Debt-O-Nomics


Unknown photographer ‘credit factory spewing its product in all directions’

 

Americans since the end of World War Two have for the most part lived with credit expansion and inflation. The components of credit are the same as everything else: supply and demand. Both have been robust as there have been until recently a near-endless parade of ‘innovative’ wasteful enterprises that have been deemed ‘creditworthy’ by the credit manufacturing industry. Consequently, there has been both a bottomless supply of available credit along with those eager to make use of it.

As long as (mispriced) capital could be made available the parade of wasteful enterprises, ‘growth’ and credit expansion could continue. Once capital became scarce, growth ground to a halt to be replaced by ‘shrinkth’. The word for the rest of the 21st century is ‘Less’.

Deleveraging is currently ongoing and the outcome in the industrialized West is general deflation. Moderns have near-zero experience with deflation or appreciation of how it works except in a few countries such as Japan. That country has been able to deflect deflation’s worst effects by way of policy adjustments and a trade surplus: Japan has been able to borrow freely against the accounts of its trading partners.

There are multiple, important, somewhat conflicting dynamics underway right now:

- Debtonomics: credit amplifying or triggering price changes

– Debtonomics: the dollar/crude trade which determines the worth of both.

– Creeping dollar preference and amplified deflation.

- Debtonomics: ongoing collapse of the euro currency as a ‘going concern’.

– Bilateral international trade deals involving crude production that exclude the dollar.

- Debtonomics: all of the above taking place in a world economic context of distrust and failing institutions.

This last is the most important. The current economic establishment is a pop-art ‘masterpiece’ evolved to provide a pseudo-scientific rationale for industrialization and to eliminate credit bottlenecks so that powerful interests have the means to continually expand at the expense of ‘competitors’ and customers. If it appears that the managers don’t know what they are doing it is because they don’t. They’ve never been required to, only to meet public expectations of what managers are supposed to ‘be like’ in the Marilyn Monroe sense.

Both inflation and deflation are matters of credit. Confusion arises because credit is both the cause and effect of price changes. Credit is the enabler of demand, increasing or decreasing it, while at the same time credit is the means by which the demand is satisfied. Access to credit gives the prospective buyer the means to make a bid. Credit also allows the buyer to outbid others then take delivery, the process ‘discovers’ the good’s updated price. In order to meet the new, presumably higher price more credit becomes necessary along with more credit-worthy buyers. These appear because the new price represents an increase in similar items’ worth as collateral.

Because of universally available credit over the span of decades there is no such thing as a ‘fundamental’ price. Leverage is the largest component of the market price of pretty much every good: prices tend to be wildly inflated. Nobody knows what anything is really worth. Confusion over worth is another component of our interlocking set of paralyzing crises. Due to the buildup of leverage, within every transaction lies the possibility of fatally over-paying for a good: making a purchase an instant prior to an unstoppable cascade of deleveraging or in some way triggering it.

During and after the long period of credit expansion, the purchase of any good requires over-paying for it. One either over-pays or declines to bid. Credit begins to contract when the market is cleared of buyers, after the last person seeking entry into a market has bought in. At that point, all are sellers looking either for an opportunity to exit or are anxious for events to hound them out of the market at a thumping loss. Because of the length of the just-ended credit expansion, the fundamental- or cash-price of just about every good is substantially lower than the current — unstable — credit price: this includes petroleum.

The price of a house is its mortgage price, that is the cash worth of the house added to the effect of the mortgage that must be taken on to buy the house. This mortgage price becomes that of all the other houses whether a mortgage is taken on or not. The universally available mortgage amplifies what customers can pay for all houses … for all college educations and hospital stays, for jet fighter planes and SUVs, for guided missile cruisers, for exchange-listed companies and everything else under the sun. Whatever can be afforded by way of a torturous scaffold of credit becomes the collateral basis for succeeding rounds of credit.

A house might be worth twenty-five thousand dollars in cash as that is the equity that can reasonably be demanded to secure the mortgage. Mortgage availability determines equity by way of the ‘back door’: the price of the same house would be five hundred thousand dollars because this is what the equity plus the mortgage will support.

Likewise, the crude oil futures market is a ‘margin’ or leverage market as the price includes the margin needed to buy the fuel contract: the margin is bought along with the fuel itself. Without leverage in the fuel markets — and in the pockets of customers — the cash price of crude oil would be very low, perhaps $5 or $10 per barrel. The additional $100 in the form of credit is assumed to always be available to market participants.

Times have changed. The vast quantities of low-priced fuel once available when it last cost $10 per barrel have long ago been spent into the atmosphere as waste. Ours will not be great-grandfather’s $10 fuel or even the 1998 variety. Instead of the low price representing an increasing surplus, it will represent the annihilation of demand.

