plain pissed off, and remains pissed off after the Trump Victory. Their anger has been fermenting for decades as their economic prospects dwindled and they began to understand how it all worked against them. The battered middle class might have gotten a temporary thrill from the election, but an awful lot of them are still out of work, or working at the humiliating shit-jobs that replaced their old lost jobs in the old real stuff economy. Worse is coming their way in 2017. Theirs is a true existential crisis.
Even under the most favorable circumstances, a stimulus program would not likely get out of congress until much later in 2017, and I personally doubt that it will get through at all. The so-far-fortunate retirees plugged into pensions represent another potential trouble spot. Pension funds are going bust all over the country from the incapacity to stay solvent in a near-ZIRP environment. In 2016, fissures started to show in places like the Dallas Police and Firemen’s Pension fund, when pensioners’ redemptions were shut down. There are pension funds all over the country floundering from the same conditions, since the Fed took the “fix” out of “fixed income.” In the absence of decent “yield,” the pension funds have been herded into risky stock markets, and if those markets blow up, the pension funds are going to blow with them… and then the pensioners’ lives are going to blow up… and then maybe civil order dissolves around the country.
That may be the moment when President Trump and his militarily-weighted cabinet appointees opt for martial law. What a goddamned mess that will be. There is no civilized country on earth with as many small arms per capita than the USA, and despite the fearsome appearance of militarized police forces, you cannot overstate how much deadly mischief a small number of pissed-off people can make with automatic rifles, rocket-propelled-grenades, Semtex plastic explosive, and other fun stuff. It could morph easily to a literal war on bankers and Wall Street in particular, especially if Ice-Nine goes into effect. Bear in mind that a lot of veterans of the endless Middle East wars belong to this suffering economic class, and they actually have some training in the warrior arts.
Their political counterparts in the Democrat / Prog coastal elite, hardcore Hillary, PC-and-unicorn crowd are moving through their post-election Kubler-Ross Transect-of-Grief from denial to anger too. So both sides are quite pissed off and primed for conflict. The Left will certainly do everything possible to oppose Trump and try to make him look bad, whether it’s in the public interest to do so or not. They will throw every monkey-wrench possible into the machinery of governance, up to and including the (mostly Democratic Party weighted) Federal Reserve hierarchy, whose interest rate “dot plot” could be truly a plot to exact revenge on Trump. Of course, that would blow up in their faces since proportionately the coastal elites own much more stock than the Trumpenlumpenprole red-staters, and they could be wiped out in a significant market crash triggered by rising interest rates. But that’s the thing about political rage: it’s the opposite of rational.
There’s no sign that the Democrat / Progs have recognized that their poisonous identity politics played a significant role in their electoral defeat. They will not abandon that endeavor in 2017. They will double-down on it. And as that happens, the Democratic Party will go the way of the Whigs in 1856 — with a whimper, not a bang. God knows who or what will replace them as a credible opposition to Trumpist crypto-Republicanism, although Trump himself stands a good chance of leading that party to oblivion, too, if my forecast of a big financial blow-up comes to pass....
The Oil Quandary
The reports of Peak Oil’s death are exaggerated, to borrow a gag from Mr. Twain. It’s just been playing out in ways that many of us didn’t quite anticipate and it is still at the heart of our economic predicament — which is that you can’t rationalize an annual debt growth rate of 8 percent if your actual economic growth rate is under 4 percent (paraphrasing Chris Martenson at Peak Prosperity.com).
We haven’t run out of oil, but we have run out of oil that is rationally economical to pull out of the ground. The so-called “shale oil miracle” extended the oil age a few years by debt-financed legerdemain. Yes, we drove US oil production way up, almost back up to the 1970 peak production level around 10 million barrels-a-day (b/d). The trouble was that the companies producing it didn’t make a red cent in the process. They just ran up a huge amount of debt to pursue the shale project. The pursuit was on wholeheartedly beginning around 2006, because 1) the Peak Oil story was scaring folks, including folks in the oil industry, and 2) the market price of crude oil soared after 2004 and shale looked like a possibly winning venture — especially since conventional exploration in recent years was turning up almost nothing of significance.
