All The Answers Are Wrong


07 ‹bersicht Kraftwerk

Unknown photographer (Bundesarchiv): The central powerhouse of the IG Auschwitz ‘Buna’ chemical complex at Monowice, Poland, in 1944. This giant factory was built by the chemical firm IG Farben to produce synthetic rubber, motor fuels, styrene and other compounds for the Third Reich, using raw materials mined nearby. The plant was a monument to brutality, built largely by tens of thousands of Jews and other slaves press-ganged across Europe by the German SS and ‘rented’ to Farben. Unlike much of wartime German manufacturing, toiling under the lash of Allied bombing; set up in flimsy sheds, in caves or even out in the open, the Buna facility was built of permanent materials to the highest standard. The intention was to produce wartime supplies for the German military during the years of conquest, then commercial plastics after the war was won. It was also meant to put the German stamp on defeated Poland, a permanent landmark for a thousand-year empire.

Farben was a cartel created in 1925 by combining the firms BASF, Hoechst, Cassella and Chemische Fabrik Kalle, Bayer, Chemische Fabrik vorm. Weiler Ter Meer, Chemische Fabrik Griesheim-Elektron and Agfa. These firms were founded beginning in the mid- 19th century, to synthesize dyes and related compounds from coal tar, a toxic material left over from the manufacture of illuminating gas. By the time the combine was formalized, interests had expanded to fuel, fertilizer and pesticides, cosmetics, non-ferrous metals, explosives, pharmaceuticals, reagents; also construction, mining and materials. The leading firm within the Farben combine was BASF, which had become dominant by way of the high pressure hydrogenation processes it developed beginning in 1912.

During that year Fritz Haber and assistant Robert Le Rossignol learned how to produce ammonia by combining atmospheric nitrogen with hydrogen from methane in a pressure vessel at high temperature in the presence of a catalyst. Engineer Carl Bosch at BASF expanded the process to the industrial scale. Arguably one of humanity’s significant inventions, synthesized ammonia represented a superabundance of fertilizer, allowing crop yields to increase geometrically without the need to increase the area of land under cultivation. The Haber process was soon combined with the Ostwald Process to synthesize nitric acid which together produces ammonium nitrate; this allowed for nearly unlimited supply of explosives and propellants. The timely adoption of nitrate synthesis at the industrial scale right before the beginning of World War One allowed Germany to wage war against its neighbors even as supplies of natural nitrates were cut off by British naval blockade.

In 1913, Friedrich Bergius patented a process for converting lignite coal to liquid fuel by hydrogenation under high pressure and temperature in the presence of a catalyst. Theodor Goldschmidt, a businessman and chemist with family background in the dye business built a facility utilizing the Bergius process to produce liquid hydrocarbons which became operational after the war. Ultimately, Bergius’ patent was sold to BASF where Carl Bosch perfected- then expanded the process. Starting in 1934, Farben (as Brabag) constructed a dozen coal-to-liquids plants capable of producing at full capacity as much to four million tons of synthetic gasoline and other fuels per year. In 1925, Franz Fischer and Hans Tropsch developed a complimentary coal-to-liquids process that likewise involved passing feedstocks through a catalyst at high pressure and temperatures. The output of the two processes together was sufficient to meet the entire military requirement for gasoline with synthetic fuel until allied bombing destroyed most of the plants and fuel transport.

In 1929 Walter Bach (for Farben) developed a process to produce synthetic styrene-butadiene rubber (SBR) trade named as Buna-S. There were other formulations for synthetic rubber and to some degree Farben had a hand in all of them. including types developed in the US and the USSR by Sergey Lebedev; these were all places lacking a native source of natural rubber. Farben built several facilities to manufacture Buna in Germany and occupied lands including the plant at Monowice. Together these factories were able to meed the German military demand for rubber until they were, like the fuel plants, destroyed or rendered useless by Allied bombers.