The credit stripped from fuel would have credit stripped from everything else, including wages, investments and other sources of income.

Credit represents multiple parallel forces under tension, it is at odds with itself. Credit interferes with market price discovery function. Non-linearities and feedback loops are inherent to the credit function and the accompanying accumulation of debt. Many of these non-linearities are difficult to perceive against the background of ‘market noise’ and the generalized assumption of credit expansion.

Credit is made available by virtue of fuel waste enterprises that are considered as something other than fuel waste enterprises. If these were ever honestly considered no credit would ever be extended to them.

Our fuel wasting enterprises are worth much less than their current market prices. The enterprises have diminishing worth as collateral, regardless of what the promoters claim and what assumptions support. Even at the lowest price, fuel has far greater worth than what can be gained by wasting it for nothing. Here is your ‘Great Arbitrage’, between the worth of enterprises’ capital inputs and the worthlessness of the enterprises themselves! Everything is worth more than zero. At the same time, the waste of past decades has left the world nearly empty of value. Waste is promoted within pop-culture as a metaphysical journey or transformation leading toward a socially and personally gratifying future where values will presumably reappear by magic. The arrival of this precious future is vague, in fact it is the ultimate “I’ll pay you on Tuesday” fraud. Waste is nothing more than the means to borrowed profits for enterprise owners, the costs being shifted onto the suckers who happen to be these same enterprises’ customers.

Both fuel and house prices are relative. They are the children of credit, determined by credit creation in fuel- and house markets. The ability to pay is also a creature of the same markets but at a lower level. Ability to pay decreases faster than do prices because the (credit) price of wages/earnings is arbitraged against the (credit) price of goods and services. Credit arbitrage straddles the different markets, between costs and what can meet them, what the waste-dependent businesses need to survive and what customers can afford to borrow.

The price of fuel is high relative to the ability of users to pay for it. Even a deflated price is a high price.

The margin- or credit price of fuel will always be too high, whoever pays for it is over-paying. The price discovery mechanism is not only at hand but is wound like a spring needing practically nothing to set it into motion (Barry Rithotz and Bloomberg)(Click on for big):

 

 

Figure 1: What’s missing from the flash crash? A marching band: here is the same index for sale in two different markets with trade arbitraged between the two. An identical form of index arbitrage took place in October, 1987. Had the arbitrage expanded outside of the stock exchange machinery in May the index would have flash-crashed all the way to the non-credit price. What propels deflationary arbitrage is the same thing that propels its inflationary counterpart: price discovery across multiple marketplaces. In this flash crash, the deflationary process strips credit rather than enabling it.

The effects of relatively expensive fuel is something to pay attention to. In 2008, the too high price was over $140 per barrel. Now, the too high price is near to the current $120 per barrel. In a few months more the too high price will be less than $110 which is a severe problems as the cost to produce is at $100 per barrel or more. At some point there will be physical shortages as ‘expensive’ production is shut in or left undeveloped.

 

 

Figure 2: Flash crash in the material world: a schematic of GDP (in blue) and fuel price (violet). Red represents GDP linked to the (diminishing) creditworthiness of waste-based enterprises. Deleveraging cuts fuel supplies which in turn causes GDP to collapse which delevers fuel prices. Fuel prices and output can be arbitraged with losses in one amplifying losses in the other then back again.

Energy deflation accelerates as fuel shortages silence the machines. The fuel price of the moment is then too high. This high price results in yet more demand destruction which takes place even as fuel production decreases. To the producers there is a perceived surplus of fuel which requires cutting supply. To the consumers who waste fuel, the price is always too high requiring cuts in demand!

During deleveraging periods, declines in supply have an out-sized adverse effect on demand. The decline in demand outstrips any decline in production. Because of this accelerating imbalance, just about any price is too high.

Conventional analysis suggests that fuel shortages will result in higher prices. This assumes there are reserves of ‘excess’ cash savings or credit available or that shortages will magically provide more credit. A fuel shortage will cause credit to disappear; the fuel price will decline while the discretionary purchasing power of customers declines faster.

The imbalance between supply and demand indicates fuel might suggest a higher per-barrel cost. If fuel prices cannot increase, the amount of increase will be subtracted instead from the purchasing power of customers. This will appear as a decline in the ‘C’ or consumption component of Keynes’ famous GDP equation.

This vanishing purchasing power would then ‘de-lever’ backwards through the fractional lending system. What would be stranded is not simply the credit embedded within fuel-specific goods but credit leveraged to the multiplier which is embedded within all goods and services, wages and investment returns. This deleveraging would take place (and is currently underway in Europe) until the fuel price declines to a level affordable to a regime that is completely stripped of credit!

Our high fuel prices are causing fuel-driven deflation by removing purchasing power from economies. You drive a car or you have money in your pocket but not both at the same time: that is your choice for 2012.

