Figure 1: Brent crude weekly futures chart by TFC Charts (click on for big): Fuel prices decline because there is less credit available to support the price, yadda, yadda, yadda …

Estimable Gregor Macdonald had an interesting bit the other day regarding the last TED circus. For those unfamiliar The TED, here is their webpage:

“TED is a nonprofit devoted to Ideas Worth Spreading. It started out (in 1984) as a conference bringing together people from three worlds: Technology, Entertainment, Design. Since then its scope has become ever broader. Along with two annual conferences — the TED Conference in Long Beach and Palm Springs each spring, and the TEDGlobal conference in Edinburgh UK each summer — TED includes the award-winning TEDTalks video site, the Open Translation Project and TED Conversations, the inspiring TED Fellows and TEDx programs, and the annual TED Prize.

The prize being a shiny new car no doubt. Basically the TED is ignorable waste of time due to self-congratulation-without-limit and its hammer-meets-nail fixation on computers. It is a launch pad for tomorrow’s crop of wannabe technology oligarchs who have no real products but highly developed marketing skills. The TED events give pilgrims a chance to hone their skills on defenseless victims: each other.

Gregor introduced a new kid on the Economic Undertow block: Paul Gilding:

… it was perhaps surprising but also encouraging that the January 2012 TED conference finally addressed the subject of Collapse, by inviting Paul Gilding to give his talk The Earth is Full (opens to video).

I’d actually seen a version of Gilding’s talk at the Ilhahee Lecture Series here in Portland last fall. Gilding’s view is that we’ve reached a relationship between global population and available natural resources, that makes it inevitable that the economy—a converter of natural resources into goods—will sharply slow down, if it has not started to slow down already. Gilding can be thought of not as a neo-Malthusian, or a doomer, but rather as an ecological economist. (As most readers know, I share this same view.) Gilding looks at trailing historical growth rates — again, the rate at which natural resources are converted to industrial and population growth — and concludes that the future size of the economy at these growth rates would create a machine that the earth simply cannot sustain. Again, I agree.

Gilding’s observations regards limits and are familiar to readers here, at the same time he doesn’t scare the horses:

There are two key issues to making this the case. Ecosystem lags – the delay between action e.g. emitting CO2 pollution and response e.g. the climate changing – and the inherent risks in a highly integrated global economy i.e. the low margin for error when a globally impactful crisis hits.

We learnt the latter in 2007/8, which many now believe was triggered by record oil prices sucking money out of the US economy, causing sub-prime mortgages to default and almost bringing down the global financial system. This is a good example of systemic risk vs theoretical markets. In theory higher oil prices just reduce demand and encourage alternatives but in reality change happens fast and markets can’t respond, leading to complicated impacts. As we saw, our now tightly wound and integrated global economy can thus be easily shaken to the core by a relatively normal event such as high oil prices.

This argument is not idle, having been similarly made by James Hamilton and Jeff Rubin. What happens on the crude and related markets matters.

It’s semantics whether the current price run up/mini-spike in Brent futures prices is/was a ‘shock’ or equivalent to the 2008 spike: I say ‘tomayto’ you say ‘tomahto’. There have been a series mini-spikes and retreats, of smaller price run ups and consequent declines; this post-2008 interval has been punctuated by firm- then market- now sovereign bankruptcies. These bankruptcies appear to be closely coupled to rising fuel prices: demand destruction is more serious now than it was in 2008 which primarily effected firms and households. The bolt to $128 two months ago might have been sufficient to unhinge the Chinese economy and send it over the edge.

There are two opposing forces at work: China is dependent upon external sources of credit and foreign exchange. Its economy is an integral part of the overseas supply chain, its trade — the bulk of its economy — almost entirely takes place using euros and dollars rather than in its own currency. Difficulties among China’s customers reduces capital flows to China. Europe is in a recession, China feels pain because she can’t sell as many goods nor can it gain as many euros.

China like Greece must pay increasing amounts of hard (overseas) currency for fuel and other inputs. Its bid moves the price: here is the First Law of economics in action: the costs associated with China’s existing euro surplus are greater than the euros’ worth … and are increasing. China must diminish its surplus by spending euros but its overall currency position — like that of JP Morgan-Chase’ London Whale — is too large to liquidate.