11 Kompressorenbau

Unknown photographer (Bundesarchiv), Compressor station in IG Auschwitz Buna hydrogenation facility in Monowice. The scale of these compressors can be seen by noting the figures on the far right and in the center.

In 1937, Otto Bayer (Farben) developed the chemistry to produce urethanes which today are ubiquitous in adhesives, coatings, paint, insulation and packaging. Farben chemists also developed polystyrene and epoxies, organophosphate pesticides; also photographic film, X-ray plates and developing chemicals; also pharmaceuticals including phenobarbitol and the first antibiotics; also solvents, synthetic fibers and dyes; reagents and chemicals for refining, also catalysts, lubricants and special materials for high temperature applications. One of the production centers within the sprawling Buna factory was intended to synthesize glycol compounds used for explosives, also chemical warfare agents including precursors for the nerve gas Tabun. Glycol is a component of anti-freeze.

The 1925 consolidation created Farben as Europe’s largest company; it was also the world’s largest chemical company; a top-four largest industrial firm after General Motors, US Steel and John D. Rockefeller’s Standard Oil of New Jersey. Operating through hundreds of subsidiaries and merger agreements, the greatest proportion of the firm’s business was outside of Germany. Until the war, Farben was the source of the bulk of pre-WWII Germany’s foreign exchange.

Farben was extraordinarily inventive. A reason was the company did not skimp on critical investments: from The Official 1945 Report of U.S. Congress on IG Farben;

Vast sums were devoted to research. In the period between 1932 and 1943 I.G. spent slightly less than RM 1bn, averaging an expenditure of rather more than 4.1 percent of (war inflated) average annual gross sales. A significant percentage of these expenditures went into research on products not yet in commercial production, and constant attention was also paid to novel applications of products. Well over 1,000 highly qualified men and women were regularly engaged in research work. In addition, the firm financed research work in many universities and scientific institutions.

Unlike the current run of tech firms with little- or nothing to show but borrowed fortunes for executives and venture capitalists, Farben’s top scientists and engineers were Nobel Prize winners … Haber, Bosch and Bergius; later Otto Diels for chemistry, Gerhard Domagk for medicine. Brilliant as the company was, Farben’s crimes were appalling. Farben and its manufacturing counterparts Vereinigte Stahlwerke, Daimler, Krupp, BMW, Messerschmidt, Rheinmetall, M.A.N., Mauser and the rest were the ‘Military Industrial Complex’ before the term as such existed. The complex’s war against Europe cost the lives of thirty-two millions or more, additional millions were wounded or left homeless. Instead of empire, the war left Germany divided and in ruins. The conventional narrative suggests Farben as an accomplice or pro-forma enabler of the Nazi Reich and its horrors but this is incorrect. Hitler and his gangster cronies were products of Farben no different from polystyrene and printing ink.

Technology is seductive. From the dawn of modernity in 1455, it has offered the chance for those who possess it to gain ascendancy over those who do not. The first public expressions of modernity were both revolutionary and aggressive. The printing press enabled Martin Luther’s reaction against the Catholic Church, the three-masted sailing ship made possible the almost instantaneous conquest of much of the Western Hemisphere by Spain and a handful of adventurers. The press put paid to the Church’s monopoly on information and by doing so ended Rome’s position as mediator of public and private affairs across Europe. The sailing ship took rapacious Europeans to every corner of the world, to pillage what they could, to colonize and enslave as far as the oceans could carry them. The roots of technology are in war and revolution, its branches are crimes and misery, death and ruin; we obsess about the flowers while we choose to endure- or ignore the rest.