33 thoughts on “Debt-O-Nomics

  1. Pingback: Debt-O-Nomics, The Untergang … | Economic Undertow

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  4. The Dork of Cork

    Looking at Irelands energy balance for transport.
    Y2007 : 5685KTOE
    Y2010 : 4670KTOE.

    Much of this reduction is due to less fuel tourism via Northern Ireland & also a dramatic reduction in international aviation , both of these are hard to quantify.

    But in 1990 we burned 1000KTOE approx in private cars yet we lost this energy in 3 Years !!

    Industry also down big….
    Y2007 : 2660 KTOE
    Y2010 : 2056 KTOE

    Residential up because of cold winters in 2009 /10 – people will spend money on keeping warm
    Y2007 : 2931 KTOE
    Y2010 : 3315 KTOE

    Primary energy supply :
    Y2007 : 16,262 KTOE
    Y2010 : 15,092 KTOE

    I reckon this is happening all over the euro periphery.

    Looking at the IEAs ” Energy balances of OECD countries 2010 PDF” which uses slightly different energy methodology then the above figures the only western european country to increase its TPES(total primary energy supply) for every year between 2007 & 2009 in Western Europe was wait for it – Switzerland ….. by 1.2 MTOE

    Spain : Y2007: 143.87 / Y2008 :138.79 / Y2009 : 128.19 …. decrease :15.68 MTOE
    Italy : Y2007: 179.09 / Y2008 :176.03 / Y2009 : 162.71… decrease :16.38 MTOE
    Ireland: Y2007 : 15 / Y2008 : 14.98 / Y2009 : 14.01…
    Decrease : 0.99 MTOE
    Greece :Y2007 :30.22 / Y2008 : 30.42 / Y2009 : 29.05
    Decrease :1.17 MTOE
    Portugal :Y2007 : 25.07 / Y2008 :24.16 / Y2009 : 23.85……. Decrease :1.22MTOE

    Total MTOE lost from 2007 to 2009 :35.44 MTOE
    Thats 2 X 2007 Ireland’s worth of activity gone somewhere else + a extra 5.44 MTOEs for good measure.
    The 2010 Data is probally still very negative but the IEA charges for the 2010 figures.

    My Guess is that it will show a stabilization of energy figures in “core” Europe during 2010 while the PIigs will show a continual decline.
    Looking at the IEA energy balance figures for OECD Europe from 2007 to 2009……..

    TOTAL TPES in 2007 : 1826 .57 MTOE
    in 2008 : 1821.5 MTOE
    in 2009 : 1720.9 MTOE
    Decrease of 105.67 MTOE

    So using TPES metrics during those years the PIigs took one third of the total adjustment for the Entire OECD Europe !!
    Wow
    The PIigs are certainly no where near one third of total GDP for OECD Europe.

    The UK is also very interesting.
    UK : Y2007 : 210 .06 / Y2008 : 208.45 / Y2009 : 197.60…………
    Decrease of 12.46 MTOE.
    Still it was a lot less given that the PIigs have perhaps double the GDP of the UK.
    Maybe the UK which still has one of the densest rail networks in Europe is benefiting from its 19th century rather then 20th century investments as it can squeeze more output from less BTUs.

    Something relatively radical is occurring in mid size / poor cities such as Nottingham – since the mid 90s the old 19th century railway lines have been developed into commuter rail systems
    en.wikipedia.org/wiki/Robin_Hood_Line (check out each rail station for passenger numbers which are rising in many stations – some even during the 2009 /10 shock which is a characteristic of British rail these days.)
    – with new Tram trains systems feeding into this matrix.
    en.wikipedia.org/wiki/Nottingham_Express

    They have announced a major extension of their 2004 Tram system with two shorter lines going to the south of the city with all Tram lines feeding into the mainline city station.
    http://www.netphasetwo.com

    Nottingham is like many cities in that area of Mid to Northern England – although car centric & poorer then the south – many of the towns that have become sub urbanised around a oringinal 19th century station although much is destroyed also.
    en.wikipedia.org/wiki/Nottingham_Victoria_railway_station

    – with rail cuttings often remaining intact and suitable for future tram trains (half urban tram , half rural rail lines)
    en.wikipedia.org/wiki/Nottingham_Urban_Area

  5. rcg1950

    An extended quote from “Meditations on Hunting” by Jose Ortega y Gasset. Originally written (in Spanish) in 1942. Somehow seems relevant to the discussion re the idiocy of our current crop of rich people. Any way – for what it’s worth – an example of great thinking and writing in any case … enjoy:

    “…what kind of happy existence has man tried to attain when circumstances allowed him to do so? What have been the forms of the happy life? Even supposing that there have been many, innumerable, forms, have not some been clearly predominant? This is of the greatest importance, because in the happy occupations, again, the vocation of man is revealed. Nevertheless, we notice, surprised and scandalized, that this topic has never been investigated. Although it seems incredible, we lack completely a history of man’s concept of what constitutes happiness.

