Ciao, Britannia!

Triangle of Doom 062516

Figure 1: Chart by TFC Chartz (click for big): It’s called the Triangle of Doom for a reason, carried through to the end, no outcome is possible other than demise of the automobile industry and its petroleum dependencies. Since 2000, there have been a series of petroleum price surges intended to meet the industry’s exorbitant extraction costs. Each attempt has failed as credit conditions outside the fuel markets deteriorated. As can be seen, many of the credit failures originated within the European Union. These fails, credit shocks and price retrenchments are to some degree, a product of EU structural shortcomings. Now, the British have voted to leave the EU, panic ensues: (NY Times).

‘Brexit’ Sets Off a Cascade of Aftershocks …

Maybe the future does not include flying electric cars after all.

By Steven Erlanger

Britain’s startling decision to pull out of the European Union set off a cascade of aftershocks on Friday, costing Prime Minister David Cameron his job, plunging the financial markets into turmoil and leaving the country’s future in doubt. The decisive win by the “Leave” campaign exposed deep divides: young versus old, urban versus rural, Scotland versus England. The recriminations flew fast, not least at Mr. Cameron, who had made the decision to call the referendum on membership in the bloc to manage a rebellion in his own Conservative Party, only to have it destroy his government and tarnish his legacy.

So it goes. There is a huge reaction and certainly more to come as markets digest what has happened … and what is certain to come. In the end it is very simple …

The Brexit vote was inevitable. Britain had no choice but to jump in the lifeboat and abandon the sinking EU Ponzi scheme.

Will it succeed? Probably not but it has to try. If not England it would have been another big European country, perhaps Italy as the first to abandon the scheme. The rest have to wait … but not for long. England’s alternative would be to devolve in a few short years to a petty euro protectorate like Greece or Ukraine begging Russia for fuel and Frankfurt for loans and forbearance. At issue is UK’s massive (£6+ trillion) external balance sheet, its banking liabilities vs. the dubious quality of its assets.

Brexit states unequivocally the City of London is insolvent; at the the point where it cannot finance itself any longer. This is the reason why the establishment rolled out the Brexit referendum in the first place, to save the banks. Think of Brexit as a bailout: the small will pay for the excesses of the great. The City certainly cannot finance the rest of the country and its massive and non-remunerative fleet of gas-guzzling automobiles; something has to give. There are 31.5 million cars in a country of 64 million humans, each car requires the resources of 20 persons. UK staggers under the equivalent human population of 630 millions on a small island … the bulk of those being dented, metal deadbeats. Talk about immigration, no wonder the economy struggles.

The automobiles and their need for fuel imports and infrastructure paid for w/ endless credit issue have bankrupted the entire West, not just England. In Europe: the euro = gasoline. For once — maybe not realizing exactly why and not being entirely happy about it — the British have voted against their cars.

It’s about time!

40 thoughts on “Ciao, Britannia!

  1. ellenanderson

    Oh come on. The stock market is down a little bit. Oil is down a little bit. I was expecting shock and awe – fireworks – and this is all we get? Ho hum… of to bed.

  2. ellenanderson

    Looking out at the street. Carz going by as usual.

    Ivan Illich said “Tell me how fast you go and I will tell you who you are.” We are still the 1% here in the US. All of us. When we can’t fill up our tanks to go out for our morning coffee that will be the end of the world. But all is complacency for the moment.

  3. LJR

    I’m totally Brexhausted with the Brexbrouhaha.

    Do I understand correctly?

    A NON-BINDING referendum with no timetable for implementation passes by a very small margin.
    Legal beagles think Article 50 must be agreed upon by the Parliament to be legally binding.

    This is a total fiasco – top to bottom. The net result is that the legitimacy of the UK government is called more into question than the Poohbahcrats of the European Union.

    I suspect there will be a second vote and the voters will choose to remain in the EU after experiencing the hopeless incompetence of their own government.

    The worms of Whitehall will find a million wormholes for wiggling out of this. And the population will let them.

    1. steve from virginia Post author

      Look @ the other countries at the edge … looking or have faced exiting the EU.

      None of them are ‘successful’ in fact all of them are bankrupt … with one exception.

      The unsuccessful countries need to leave b/c EU policy gives them a ‘one-size-fits-all’ choice, obey and be destroyed. “It’s good for you!” the Eurocrats cry as the screws are tightened on straitened little countries. This is a lie, the putative beneficiaries are northern European banks: they have lent trillions to deadbeats, and the EU is the collection agent.

      The ECB has been able to keep the banks un-dead but … England leaving the EU because they are just as broke as Greece and the other PIIGS. The difference is the UK banks cannot be helped along by the ECB which can only offer euro- denominated credit. The British are left to bail themselves out, to meet their enormous fuel bill, to survive any way they can.

      Looked at it this way, it is the EU that has abandoned Britain, not the other way around. Remember, the EU is not a transfer union, so says Mrs. Merkel!

      Now, if a second EU country leaves; even Greece; the third country out will be Germany. It is not a financial disaster on wheels like the others, however its relative success is a problem. The balance of the EU’s liabilities are payable by Germany: none of the other countries have any money. A Grexit or Spanexit would leave Germany as the EU’s bill payer of last resort.