Like a wrench or a saw, technology offers leverage: the policies that spring from it are entirely self-referential and self-contained. A saw either cuts or it doesn’t; what happens otherwise is never an issue, what matters is the ‘efficiency’ of the cut. Technology sets its own terms. To the saw everything looks like a piece of wood; analysis is reduced to these terms and none other. The observed purpose of technology to expand itself; it is both ends and means simultaneously, with one justifying and reinforcing the other. Spain’s conquests and Luther’s bid for reform set into motion social and economic events that culminated a century later with the Thirty Years War and the annihilation of a quarter of Europe’s inhabitants. On its own terms, Auschwitz was a very good concentration camp, it was able to murder over a million harmless Europeans and provide industry with a million more as slaves at very low ‘per unit’ cost; with very little fuss. Objections were- and are nothing more than sentimentality; those Jews and Russians were all going to die, anyway.

By way of the internal logic of technology, the most outrageous crimes are nothing other than ordinary, predictable mechanical processes. Technology ‘does’ because it ‘is’, there is are no other reasons, in fact reasoning is never part of the industrial equation; here there is never a why. Like the genie and the bottle, technology cannot be ‘un-invented’, it can only be replaced by newer, more revolutionary and warlike versions, or forgotten or starved of the materials it needs to continue. The failure of technology is that while it offers reach and grasp it cannot provide things that are inherently peaceful and accommodating. It is the same with economics, which produces ‘wealth’ but cannot provide money that is impossible to steal.

Within the version of ‘modern’ that Farben conjured as it trundled along, the firm itself was an unexceptional component as were the materialist anti-philosophy and the baggage of self-driven rationalizations that went along with it. Like gravity in Einstein’s universe, Farben ‘bent’ the space of modernity, adapting everything within it to itself. Whatever was in that space was Farben’s property, to do with what it pleased. This included the humans who were victims of the company as well as the governments that victimized them for the company’s profit. Outside the curve, the firm’s products existed for no other reason other than they did not exist before, what was to be done with them after they were delivered and the warranty ran out was never the company’s business … According to the internal logic of technology — not just Farben’s — the product was- and is always neutral; guns don’t kill people, neither do explosives, nerve gas, cars or atomic bombs, tanks, drones or air-to-surface missiles. Hannah Arendt observed of the blandly innocuous Standard Oil of New York employee Adolf Eichmann:

The trouble with Eichmann was precisely that so many were like him, and that the many were neither perverted nor sadistic, that they were and still are, terribly and terrifyingly normal. From the viewpoint of our legal institutions and of our moral standards of judgment this normality was much more terrifying than all the atrocities put together for it implied – as had been said at Nuremberg over and over again by the defendants and their counsels – that this new type of criminal, who is in actual act hostis generis humani, commits his crime – under circumstances that make it well-nigh impossible for him to know or to feel that he is doing wrong.

Eichmann, like Arendt’s ‘others’, was a product … of what-ever branch of industrialization, it does not matter. He was more deadly than some, less so than others. Accompanying Eichmann in the dock was the banality of technology, the dumbest of all automatons; without comprehension or sense; a Golem made of nitrate and rubber hovering both in- and outside good and evil not quite one nor the other, all things being exactly the same. This is the logic and tyranny of the machine, the false idol we have decided it is best for us to live in the center of.

Gerhard Schrader aimed to end world hunger; in the process of developing pesticides he discovered the nerve agent Tabun, that was later produced in large quantities by Farben. The chemical turned out to be difficult to handle and for that reason and for others, it was never deployed. Haber’s ammonia synthesis offered the same benign promise, to feed the hungry. In 1914, Haber without hesitation volunteered his expertise to the Kaiser government, to develop and deploy poison gas during the war, having a personal hand in the first use of chlorine during the Second Battle of Ypres in 1915. “During peacetime a scientist belongs to the world,” said Haber, “during wartime he belongs to his country.” Ammonia synthesis was the foundation of Imperial German firepower, without BASF’s explosive compounds, the German assault on the rest of Europe would not have been possible. Hitler’s war would have been stillborn without the ability of Farben to synthesize motor fuels and rubber — and to obtain essential compounds as well as intelligence from its American partner Standard Oil. The conventional narrative casts Hitler as the convenient villain; that the rest of the German government, its helpful industries and naive populace were dupes. That Hitler was a villain there is no doubt. The narrative one step further makes Farben the industrial villain and that its fleet of partners and lenders, including Brown Brothers Harriman, Standard Oil, Shell Oil, Morgan Bank and the Bank of England were dupes as well. Another step further and the German Schutzstaffel-SS were the evil actors that the Farben executives were taken advantage of; this narrative held longer and was very convenient as scores of Farben executives took high-level management positions within the firms that succeeded Farben: Agfa, BASF, Bayer AG and Hoechst (merged with other companies).