From 2004 the price of oil skyrocketed from around $40-a-barrel until 2008, when it reached a high point of about $140-a-barrel. Then, of course, the price crashed catastrophically for a year, along with Wall Street and the economy. But, by then, the fracking industry was all ramped up in the Bakken fields of North Dakota and the Eagle Ford range of Texas. Plus the industry was learning some additional new fracking tricks to goose more oil out of the “tight” rock. So they were full of confidence, despite the price crash. Then, in 2009 the oil price turned sharply upward again — with central bank ZIRP and QE and other maneuvers to prop up the economy with more debt at lower interest rates. And the price of oil just climbed and climbed again back into the $110-plus range in 2011, and lingered there until 2015, when it crashed again.
Of course, most of the producers weren’t making any money even at the $110-a-barrel, but they expected improved technology to mitigate that eventually. In the meantime, they just produced too much shale oil and the market was flooded and OPEC got into the act and pumped all-out trying to crash the price further to put the US shale producers out of business, and then nobody made a red cent fracking for shale oil. So, you can see there was a pattern.
The pattern nicely describes the dynamic advanced by Joseph Tainter in his seminal work, The Collapse of Complex Societies: namely that over-investments in complexity lead to diminishing returns. That is, as you keep making your systems extra-hyper-complex, you get less value back for doing it, until you get to the point where there’s no benefit whatsoever, and then the system implodes. And that is exactly what has happened with oil and the economy that was engineered to run on it, and the financial system that evolved to manage the wealth it used to produce.
A few other things happened the past few years on the oil scene. The American oil companies bowed out of Arctic drilling. The Canadian Tar Sands went bust. The overthrow of Muammar Gaddafi choked off Libyan production, which was offset by Iran coming back onto the international market, which was offset by political mischief in Nigeria that choked off production, which was offset by increased Iraqi production, which was offset by the collapse of Venezuela. Most of the world’s oil producers had entered decline anyhow.
Don’t be fooled. The low prices at the gasoline pumps only mean that US oil companies are going broke fast, as are American “consumers.” There’s a basic equation I’ve repeated a few times on this blog: oil over $75-a-barrel destroys industrial economies; oil under $75-a-barrel destroys oil companies. That’s were things stand when the energy return on investment falls to 5-to-1, as is the case with shale oil. Steve St. Angelo over at the SRSRocco Report makes the excellent point that it takes at least 30-to-1 energy return on investment to maintain plain vanilla modern life. Anything below that and parts of the economy have to be sacrificed. Trucking, air travel, commuting, theme park vacations, your job…. It’s just another way of describing the pernicious effects of the diminishing returns of over-investments in complexity.
In the fall of 2016, OPEC members tried again to agree on an oil production output limit, as they have done many time before. Each time, they all managed to cheat in order to sell greater volumes of oil and make more short-term money — a classic Tragedy of the Commons story. Consequently, the price of oil went up to about $53-a-barrel by Christmas 2016. Don’t expect that to last. Unless, of course, there is a geopolitical event somewhere out on the oil scene, most likely in the Middle East, though Venezuela’s economy is approaching total collapse. The forecast here is for oil prices to follow the stock markets down in the first quarter of 2017. A lot of junk bonds in the oil space will default as a result, leading to a general crisis in shale oil investment.
Vagrant Thoughts on Geopolitics
As I write just before New Year’s Eve, President Obama is trying to start World War Three with Russia as a parting gift to the voting public. I’m among the skeptics who think that the “Russia Hacks Election story” is a ruse to divert the public’s attention from the stupendous failure of the Democratic Party to win, as expected. Rather, Wikileaks should get the Pulitzer Prize for revealing so much about the nefarious workings of the Clinton Foundation and the Democratic National Committee.