  4. Creedon

    I agree that the car needs to go, but their must be many other changes also, and they won’t happen without the time of travail.

    1. steve from virginia Post author

      Where does a TV personality/talking head get that kind of money?

      Okay he borrowed it. Who is he going to get to repay the loans? He has nothing to ‘sell’.

      1. Lidia

        Believe it or not, Mr. Lauer’s salary is something like $25 million per annum.

        What does he sell? Business as usual, I reckon…

      2. steve from virginia Post author

        I’m reeling here, I had no idea. I can understand paying Johnny Carson the big $$$, but …

    1. steve from virginia Post author

      Your article is very good, it’s sensible and to the point. It is hard to do better than that.

      It’s hard to say a recession is going to happen __________ because nobody can see all the moving parts. The trend is certainly heading in that direction: maybe next year, maybe next week!

      Low/negative interest rates indicate deflation and the absence of ‘investments’ outside of finance … which aren’t investments at all.

      Are low rates the chicken or the egg? Low rates have knock-on effects that make business difficult. At the same time, enough business difficulties and rates plunge as there is less demand for credit.

      Low/negative interest rates are also a product of relentless central bank ‘bond-buying’, mostly since 2009. Finance companies borrow from central banks while posting their assets (bonds) as collateral with little regard to what the asset is worth on the open market. Deflation and monetary policy amplify each other, making it unlikely for rates to rise. I believe the entirety of the Swiss government bond issue is at a negative yield.

      The banks can’t make any money in this environment, this leaves them begging for bailouts as in Italy. Ironically, the low rates are an effort to bail the banks … the effort is backfiring. There are also new rules requiring banks to hold more ‘capital’ (skin in the game) and to ‘bail in’ depositors and third-party lenders to the banks when they fail. The outcome is preemptive depositor runs and the dumping of bank shares … exactly the opposite of what the regulators want!

      Banks in trouble => less lending => lower fuel prices as the panicked depositor has no incentive to throw away money he just made a big effort to retrieve. Sadly, bankers do not think of the consequences of their poorly thought out theories: jump first, strap on parachute later.

      IMO, the biggest danger of low rates is the mispricing of risk. Even as Italian banks sink beneath the waves, the Italian government bonds (loans from the same banks) are priced as if there is absolutely no risk of any kind at all. Once there is the inevitable default, the prices will plunge, rates will skyrocket and systemic risk will emerge from behind the sun! Everyone who has loaned to these defunct governments will lose an absurdly huge amount of money … this includes the central banks. Their veneer of infallibility will be stripped and they will be revealed as incompetent like all the other lenders.

      1. Creedon

        Your saying that there will be a time when bond rates go up and price falls. Right now it seems that there are no consequences for their actions. In fiat money systems there don’t appear to be limits or consequences. The limit that I would see, and I am a follower of B.W. Hills Etp model is that oil prices will continue to fall and that this will eventually take oil off line, although they seem to have an amazing ability to lend for oil drilling that doesn’t have a realistic return on investment. I believe that in the end it is all about oil. Flooding the world with bad investments should at some point have consequences. Inflation reduces the standard of living over time. So many people in this day and age are looking for the next crisis. What if there is no crisis coming but instead we are at the beginning of a two decades long, slow reduction in the world’s standard of living.

      2. steve from virginia Post author

        Realistically, the decline in the overall standard of living has been underway for quite awhile; since ‘real-‘ or economic oil peak in 1998.

        At some point risk will emerge in the bond markets, because it always has. Markets can only defy gravity for so long then … Maybe no crash but the result is the same: large losses. Bond market is ‘over-invested’ (bubble) like so many other markets have been. It’s really the only economy we have left.

    1. steve from virginia Post author

      Peak oil? What’s that? Never heard of it. Must be a myth.

      When prices go back up. When customers get more mone … oops, more purchasing power. Can’t get that? What’s the matter with you? Are you a socialist?

      1. Creedon

        9 July 16; oil is just under 45 dollars per barrel. As oil goes lower over the next few years there will be a breaking point. I don’t know if it’s 20 dollars a barrel, 5 dollars a barrel or -50 but there will have to be a breaking point. When that happens, I would say that all bets are off on anything. It’s amazing how resilient they have been at keeping the money flowing into the system.

    1. steve from virginia Post author

      Why not? Everybody believes what the read on the Internet.

      If the electrons say it’s a glut, it must be a glut.

      (After awhile, the electrons are discredited … but we aren’t there yet!)

  5. peakperk

    Now that was a good post of yours, Steve, on Wolfstreet! I understood every word of it which means you must have dumbed it down for the man-on-the-street. I thankyou 🙂

  6. wigwam

    HI Steve, found out about your blog via Jim Kunstler’s site. I am writing an essay on the convivial bicycle and wondering, do you have a source or any figures for the concept that cars are bankrupting the West? I think it was Illich who first calculated that if you factor in all the hours you need to work in order to pay to run a car, you end up traveling at about walking speed. I wonder if there is some data for how much of the economy is centered around cars and related expenses–infrastructure, police, medical (both accident-related and failure to get enough physical activity related), emergency response, repair, sales, disposal, refining fuels, clean-up, lawsuits, etc. I imagine it is not an inconsequential figure. Any leads greatly appreciated!