Technology pushes back limits, but cannot eliminate them. It only goes so far, providing some solutions but not all of them. Farben offers a window allowing technology to reveal its shortcomings, it also a means to understand Germany, which to a large degree was a product of the dye firms that were the parent of the IG Farben company.

– All the answers are wrong: the long shadow of Farben.

– Germany, like the United States, emerged from the crucible of war. They also emerged against the same adversary.

– The First and Second European wars were started for the same reason, Germany lost both wars for identical — but different — reasons. Technology gave Germany the chance at success in its wars but technology proved to be irrelevant at the end.

26 thoughts on “All The Answers Are Wrong

  1. LJR

    – The First and Second European wars were started for the same reason, Germany lost both wars for identical — but different — reasons. Technology gave Germany the chance at success in its wars but technology proved to be irrelevant at the end.

    What does “identical — but different — reasons” mean? Logically speaking it makes no sense. Two things that are “identical” are not “different” – right? “Irrelevant” probably should be “insufficient” – no?

    Very strong beginning and middle but last paragraph needs work.

    1. steve from virginia Post author

      What you are referring to is going to be the second part of this series; with time, all will become clear.

      The first and second European wars were started for the same (economic) reason.

      The wars were both lost for the same reason but this was different from the cause that triggered the wars.

      Indeed, it turned out technology was irrelevant to the outcome … in the European theater, not quite the same sequence of cause-and-events in the Japanese theater.

      More to come … I don’t want to give the ending away.

  2. Oilcrashing

    Hello everyone,

    Steve, what do you think about this comment (BW Hill is the author)? Would you add anything to it?

    “The bulk of the world’s capital is held by pension funds, SWF, and the 1%. The 1% are noted for squeezing the last nickel out of a dead man’s hand, but they aren’t stupid. Just incredibly greedy. It is that greed that keeps them in the game, and the belief that their god, the FED, will never desert them. But they do appear to be getting closer, and closer to the exit. The crash in oil prices has probably cost them better than a $ trillion in the last couple of years. NIRP has sent European banks heading for cash and gold.

    Interest rates are a measure of the time value of money. NIRP means that cash is no longer a place to make money; it has become a place to lose money. The 1% are now looking for any place that can preserve their wealth. That is not going to be in oil, or buying additional debt. Without their cash to support credit markets there will soon be no credit market. Corporations will not be able to roll over their bloated debt holdings, and mom&pop won’t be looking to buy next year’s F250.

    The CBs will lose control when the FX markets sweep them out of the way. Oil producing nations are already seeing their currencies crash. The US petro-dollar is getting to be the last man standing. The petro-dollar, however, depends on petro, and with most producers now losing money on every barrel that they produce, that can not last for long. The end of the oil age will not be a massive collapse all in one day. It will be a series of crises coming one after the other. It will be the world sitting around waiting for the next shoe to drop, and completely void of any idea of what to do to prevent it! Most will never understand that it is an energy problem; that the world is simply running out of gas.”

    http://peakoil.com/production/the-seneca-cliff-of-oil-production/comment-page-1#comment-268520