Regular readers know I didn’t vote for Trump, that I heaped considerable abuse on him in the campaign commentaries. But I didn’t take any comfort in the nostrum about being “better off with the Devil you know (Hillary) than the one you don’t know (Trump).” Both candidates were awful, and the condition of the country is pretty awful as we turn the corner onto 2017. Readers also know from these commentaries and from my books that I expect we will have to make big changes in our living arrangements up ahead as the techno-industrial fiesta winds down. I won’t reiterate the particulars here, but 2017 is the hinge year for that. The strains on global finance are so spectacular that something’s got give. President Trump is sure to be overwhelmed by epic dislocations in markets, currencies, debt, and misguided central bank efforts to hold back the tides of a necessary re-set — a re-set which will see a lot of wealth vanish and a lot of pain inflicted on the losers of wealth, including whole societies.
We have three major European elections to look forward to in 2017: The Netherlands and France in the Spring, and Germany in the fall. Geert Wilders (a member of the Trump Big Hair Club), is virulently against the “Islamisation” of his country. He has campaigned previously to leave the European Union and for the return to the old guilder currency. Should the right-wing Marine LePen win in France, the EU experiment will likely end — she has made express promises to take France out of the EU. Angela Merkel has made herself impressively unpopular by opening the gates to a flood of immigrants fleeing the breakdown zones of the Middle East and Africa. And then, because of the Schengen Agreement (free passage across EU borders), the immigrants were unleashed on the rest of Europe.
Those of us paying attention may have easily lost count of the terror atrocities carried out across Europe by Islamic fanatics. Charlie Hebdo, Bataclan, the Bastille Day truck attack in Nice, the Brussels airport, the Berlin Christmas Market were only the most recent and spectacular. For years, individuals have been stabbed, had their heads cut off, throats cut, been blown up, machine-gunned. Take a look at this comprehensive list going back to 2001. You may be astonished. In that light, it’s pretty hard to keep waving the “diversity” banner, and I sense that Europe has had enough of it. One big question is whether the new European right-wing leaders will actually move as far as mass deportations. I rather think they will.
The UK “Brexit” vote was surprise all right. (I hit a white-tailed deer on the Maine Turnpike at 70mph that June morning, uccchhh, and lived to tell about it.) Now there’s a fair chance that Parliament will find a way to wiggle out of Brexit. Noises are also emanating out of Brussels to the effect that the EU could loosen up some of their rules — e.g. the Schengen Agreement — to induce Britain to stay in the EU. But there are so many other fissures and fragilities in that system that the Brexit may not matter anymore. The European banking system is melting down and there is absolutely no way to rescue it on the macro EU scale. Italy was heading for a banking crackup before Christmas. Deutsche Bank has been whirling around the drain for a couple of years. When the US markets and banks shudder in 2017, Europe will get the vapors. Hence, I’ll forecast breakup of the EU by this time next year.
We’ve come to the pass where “all that is solid melts into air,” in the poetic phrase of old Karl Marx. Marx was referring to the “specter” of communism that loomed over burgeoning industrial society of the mid-19th century, and indeed it turned into quite a world struggle through the century that followed. But now communism is down for the count and we begin to see what is truly melting into air: Modernity itself, this colossal, hulking, grinding, machine of destruction that threatens the global eco-system, and all its sub-systems including the human realms of money and politics.
The idea that Modernity itself might go down is inconceivable to those in thrall to the Religion of Progress, which declares that the world (and life in it) only gets better and better every year. This would appear demonstrably untrue, just in the visible damage to the landscape and the living things that struggle to dwell there. The most obvious problem with Modernity has been human population overshoot. The truth is, we’re not going to do a darn thing about it. There won’t be any policy or protocol, despite the good intentions of the groups inveighing against it. It will just go on… until it can’t, to paraphrase the late Herb Stein. Of course, people still have sex under conditions of hardship, so the population may plateau for a while until we are well into the long emergency. But the usual suspects of starvation, disease, and war are all still out there, doing their thing, and will only ramp up their operations.