    Exceptional vocations aside, we confront the stupefying fact that, while obligatory occupations have undergone the most radical changes, the idea of the happy life has hardly varied throughout human evolution. In all times and places, as soon as man has enjoyed a moment’s respite from his work, he has hastened, with illusion and excitement, to execute a limited always similar repertory of enjoyable activities. Strange though this is, it is essentially true. To convince oneself, it is enough to proceed rather methodically, beginning by setting out the information.

    What kind of man has been the least oppressed by work and the most easily able to engage in being happy? Obviously, the aristocratic man. Certainly the aristocrats too had their jobs, frequently the hardest of all: war, responsibilities of government, care of their own wealth. Only degenerate aristocracies stopped working, and complete idleness was short-lived because the degenerate aristocracies were soon swept away. But the work of the aristocrat, which looks more like “effort,” was of such a nature that it left him a great deal of free time. And this is what concerns us: what does man do when, and in the extent that, he is free to do what he pleases? Now this greatly liberated man, the aristocrat, has always done the same things: raced horses or competed in physical exercises, gathered at parties, the feature of which is usually dancing, and engaged in conversation. But before any of those, and consistently more important than all of them has been … hunting. So that, if instead of speaking hypothetically we attend to the facts, we discover—whether we want to or not, with enjoyment or anger– that the most appreciated, enjoyable occupation for the normal man has always been hunting. This what kings and nobles have preferred to do: they have hunted. But it happens that the other social classes have done or wanted to do the same thing, to such an extent that one could almost divide the felicitous occupations of the normal man into four categories: hunting, dancing, racing, and conversing.”

    1. Ross

      Excellent and topical.

      What the average man undertakes to survive, the Aristocrat makes his leisure.

  6. steve from virginia Post author

    The large, at-scale enterprises will have the hardest time adapting. The absence of customers will be more strongly felt over time. The enterprises cannot survive today’s reduced throughput. What will survive? The fuel equivalent to a cottage industry.

    A lot of US production is very low cost (from stripper wells), local refiners who can afford to produce intermittently would supply very limited and tightly regulated demand: agriculture, fire departments, first responders, military up to a point, goods delivery and transit.

    After a thousand years perhaps some genius can discover a use for petroleum that adequately reflects its value, something besides burning it up.

    Our idea of ‘rich’ is very different from what will be ‘rich’ after the petroleum age is done. Wealth of today has no value, the instruments of the rich destroy it. Wealth is nothing but a surplus of claims for goods and services that are only valid when rich claims and non-rich claims are identical. The rich have more claims than you do, not different kinds of claims.

    When you throw away the car, the TV and the other dross of modernity (bads by way of Herman Daly) you undermine the idea of claims of the rich while escaping the claims’ baggage at the same time.

    The rich have no idea what wealth really is, they are idiots. This may seem silly but the idea of wealth has two components: the first is a number (compared to others’ larger or smaller numbers) which is meaningless by itself. What does five billion actually mean, on what terms? Are these different terms than fifty-five billion or a billion-gazillion?

    The other component of wealth is the perceived desires of others or its ‘currency’. The rich see what others desire then they accumulate more of these desirable ‘goods’ for themselves. Wealth is external, it constantly looks outward toward others who instruct the wealthy about what to want. This, of course is determined by advertising, the process is circular. The outcome is the rich have the same consumer garbage as ordinary citizens but more of it (at the absurd scale): (bigger, more) cars, (bigger, uglier) houses, (more gigantic) boats, (personal) airplanes, (Hollywood screening room sized) televisions, etc. The feedback loops through America’s trailer parks from those who similarly desire larger, more-crass houses and more gigantic pickup trucks.

    Unrequited desire for its own sake is the currency of the rich.

    When enough claims evaporate, the rich man’s claims are worthless because there is nothing to exchange them for (they never have any value.)

    1. Reverse Engineer

      “The rich have no idea what wealth really is, they are idiots. This may seem silly but the idea of wealth has two components: the first is a number (compared to others’ larger or smaller numbers) which is meaningless by itself. What does five billion actually mean, on what terms? Are these different terms than fifty-five billion or a billion-gazillion?