    Best Regards,

    1. steve from virginia Post author

      The ‘Seneca cliff’ has gone mainstream … interestingly enough, the graph is the same as one of output from a fracked well, or a fishery exposed to ‘modern’ harvesting technologies. Dennis Coyne’s graphs (at the top of the page @ peakoil.com) have an ‘optimism bias’ (the data comes from EIA & PB), there is also a lot of information. For instance, depletion (in aggregate) is racing as more tech/more exotic tech are applied to the reservoirs we have access to. At the same time, the decline rate (in aggregate) is expected to be very modest which does not make any sense at all. Plays past their peak exhibit decline rates that are much higher than a percent or two. An increase in the decline rate against more aggressive extraction would mean the drop off in the end would be much more severe. The graphs don’t do any favors but showing chronic decline in the aggregate taking place decades from now.

      I expect net declines across the board taking place already.

      I agree that interconnected oil extraction and credit provision are the vulnerabilities in our current way of doing (oil) business. I disagree about central banks, they have been relevant since the turn of the millennium. The price of money is no longer forward cost but the exchange rate: the amount of the petroleum that can be swapped for this-or-that kind of money. In this onrushing ‘hard currency’ regime, central banks have little role as they do not have the means to conjure petroleum. They can manipulate asset prices but cannot enrich the customers that the assets represent. Instead, the gains of asset holders are equal to losses of everyone else, it means drillers can finance themselves through asset sales even as their customers are starved of funds.

    1. steve from virginia Post author

      The nat-gas industry should check out the fishing industry, there are parallels.

  3. ellenanderson

    I like the direction you are taking. Two of my favorite books are by Thomas Hager on this topic. They are ‘The Demon Under the Microscope’ and ‘The Alchemy of Air’
    When I first read them I was less aware than I am now – of everything – and I thought about all of the supposedly “good” things that came out of technology. I thought especially about wonder drugs because they have been so especially beneficial to women and children. But now I think that these benefits are far outweighed by the deaths of other humans and other species and the impending destruction of the planet.
    Here is a quote from The Demon that is up on Hager’s website: “Where there were once several competing approaches to medicine, there is now only one that matters to most hospitals, insurers, and the vast majority of the public. One that has been shaped to a great degree by the successful development of potent cures that followed the discovery of sulfa drugs. Aspiring caregivers today are chosen as much (or more) for their scientific abilities, their talent for mastering these manifold technological and pharmaceutical advances as for their interpersonal skills. A century ago most physicians were careful, conservative observers who provided comfort to patients and their families. Today they act: They prescribe, they treat, they cure. They routinely perform what were once considered miracles. The result, in the view of some, has been a shift in the profession from caregiver to technician. The powerful new drugs changed how care was given as well as who gave it.”
    ― Thomas Hager, The Demon Under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor’s
    Heroic Search for the World’s First Miracle Drug

    This is an example of exactly what is so awful about technology in the long run. But most of us alive today would say that we have benefited in the short run and that we are happier than people who lived without technology. That is because we do not see ourselves as part of the long run. Aristotle said that no one could be judged happy unless one looked at the lives of his children. We moderns have reduced our concept of ourselves to material beings who just need a good meal and a warm bed. That is what we mean by “human nature.”

    Also, there are many who would say that agriculture itself is an example of technology. It allows us to build up a surplus which requires management and ultimately leads to collapse (Steve’s law?)

    Others like the Levelers and Diggers and assorted peasants through history would say that agriculture is OK so long as it is done by humans feeding their families (tribes?)

    You recently said that the only activities producing value are “art and agriculture.” I would like to agree with your but can I? Should I?

  4. Ken Barrows

    I don’t think it’s a trend, but rig counts for oil up the last two weeks. Why? Anticipation of further price increases for a barrel?

    1. steve from virginia Post author

      The drillers are doing two things: a) chasing their tails, b) hedging their bets.

      ‘Investments’ in the futures’ markets gives the green lite to drillers by indicating (as you observe) higher prices to come. This means more specs jumping in, higher futures prices in a virtuous cycle.