    (I am posting this as a comment because I have no other way of reaching you. I have a local blog, Thanks.)

    1. steve from virginia Post author

      Wigwam, sorry I haven’t responded sooner but real life intrudes.

      To answer your question, I pretty much came to this conclusion on my own. I noticed that none of the new cars — or old ones either — comes with a slot in the dashboard that spews cash as the car is motored down the highway. Only a few drivers can gain a return by driving: deliverymen, farmers, emergency workers, transit. For the rest, driving is ‘utility’ … a form of satisfaction not necessarily economic return. This means all the car-related expenses have to be met by activities that are outside of driving the car. This in turn means borrowing. The drivers have to borrow to pay for the car, the fuel, the infrastructure, etc. or have someone else — their bosses’ companies’ customers, the government or firms overseas — borrow in their place.

      At some point the only issue is how long before the drivers can no longer borrow … or their proxies?

      There are about a billion cars in the world, it is the largest single industry not including its various dependencies — fuel, finance, real estate, government, military, insurance — and only about 5% of it offers any sort of direct, economic return. Once the credit runs out — now — ruin.

      1. Volvo740...

        What if, in the end, US Gov/Fed, buys up all ‘non-performing’ assets… (OK, I’m talking about things I don’t understand…) Couldn’t that keep it going for a little longer? Or even quite a while longer?

      2. steve from virginia Post author

        Japan and EU central banks are doing just what you are talking about. What happens is eventually securities bought are perceived as worthless and that the central bank is making unsecured loans, that is, loans in excess of collateral or with no collateral at all. When that particular light bulb turns on, depositors will run out of their, banks out of their securities and out of the currency = finance system upset.

        Central banks are tempted to make unsecured loans after the entire commercial lending system has become insolvent. The banks are in this state because they have made too many unsecured loans & collateral has soured. When the central bank makes unsecured loans it is as if the central banks is just another lousy defunct bank … with ZERO capital (central banks have balance sheet but no capital structure). Because insolvent banks cannot rescue other insolvents there is no lender of last resort, no guarantor for deposits = bank run.

        What is underway in Japan and EU is the end of the gangplank.

  7. Creedon

    Thanks for the link. This fits in with what B.W. Hill has been saying, who I feel has yet to be proved wrong. My current theory is that the coming black swan for the stock market, maybe also the bond market will be low oil prices. I read in the New York times yesterday that Cuba is going to have to cut it’s energy consumption by 40 percent because of falling supply from Venezuela which is basically in collapse. When does this effect Saudi Arabia and Russia. The twists and turns in the death of oil will always likely surprise us.

  8. Ken Barrows

    Bakken production down almost 13% with 900 additional wells producing year over year (May 2016 v May 2015). But, once additional wells producing is up about 2,000 wells year over year, I am sure production will rise. Can anyone spare a loan?

  9. Bill Sodomsky

    Boy, a day doesn’t go by without another maven mentioning the inevitable and of course obvious, to any of us Undertowers. I thought Berman said that prices would go up? I guess he finally tuned into the Economic Undertow.

    Now we just need to hear the same from that self-absorbed know-it-all RICHTER who lambasted Steve for predicting energy deflation. The “WOLF” doesn’t believe in deflation and he considers himself an expert commentator on matters of energy. He’s not a Doomer either, God forbid, just an analyst like the rest of them who can’t figure out the nature of our problems if it hit him square in the nose.

    Oh well… it won’t take much longer for the rest of world to figure out that the energy source as we knew it and took for granted, is rapidly slipping away. What comes after that is anyone’s guess but at least those of us that tuned into Steve’s work will not be taken by surprise.

    1. steve from virginia Post author

      Most folks in finance understand cycles and think that contraction cycles are inevitably followed by inflationary periods. Most financial analysts believe the last cycle was incomplete because of bailouts and central bank interference. They point out that letting finance firms fail and deleveraging would create niches for new firms, new credit providers restarting the expansion phase. In the past this tactic was effective some of the time — it is the basis of Keynesian economics — but not relevant to our current tip into resource depletion.

      It’s clear that prices will never recover, the only question is how long the industry can remain afloat under the current credit regime? The next step is command economy, I’m sure the bosses would like to keep that sort of thing at bay as long as possible.

      1. Volvo740...

        So the bottom line is: every day families go under or at least lose income through layoffs. In some situation entire countries go under in just years and this process is now well under way. Harsh living conditions arrive quickly. Collapse is definitely here for some. Media is mum or is spreading dis-information. Time to complete process: 20 years?

        Best course of action: Pay off debt and save for the lucky who still have a job?

        Other ideas?

      2. steve from virginia Post author

        Simplify, simplify, simplify.

        The less you have to manage the better.

  10. Creedon

    Net energy can only go down. Money printing has its limits as to how much growth it can create.

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