      The other component of wealth is the perceived desires of others or its ‘currency’. The rich see what others desire then they accumulate more of these desirable ‘goods’ for themselves. Wealth is external, it constantly looks outward toward others who instruct the wealthy about what to want. This, of course is determined by advertising, the process is circular. The outcome is the rich have the same consumer garbage as ordinary citizens but more of it (at the absurd scale): (bigger, more) cars, (bigger, uglier) houses, (more gigantic) boats, (personal) airplanes, (Hollywood screening room sized) televisions, etc. The feedback loops through America’s trailer parks from those who similarly desire larger, more-crass houses and more gigantic pickup trucks. ”

      All these thing are just the accoutrements of being rich. What the truly Rich have predates Modernity and was just as prevalent in 1750 as it is today. The Rich have control over the lives of others and how the earth’s resources are distributed out. Its the Private ownership paradigm codified into common Law.

      The main question is whether the collapse of the Monetary system run by and for the rich will enable the rest of humanity to break free of their control, strip them of their ownership of the Earth and give them a first class send off to Burn in Everlasting Damnation and Torment in the Fire and Brimstone of Hell.

      RE

      1. steve from virginia Post author

        People are insecure, the rich are the most insecure. The need is for reassurance wrested from others by force or connivance, this is a ‘power narrative’ of uncertain meaning.

        ‘Wealth’ is the measuring stick of outsiders, possession of it become a reassurance but only for an instant. Is the hundredth tape measure that much more useful than the first? Wealth suggests powerlessness and agitation in possession of many things/fetishes but also search of ‘other’. This desired other is always in someone else’s possession which defines the limits of wealth and poisons it.

        American-style wealth is disconnected from everything other than self-indulgence and decadence, the effort has to be made to reconnect. Bill Gates becomes philanthropic (because he can afford to be).

        Those seeking power are not necessarily interested in wealth nor is wealth a way to it. Some of the wealth-power concept is part of popular culture, the inflatable Rothschild doll. Outside of the ‘number’, the wealthy tend to be venal, dull, self absorbed … spectacularly ordinary.

        People have power only if others give them power.

        There is always Steve’s First Law of Economics. Cost management is the ‘job’ of the wealthy who have no other.

        The idea of ‘the 1%’ is more compelling (as a bogeyman for the 99%) than the 1%ers themselves. These come across as little men endlessly seeking flattery rather than honest opinions … who despise their flatterers for it.

        It is annoying all the efforts made on the part of the establishment to monopolize ‘things’ that don’t matter by using up everything that does.

      2. Reverse Engineer

        “Those seeking power are not necessarily interested in wealth nor is wealth a way to it”-Steve

        I think for just about all of History for so long as Money has been used to distribute resources this postulate has not held true.

        The great wealth accumulated by the Robber Barons during the 19th Century enabled them to direct an entire civilization toward Industrialization. The power to create credit and to distribute it out in ways which most benefit yourself leads to still more power. The money and property consolidate into a few hands, and those who hold it are the arbiters of ways in which people can live and work in a given society. The power given may be at first consensual, but eventually the power skew becomes so great that it no longer ever is consensual.

        Stepping off the treadmill isn’t generally a popular option even if you do not particularly like the way its organized up. It also is made near impossible to live without participating in the structure of the society. You can’t go out and live a Hunter Gatherer life, there isn’t freely avaialble land upon which to live that way, except in the most marginal of places like the Kalahari. You can’t even really live a subsistence farming life, because you are obligated to pay taxes on the land you live on and farm. You have to trade out some of the produce for money to then pay the taxes, and if you cannot get a good enough price for what you sell, you lose the land to somebody bigger who will farm it with Machines.

        Perhaps it is true that power and wealth seeking comes from insecurity, but this is irrelevant. It still creates a society where people are directed and manipulated by those who do accumulate power and money. The two are nearly synonymous in a monetary based system. You cannot set up a Tax Exempt Foundation with Billions in Assets to solve whatever Problem it is you decide to direct the money at, Bill Gates can. If he wants to try to solve the global AIDS epidemic, he is free to do that. You are powerless on the other hand to solve the Global Carz Epidemic, you just have to watch and wait as it runs its course and decimates the population. You don’t have the MONEY, you don’t have the Control. That is what Wealth really buys, the Toys are just an artifact, like the Jewels worn by Kings and Queens of old.

        Most of the 1% who think themselves Wealthy are just as you characterize them to be, venal and often also powerless, captured by the system they live under to an even greater extent than the most impoverished person is. These folks will mostly see their “Wealth” disappear here and be quite devastated by that. The truly Wealthy who capture the political and economic processes of society will attempt to maintain their positions of power in the society, and you cannot “choose” to give them power or not, they will TAKE the power without your consent. To stop that from happening people have to actively seek to eliminate those who use these conduits to control them. If you do not eliminate them, it matters not whether there is Oil in the ground or not, they’ll busy themselves figuring out how to reproduce a Feudal or Slave paradigm again. They’ll try to reboot another Monetary system and rewrite the laws to try to retain the power already accumulated here over so many millenia.