      At the same time, drillers have hedged their output by selling forward. The drillers’ counterparties have to pay out if the price is too low when the contracts expire, the drillers also have to borrow more to make the spread between actual price and cost. There is a convergence of interests on the parts of both drillers and their counterparties to seeing futures prices rise. Drillers would rather not borrow as much, counterparties don’t want to lose money on their contracts.

      What what torpedoes the drillers is their bottom lines; their customers are still broke, becoming more more broke all the time. The strain on the industry increases relentlessly. I personally don’t think the current price can hold … some (credit) market somewhere is going to go under the blade and the price will fall. Specs will lose … more drillers will be clobbered.

      Gas industry has the same problem. Nobody can afford more than the lowest possible price.

  5. Reverse Engineer

    All of this is quite understandable once you grasp that it is the outcome of the Will to Power rather than Fashion.

    IG Farben did not develop its chemical processes and industry because they were Fashionable, they developed them because it brought the owners of the company and then Germany by extension more Power. With more power, they could hope to conquer more lands and thus have more resources at their disposal to further increase their Power.

    Making the lifestyle that this power enabled Fashionable was secondary to the Will to Power. The population at large had to be convinced that the Industrial Lifestyle was the better one, due to all the wonderful labor saving devices it offered. No longer do Housewives have to scrub laundry on a Washboard, a Washing Machine from Whirlpool will do that for you! No longer do you have to wait for a train full of smelly and diseased people, you can drive to work in your own Car! Very appealing perks, and so EZ to make Fashionable, but it was the Will to Power which set it off.

    RE

    1. steve from virginia Post author

      RE, you make my argument with two words, I need say no more: ‘Industrial LIFESTYLE’.

      Of course the lifestyle was ‘better’: that is, it was more glamorous, more leisurely, it could be showed off and fit into prepackaged and assigned (contrived) roles:

      https://thesocietypages.org/socimages/2012/02/27/torches-of-freedom-women-and-smoking-propaganda/

      Hitler was successful where Tojo, Stalin and Mussolini were not. Hitler is an enduring fashion figure (even today). He is so in ways the other ‘Brand X’ could not understand, in his dull, folkish way he was thoroughly modern and ‘innovative’. It was his genius to glamorize state violence, to make it sexy in a gay-ish, S&M sort of way:

      SS Uniform

      Hitler is the love that dare not speak its name … He put the stodgy, ultra-conservative (mostly Roman Catholic) ex-Prussian Junkers on wheels and made them fast:

      https://www.youtube.com/watch?v=8ha0qKquG2E

      (Will to) Power is an appearance which conveys meaning / teleological conclusion, like a painting or a religious icon. That is so is borne out by ongoing events: fashion dissipates itself along with the supply of resources upon which is formed, its only power is to appear invincible even as it becomes decadent- then impotent by way of its own internal processes.

      As far as Farben goes, it had its roots in the dye industry (its business components were almost all dye makers).

      http://www.jstor.org/stable/226925?loggedin=true&seq=1#page_scan_tab_contents

      1. Reverse Engineer

        Cool looking uniforms would not have done jack shit for making Hitler successful without the Haber process.

        Will to Power —-> Fashion

        NOT

        Fashion —–> Will to Power

        RE

  6. Creedon

    When you simply “drive,” around and look at what is going on in America, it seems that we are at peak auto, and have plenty of money for gasoline. The parts of the world that are collapsing are the oil producing parts of the world, Venezuela and Nigeria. If this process continues, places like Saudi Arabia and Russia might be the next ‘stressed,’ part of the world. Is there any real evidence that world demand is falling. We are still pretty close to peak as far as I know. It seems to me that what has possibly changed is that the world is producing more and more oil of lesser quality that is helping to drive down the cost and driving out those producers that can’t produce at that coast. B.W. Hill says that we are too concentrated on volume rather than quality.