The reason the Middle East and North Africa are melting down most conspicuously is because they are geographically among the places least well endowed for supporting the swollen populations they acquired over the past two hundred years. Iraq, Syria, the whole Arabian peninsula. Egypt, Libya, et. al. are all deserts artificially supported by the perquisites of Modernity: cheap energy, fertilizers made from that, irrigation, money derived from it, and continuing life-support subsidies from even wealthier modern nations outside the region. In recent years that life-support has flipped into deadly violence imposed from both within and without, as homegrown Sunni ad Shiite vie for supremacy and their puppeteers in the First World rush in with bombers, rockets, and small arms to “help.”
Iraq and Libya were already goners in 2016. They’ll never be politically stable again in the modern sense. Egypt is still headed down the drain despite the grip of General al-Sisi and his army. In all these places the “youth bulge” has no prospects for earning a living or supporting a family. The young men, especially, put their energy into Jihad, revolution, and civil war because there’s nothing else to do. Making war may be thrilling, but it won’t lead to a better future because those benefits of Modernity are running out and there’s nothing to replace them.
Syria is the current goner-du-jour. Whatever it ends up being, either under Assad or someone else, it will not be stable the way it was. The USA ended up arming and funding the Sunni Salafist “bad guys” there because they opposed Shiite Iran and its regional proxy Hezbollah plus Assad. Russia eventually came in on that side on the theory that another failed state is not in the world’s interests. President Obama blinked after he drew his infamous “line in the sand” years ago and now America is too spooked to act directly. In fact, the Russians and Assad have the best chance of restoring a semblance of order, but America’s support for the “moderate” Salafists will necessarily keep undermining that. In the meantime, all this activity has sparked a demographic emergency as refugees flee the country for Europe and elsewhere, creating greater tensions where they land. Trump could stop the flow of US arms to our favored maniacs in Syria. He may see the practical benefit of letting Russia be the policeman on the beat there, and maybe he can sort out the underlying competing interest between the Russian-sponsored gas pipeline proposed to cross Syria and the American-sponsored one — a dynamic underlying all the mayhem there — and make some kind of “deal.” Or maybe he’ll just fuck it up even more.
The situation will grow increasingly acute in Saudi Arabia, where population growth outstrips the ability of oil production to pay for it. Their old “elephant” oil fields are aging out and they know quite well that they cannot depend on oil wealth many decades ahead. The trouble is, they have no realistic replacement for it, despite noises about creating other industries. The truth is, the country was cursed by its oil. It grew its population too much too fast in one of the most inhospitable corners of the globe, and it will take only a modest decline in oil income to destabilize the place altogether. To buffer that, Saudi leaders plan an IPO for shares in Saudi Aramaco — which was originally composed of American and western oil companies nationalized decades ago. That may get them a few hundred billion or so in walking-around money that won’t last very long considering that just about everybody in the nation is on the dole.
The big news in that corner of the world last year was the collapse of Yemen, which occupies a big slab on Saudi Arabia’s southern border. That poor-ass country is the latest Middle East basket-case and Saudi military operations there continue to date, using airplanes and weapons supplied by Uncle Sam — just another case of feeding Jihadist wrath.
Make no mistake — as our Presidents like to say — all these countries are heading back to the Middle Ages economically, maybe even further beyond. Their culture is still basically medieval. The main point is that Modernity inflated them and now Modernity is over and they’re either going to pop or deflate. One wild card for now is what effect climate change may have in ME/NA. If the trend is hotter, then that’s not good news for a region so poorly watered and so hot that air conditioning is mandatory for the pampered urban elites. Last one out, please turn off the lights.