        The collapse of the Oil economy and the Age of Industrialization will level the playing field quite a bit, but for so long as you use money as means for resource distribution and to signify Ownership, you’ll still have the same old problems here as always.

        Real Wealth is not about 20,000 square foot McMansions or 300′ Yachts with Helicopter or Gulfstream V Private Jets. Those are just Baubles. Real Wealth is about Power and Control over the way the society functions. It allows you to direct Credit at the creation of eneterprises like the Railroads and like the Interstate Highways. A few people gained hegemony over this system long before you or I were ever born, and we never had any choice in how our society developed. There was nothing you ever could have done to stop this dynamic; nor was there ever any real way for you to escape its progression either. You don’t have the MONEY to do that, nor the Power either. That is what real Wealth buys, or at least it has since the Dawn of Money.

        Things are in flux here, they are changing rapidly because Money is failing in its purpose as a resource arbiter and power distributor. When it fails completely, we will have a far different world of course. Until that day comes though, you have few choices and fewer ways to escape the consequences now becoming evident.

        RE

  7. Ric

    Ha! I’m becoming an expert at not driving and not having any money in any pocket. ;-)

    Me too! Ditched the house in 2010, the job in mid-2011, and the car at the end of 2011. Never been happier. Ride my bike and take the bus everywhere. Have a bike trailer for my surfboards. Help a small-scale farmer growing vegetables and raising chickens and goats. Dumpster dive at grocery stores and my local Dunkin Donuts. Lots of cats around if I get really desperate for meat. Again, I am much, much happier now than when I was working at any of my “real” waste-based economy jobs (navy pilot, high school science teacher, software and web app development, media production).

    Re “boutique industrialism”:

    Dmitry Orlov has said many times that he doubts the energy infrastructure (oil-related in particular) can smoothly scale down to boutique size to serve only the rich.

  8. robert in london

    Steve, for a guy who claims to have no sheepskins pegged to the wall, you sure have this mess figured out. It’s a shame the current crop of leaders don’t have less formal education or we would all be in a better space. I guess credit drying up should take care of that ‘problem’ for the leadership class of 2032.

    On driving. We keep a budget and last year the vehicle expense was the lowest ever. Less than 6K kms driven means lower insurance, a lot less gas and a lot of deferred maintenance. Plus vehicle was paid for eleven years ago (when it was already seven years old) so no monthly nut. Granted I am retired and other half uses public transit to work but I have managed to raise progeny who have no interest in vehicle ownership and will definitely not be contributing to car based waste going forward (if there is a forward).

  9. p01

    “You drive a car or you have money in your pocket: that is the choice for 2012.”
    Ha! I’m becoming an expert at not driving and not having any money in any pocket. ;-)

    Great post as always, Steve!

  10. Reverse Engineer

    “The effects of relatively expensive fuel is something to pay attention to. In 2008, the too high price was over $130 per barrel. Now, the too high price is near to the current $110 per barrel. In a few months more the too high price will be less than $100 which is a severe problems as the cost to produce is at $100 per barrel or more. At that point there will be physical shortages as ‘expensive’ production is shut in or left undeveloped. “-Steve

    At this point, I’m not sure we will see “shortages” in Supply, since Demand appears to be crashing faster. if demand crashed by just say 20% but the supply of the Cheap Oil is only 10% reduced over the near term, we will have a GLUT of Oil on the market. A near term 20% demand crash is not hard to imagine if Europeans pretty much stop driving, FSofA Unemployed mostly stop driving, and chinese never START driving even though they have a few 100K autos in the warehouses they already built, but no Chinese can afford to buy.

    The bigger problem would be in the Oil Producing Economies who even though they might still have Cheap Oil avaialble to Pump Up at say $20/barrel, even though they can still sell at a Profit, this profit isn’t sufficient to keep their economies rolling along. More Political Turmoil as a result.

    Ross is correct insofar as Boutique Economies developing and Rignfencing themselves, this process could go on for a while. I think though that the Political blowback will collapse the ringfencing faster than he postulates.

    The big game changers come when there is sufficient Political Instability in Saudi Arabia and Iran that their production facilities get take offline at a rapid pace. A few missiles tossed at Ghanwar, etc. Then the ringfencing and Boutique economies collapse along with thsoe being gradually starved of Oil now.

    RE

    1. jb

      Re said: “Then the ringfencing and Boutique economies collapse along with those being gradually starved of Oil now.”

      I imagine that the US will still have private oil fields willing to sell to domestic ’boutique’ refiners. Domestic demand will exist from the US military and private security firms (who will be very busy) the Congressional Billionaires Club and their corporate sponsors. The 1% who own large farms and ranches won’t ‘suffer’….much.