    1. steve from virginia Post author

      It’s hard to come to any specific conclusions about America right now: some places like coastal cities, are more economically secure than others. In fly-over country or outside the US there are consumer stresses anywhere. Outside the US, local currencies surrender purchasing power to the dollar, declining demand takes place by way of the forex channel. Declining demand in these places is self-reinforcing as local currency is used to bid for harder varieties such as: dollar, euro, yen, sterling. In oil producing countries this currency arbitrage is a very serious problem.

      The outcome is a vicious cycle where worker buying power drops, GDP growth slows, local currency declines in forex markets vs. dollar; local currency is used to buy dollars => removal of dollars out of the country. Those w/ dollars can afford to buy fuel but don’t (b/c dollars are too scarce), those with local currencies cannot afford to buy fuel … little or not at all.

      See this dynamic at work in China where RMB buys dollars which leave the country — not to bid on gasoline, but to buy real estate in Vancouver or San Fransisco.

  7. ellenanderson

    Modernity may have started with the Norman invasion of England in 1066. (The world would have been better off without William the C.)
    Until the end of the high middle ages Christians and Muslims agreed that usury was a mortal sin. But the French and the British and the Italians had to set up a banking system so the Europeans could finance wars to decide who was king. Once you allow banking you are cooked – literally as it turns out I guess.

  8. Oilcrashing

    Nigeria’s latest developments:

    Nigeria’s Central Bank Finally Throws in Towel on Naira Peg
    http://www.bloomberg.com/news/articles/2016-06-14/nigeria-central-bank-to-announce-new-currency-policy-wednesday

    It seems to me that Nigeria is just next on the list of countries which will suffer an hyper-inflationary collapse. I am afraid it will take out major parts of Africa with it, if it finally collapses.

    http://www.businessinsider.com/nigeria-gdp-head-into-full-blown-crisis-2016-5

    Best Regards,

    1. steve from virginia Post author

      Venezuela’ currency crashed a while ago. Ditto Brazil’s and Russia. Saudia’s peg will be broken soon enough that will likely knock the price of a barrel of crude back to $25.

      Strong dollar will impair US exports including agricultural goods, this will have reverberations in food markets.

    1. steve from virginia Post author

      Mmmmm … maybe!

      Deleveraging is definitely coming, no doubt about it. On fire everywhere … UK, EU, Russia, China, S.Asia, Latin America … US actually looks good by comparison (even with the crashing oil business).

    2. steve from virginia Post author

      Mmmmm … maybe!

      Deleveraging is definitely coming, no doubt about it. Credit is onn fire everywhere … UK, EU, Russia, China, S.Asia, Latin America … US actually looks good by comparison (even with the crashing oil business).

  9. Creedon

    Macro ops sees oil going to the teens in a year or two and basically causing the next crisis. Do you think this is wild eyed guessing. They base this on the dollar gaining in value over the next year or two. It seems to me that many of the oil prognostications involve just the inventories at Cushing, Oklahoma or some other parameter when the reality is that the oil price is made up of more than one thing happening.

  10. Creedon

    ‘Credit is on fire everywhere,’ In practical terms all these countries that you mentioned are running up debts in economies that cannot support them. If the Brazilian economy collapses, I’m still having trouble seeing how that translates into a demand for the dollar. Are you saying that all debt is issued to the U.K., Russia, China, South East Asia, and Latin America in dollars. It would seem to me that banks in their countries would issue the money for development in their local currency. If their local loans fail then it would be their banks and currency that fail not the dollar.

    1. steve from virginia Post author

      What happens is that exporters like Brazil (who ship iron, petroleum, sugar and other agricultural goods to China) receive in exchange a lot of dollars. Because of the lively export trade and a happy narrative of growth and prosperity, there is also ‘direct foreign investment’; billion$ lent by Wall Street to Brazilian firms and the government. Up until a few months ago, Brazil was one of the vaunted ‘BRICs’, it could do no wrong. The result = flood of dollars and other hard currencies (euro, yen, sterling) into Brazil.