Then there’s Turkey, for decades known as “the sick man of Europe.” Now, of course, it can’t even get into Europe, the EU, that is, and it’s probably too late to sweat that anyway. Back when it was “sick” it was quiet at least. You barely heard a peep from the fucker through the entire cold war and beyond. But now that the countries on its border are breaking down, things have understandably livened up in Turkey. It was, until World War One, the very seat of the Islamic Caliphate, and it controlled much of the territory now occupied by the nations creatively carved out of the Sykes-Picot Agreement. Turkey is still a power in the region, with a lot of well-watered, habitable territory and a GDP half the size of Italy’s, though shrinking. Its current president, Recep Tayyip Erdogan, has shown twinges of megalomania in recent years, no doubt in fear of the radical Islam epidemic so close at hand. Lately, Kurdish extremists have been planting bombs around the country, too. Turkey has a lot to be paranoid about and Erdogan wants to change the constitution so he can act the strongman without a wimpy, pain-in-the-ass parliament weighing him down. He endured a coup last summer and came out of with consolidated power. But he’s capable of making another bonehead move like shooting down a Russian jet (2015). Meanwhile, Turkey’s currency is collapsing. The population is over 80 million. In the event of serious political upheaval, how many of them will try to flee to Europe?
Russia? It’s apparently stable. We hear no end of complaints about “Putin the Thug,” but in this time of altered reality and disinformation fog, it’s honestly impossible to tell what the fuck the score is. Has he bumped off some journalists? So they say. But, not to get to baroque about it, consider the impressive trail of dead bodies said to be left in the wake of Bill and Hillary. That story was so toxic that Google squashed searches for it during the election campaign. Putin seems to me, at worst, a competent and capable Czar, in a country that likes to be ruled by them. That’s their prerogative. He’s hugely popular, anyway, and it’s one of the unsung miracles of recent times that Russia transitioned out of the fiasco of communism into a pretty much normal modern society, with shopping, movies, tourism travel, and everything. The Russian people may look back at these decades as a golden age. They’ve been punished by Western sanctions for a few years now, but it has prompted them to promote their own version of a SWIFT Code for international banking transactions, and their own counterpart to the EU, the Eurasian Customs Union, and to manufacture some products of their own (import replacement).
Personally, I think the meme of “Russian aggression” is not born out by actual recent geopolitical reality. They are castigated constantly for wanting to march back into the Baltic States, Ukraine, and other former Soviet territories. Ukraine was made a basket case with direct American assistance. (Remember Deputy Secretary of State Victoria Nuland: “Fuck the EU!”) Ukraine was rendered an instant failed state. As far as I could tell, the last thing Russia wanted was to take on Ukraine as an economic dependent. Same for the Baltic States. They need to subsidize these places like they need a hole in the head. Russia’s 2015 annexation of the Crimea was a special case, since it had been part of Russia one way or another for most of the past 200 years, except for the period after Khrushchev gifted it to his homeboys in Ukraine around 1957. Anyway, the Crimea was the site of Russia’s only warm-water naval ports. They’d rented it from Ukraine before the US pranged the country. The Crimean inhabitants voted to join Russia (why do we assume that was not sincere?).
Finally, as renowned Russologist Stephen Cohen has said, wouldn’t it make sense for the US and Russia to drop all this antagonism nonsense and make common cause against the real threat of our time: Islamic Jihad? How many Westerners has Russia killed or harmed the past twenty years compared to the forces of Jihad? The tensions in Syria are admittedly complex, but why are we making them worse while Russia attempts to stabilize the joint? Perhaps The Donald can start there….
As I write, Mr. Putin just announced that his country would not take any reciprocal action against American diplomats in retribution for Mr. Obama’s fugue of punishments meted out last week for the still-unproven “Russia Hacks Election” story. Personally, I’m content to wait three weeks and see if relations improve after Mr. Obama departs the Oval Office.
Finally, there’s China. I’m among those who believe China is running the most farkakta banking system on God’s green earth. We should not be surprised if it implodes in 2017, and does so pretty badly, in a way that might shake the foundations of the entire banking system. On that note, I confess that I have run out of forecast mojo for the year, and anyway this bulletin in long enough. If you’ve gotten this far, I commend and admire you hugely for your remarkable patience. Have a happy 2017 everybody, and don’t let our Trumpadelic president get you down.
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