      I see a future business model for private helicopter companies who can deliver sacks of Starbucks coffee beans, Italian olive oil, petrol, German beer, hookers, etc. to the remote enclaves of the 1%. Maybe former US army logistic specialists could mash-up with a defunct UPS to create a new start-up? Pilots are ‘optional’ in the future:

      http://news.cnet.com/8301-13639_3-57343105-42/u.s-army-envisions-the-helicopter-of-the-future/

    2. steve from virginia Post author

      If there is a glut, the producers (OPEC) will make cutbacks OR …

      There is the appearance of a glut so that fuel prices decline (supply and demand). This strands the expensive-to-produce oil (or requires cuts in fuel/social entitlements in oil producing countries to cut costs) OR …

      Credit dries up and prices decline, with the plunging price of a component such as finance feeding back into fuel production. Fuel prices are below the costs of new oil.

      Part of the part of the production costs is credit, the other is energy price of new oil compared to the (cheap) energy price of old oil. This is the EROI argument.

      In the immediate past, access to credit has been the means to ration fuel, when credit vanishes fuel will be rationed the old-fashioned way. Jack booted thugs will descend from black helicopters and impound your car which will be towed to the crusher … for Old Glory. Or you will get a ration coupon from a faceless, pointy-headed bureaucrat good for 2 measly gallons per week, enough to run a moped.

      This explains the preventive detention laws, the suspension of the Constitution and militarized police. Dick Vodra told me last fall, “… the US energy policy is the Patriot Act”.

      1. Eeyores Enigma

        “Part of the part of the production costs is credit, the other is energy price of new oil compared to the (cheap) energy price of old oil. This is the EROI argument.”

        EROC?

      2. Eeyores Enigma

        “Part of the part of the production costs is credit, the other is energy price of new oil compared to the (cheap) energy price of old oil. This is the EROI argument.”

        EROC?

        Also are you implying an export land model based on credit?

      3. steve from virginia Post author

        Eeyore’s:

        “Also are you implying an export land model based on credit?”

        I am and there is but I will go into it later.

      4. Reverse Engineer

        ” Or you will get a ration coupon from a faceless, pointy-headed bureaucrat good for 2 measly gallons per week, enough to run a moped.”

        I’m good with 2 Gallons/Week to Go on my Fuel Using Car Keeper (F.U.C.K.) Card! At 30 mpg, I get 60 miles a week out of this I don’t have to ride my bike or mush the Dogsled. Since I only live about 1.5 miles from my workplace I’ll only consume about 1/2 gallon a week this way, leaving me 1.5 Gallons extra to run my generator a bit to keep the batteries charged up. On good weather days I can conserve and ride the Bike to work, and have some Extra Gas to sell off!

        Look, we WANT conservation, right? Rationing would be a relatively fair way to accomplish this task, so as long as you keep your needs low you can do OK. Its a way better outcome than having your car repoed by Jack Booted Thugs anyhow.

        Far as the OPEC countries shutting in production goes, if they do that with demand decreasing and prices dropping, just how will they generate enough revenue to keep their societies from imploding? They CAN’T shut in the production, they NEED the revenue!

        If Demand drops faster than current supplies available of low cost Oil, the price has to drop. Yes this will stop development of more high cost Oil resources, but if you say got a 50% reduction in global Oil waste, then the fields producing low cost Oil would probably be good at least another 20 years or so.

        A 50% reduction is pretty easy to accomplish here because the amount of Waste is so enormous. If/When the Euro crashes, the entire European continent will be on a forced conservation regime taking probably 80% of their Carz off the road, and here in the FSofA UE will take another 50% of our Carz off the road. When the Nips stop producing Carz, they’ll also stop guzzling up so much Oil. when people here run out of Credit to buy Chinese Toys, the Chinese will stop guzzling up so much Oil.

        One way or another here, you get your Conservation.

        RE

  11. dolph

    Isn’t credit deflation solved by monetary expansion? I know this may sound too simple, but isn’t this actually the way banks are functioning in the real world, right now?

    Credit is extended, which then bids up the prices of assets to unsupportable levels. When the debt inevitably goes bad, base money is printed, which goes to the banks first. The debts are leftover, to be paid by somebody’s grandchildren, or just discharged at a later date. But as long as there’s some circulation of base money in the economy, there’s always a bid for assets, even at lower prices. The “collapse” never comes. Just chaos, volatility, and confusion.

    As much as modern people would like to forget the early economic thinkers, classical liberals, libertarians, Austrian school, whatever you want to call them, this is precisely what they warned about. The lack of honest money. If you have honest base money, in an honest economy, then generally speaking you will have more honest credit, because the collateral for the credit is not just fiat money but hard currency, in limited supply.

    If you focus too much on credit, it’s like being spooked by a ghost even as a thief steals everything in the next room, or being scared by an insect and not a gun.

    The problem as I see it has more to do with unsound fiat money than credit, per say.