      These dollars found their way to the Banco Centro de Brazil where they became collateral for the issue of reals. Even as the exchange rate fluctuates in nominal terms the purchasing power of the dollars held by the bank is equivalent to the that of the reals issued. What this means is if the central bank holds $10 billion the reals that the bank issues will purchase the same goods as the dollars regardless of the ‘number’ of reals. The purchasing power relationship between currencies is unitary, one-to-one.

      This is fine except when the collateral leaves the premises, then the currency issue is unsecured. Even as the nominal amount of reals holds steady (increases), is purchasing power declines in step with decline of collateral @ the central bank.

      Countries like to export b/c they can hold the dollars while they issue their local currency; instead of just dollars they have dollars AND reals. This represents a doubling of purchasing power (the dollars are used for imports). Sadly, hard currency flows in … it also flows out again. Dollars buying imports are not in the central bank vaults. China buying less iron ore and soybeans = fewer dollars flowing in. The Brazilian businesses turn out to be Ponzi schemes or are defunct, the government is revealed as hopelessly corrupt = the investment opportunities in Brazil = mirages. Dollar investors cut their losses and sell out their positions, taking their dollars out of the country. The central bank buys Brazilian assets to preserve the nominal relationship between real and dollar. By doing so the dollar collateral is spent into hands that take the dollars out of the country. This is a process that feeds on itself, the real is depreciated in the market which provokes more selling and a greater demand for what few dollars remain. The real itself becomes increasingly over-leveraged, there is less collateral behind it.

      At some point the monetary system becomes insolvent = balance sheet recession. There is a run out of the real, also runs out of finance markets and ultimately out of Brazilian banks. There is inflation and high unemployment leading to a crisis as during the Tequila Crisis or the very similar 1997 Asian Crisis.

      Trans-national flows are tricky and dangerous. When the flows are inbound there are bubbles and mal-investments: stupid expenditures like the Brazilian Olympics and World Cup. When the flows reverse, funds needed to retire debts taken on to inflate the bubble are gone and there are demands made against other forms of collateral. The currency crashes and the government is forced to ‘devalue’ = everyone in the country becomes poorer. In this way Brazil is becoming Greece right under everyone’s nose.

  11. Creedon

    Steve, you can disregard my question. You answered it in a post on 14 June. In a way you are saying that there is a currency war going on that the dollar has to win, because the dollar is backed by oil. When these countries lose the currency war the wealthy in those nations buy dollars to preserve their wealth. All of this would make B.W. Hills position that oil will go to approximately zero by the early 2020’s important, because if he were to be right the dollar will be essentially worthless by the early 2020’s. We are currently watching the currencies of the developing world fail and when this process is complete enough the dollar will begin it’s fall.

  12. Reverse Engineer

    Basically it boils down to this: The Dollar is the best looking Dog in the Pound.

    The weakest currencies devalue first, thus raising the relative value of the Dollar, until it can rise no further. At this point, all other currencies are practically worthless, and then the claims against the Dollar itself begins. If it was as low as 100:1 I would be surprised, this is the source of Nicole Foss’ tag line, “multiple claims against underlying wealth”. So essentially, anyone holding an asset denominated in dollars gets 1 penny on the dollar for that asset, except it doesn’t exactly work that way. What happens is one person with strong political power gets $1, and 99 other people get BUPKIS.

    What the whole analysis does not take into account though is a discontinuity along the way down. All managed perfectly, you might just shrink it down, but such perfect management is highly unlikely. So for instance, a Renminby crash/devaluation by 50% sends the banking system there into a tailspin, which then causes a crash in the Western banks who hold a lot of Renminby denominated assets. They just can’t unload them that fast, and to WHO are you going to unload them?

    It will be interesting to see how it plays out, but somehow I don’t think this deleveraging will go too smoothly.

    RE

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