    1. Sandor

      http://www.acting-man.com/?p=13452

      “Unfortunately, in 2012 the world is in this sorry state. It is not the nature of banks or banking per se, it is not the nature of borrowing and lending per se, it is not the nature of fractional reserves per se. It is duration mismatch, central planning, counterfeit credit, buyers of last/only resort, falling interest rates, and a lack of any extinguisher of debt that are the causes of our monetary ills.”

      1. steve from virginia Post author

        There isn’t any honest economy, creating honest money is impossible even if anyone wanted. To have honest money first must have honest economy.

        If anything was honest there would be less concern about price.

        Credit is subversive; it is considered to mimic money but what it really does is masquerade as income.

  12. Ross

    The physical price in a physical shortage might as well be measured in gold ingots, and live cattle than any currency.

    How long does it take to bring the ceiling down on our heads? An increasingly smaller group of energy gluttons can support a boutique supply at boutique prices. About forever. Oil Energy is online. Taking the supply down 90% at this point ensures centuries of supply. It’s not the rich who are worried about running out of energy, it’s the restofems who are losing their purchasing power, and ultimately their lives.

    Labor is now completely stripped of rights. Given modern bondage accoutrements in the form of company health insurance and on-site gyms. A hamster wheel with the finest trappings. What’s to lose? It’s just everyone else who is fucked. No money, no nothing.

    This is becoming an In/Out world.

    I’m In, so as long as I don’t look Out and acknowledge the pain and suffering of destitute people who have been thrown from the oil economy, I don’t have to see it anymore. Does Out even exist? You see people curled up on corners begging for change. But, look at us, We’re In. We got jobs, insurance, perks – how come they can’t? Is it my obligation to assist them? Under what moral code?

    The dynamics of this crash are going to grind for years to come. Even a “fast collapse” of the entire system could take a decade to fully tilt every part of the world into chaos. We’ve experienced about five years of collapse and have 5 to go. Or 50…

    The horror and madness is that instead of recognizing the intrinsic bankruptcy of ecological exploitation, we are being overwhelmed by it’s physical limitations.

    There is no way Out.

    1. Sandor

      Today was a critical day in the SP. The market peaked at 10 AM EST and then dropped 20 handles. Purely technical driven ‘profit-taking’. Critical because it represented a (psychological) rejection of the FED-induced liquidity rally. The market ran up in advance of this event, pricing in further QE. At this point a crash is ‘baked-in’, before or after further QE. It’s a matter of which event comes first.

      Sure, the ECB will repo every piece of collateral not nailed down. The market will take a big hit of laughing gas in February. How long is that hit good for? 2 weeks? 6 weeks? Greece is a drop in the bucket. Portugal looms next. Then Spain. Then Italy. Then Japan. Then France. Then the USA. Then Germany. Though not necessarily in that order.

      It’s a tug of war between Central Bank balance sheet expansion and the forces of credit deflation. The ‘developed’ (aka rotten) economies are all debt junkies held hostage by their ‘primary dealers’. I’m not going to pretend I’m comfortable ‘fighting the FED’. I’ve got my share of bruises to show for the effort. It’s a dangerous game, playing the credit market.

      1. Josh

        The whole ZIRP til 2014 thing is a blatant admission by the Fed that growth is dead. It was nice to see the market wake up to that for a change.

      2. Sandor

        My thoughts exactly. Bernanke also insisted again that commodity prices won’t go higher. He clearly believes that Oil is too expensive and that the economy can’t afford it. WTI is flat since the announcement, yet Gold is up $80/oz.

        Friday’s action is also telling. Another day that Euro and the Gold are higher, yet stocks are down, due to the GDP print. This is a negative divergence. A poor technical week for the SP, as it made new highs yet failed to follow through, basically flat on the week despite ZIRP 2014. In the bull phase, the market would go higher despite bad housing numbers or poor GDP prints, especially as the Euro surged. The jury’s still out

      3. Josh

        DJIA price fractals:
        http://i41.tinypic.com/t99utf.jpg

        From Wikipedia:
        “The structures Elliott described also meet the common definition of a fractal (self-similar patterns appearing at every degree of trend). Elliott wave practitioners say that just as naturally-occurring fractals often expand and grow more complex over time, the model shows that collective human psychology develops in natural patterns, via buying and selling decisions reflected in market prices: “It’s as though we are somehow programmed by mathematics. Seashell, galaxy, snowflake or human: we’re all bound by the same order.”

      4. Sandor

        That chart shows that this area is a critical battleground for the technicians. If the Dow surges from here, the entire bear pattern is blown apart. If it rolls over, we have confirmation. I tend to agree with the fractal thesis, but I don’t really find Elliot Wave counting informative. Drop all expectations and wait patiently for her to show you.

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