China instead swaps some of its currency surplus into slightly smaller but still large commodity surpluses. The surplus-related costs haven’t been eliminated, instead they has been spread around China’s economy. The effect of the increased costs is inflation inside China.

Meanwhile, China cannot spend euros it does not earn. Having spent on commodities as stores of wealth, China must spend more to support price. China now lacks the new euros to do so. China is trapped by her own mercantile dynamic: she must sell goods for euros at the same time she has too many euros!

What China should do is buy more EU and US finished goods but she cannot. China can buy commodities and store them but not finished goods as her workers cannot afford them: China is a selling machine, only.

China’s past euro earnings pushed commodity prices higher while China’s current euro non-earning undercuts the same prices. How this turns out is anyone’s guess but right now the process indicates lower bids for commodities in China: the bids strangled by diminished credit in Europe caused by high prices of crude, the slowdown in capital flows chokes the Chinese capital-dependent economy while it must manage the high costs of currency surpluses. As Gilding points out: “the inherent risks in a highly integrated global economy”.

This leaves out entirely the matter of whether the euro itself will vanish and what will become of China’s euro hoard under the circumstance. For China to save herself ahead of the onrushing debacle would mean dumping euros at the market and precipitating the cataclysm she seeks to postpone.

Here’s gold:

Figure 2: This is the cumulative weekly gold chart: in the short term, gold has been in a bearish market for the past ten months. This is something to watch as metal prices declined during the ‘crash’ phase in 2008: the bear market in gold remained intact with no new highs until late Autumn of 2009:

Figure 3: this is the gold monthly chart: this chart and others from TFC Charts (click on for big). The 2008 decline in gold began while fuel prices were sharply increasing. The current consolidation began in September, 2011, while petroleum prices were likewise increasing. While past performance does not assure future results, it is necessary to consider whether gold is sending the same sort of economic signal it offered during the Spring of 2008. Gold is a core asset for finance firms: unlike shares or mortgage-backed securities it is not generally offered unless margin calls must be met and other assets are either unavailable or not worth enough.

The indication is that there are margin stresses building up within establishments that leverage gold or gold- derivatives. There are arguments offered that there is paper selling against the buying of physical but the price speaks for itself: there are more sellers than buyers with funds. The same means of support for crude prices exist for the gold prices. While the high price of gold does not effect availability of credit — nobody burns their gold for fun — the high price of crude reduces the amount of credit available to bid for gold.

The implications are serious: the ongoing cheerleading efforts on the part of the establishment effects assets. This includes endless moral hazard, foreign-exchange rate manipulation, ZIRP and various ‘easing’ programs. Funds flow from finance toward assets for the purpose of finding speculative returns. Some of these assets are economically vital inputs. Economists airily suggests that one input will substitute for another at some price level: what is not understood by economists is that the required price level to effect the substitution is probably unaffordable. For instance, it is technically possible to have nuclear powered automobiles if for no other reason than we have already nuclear powered ships and submarines.

(Un)fortunately, nobody can afford a nuclear-powered car so there is no economic cause to build one. What remains is alternate substitutions: in place of cheap petroleum, autos, freeways, fly-overs, parking garages, suburbs, retail malls and office towers and all that go with these things … there is shoe leather.

George Cruikshank ‘Please sir, I want some more’ From Charles Dickens’ ‘Oliver Twist’

Look across the water to the Continent(s) and see the collision between the obsolete ‘Politics of More’ and the natural economics of less. Remember, the idea behind modern politics is that the various publics (and their bosses) are entitled to live beyond their means. It is the responsibility of government to provide or else … a new collection of big-business lackeys government is installed.

Up until the turn of the millennium, the job of all governments has been to make resources available at lowest cost to giant business cartels and to lightly manage the prosperity that resulted, making certain that those at the bottom of the economic food chain were not over-supplied. The expression of this idea can be found in every kind of government including the dictatorships, monarchies and republics, constitutional and otherwise: all of these are prosperity governments. The politics in all their variety functioned more or less because there were always more resources to exploit: apparent resource growth and accompanying gross domestic product was able to race ahead of populations and their TV-driven expectations. Indeed, the only governments today suited to any degree to the hard school of less would be those of North Korea and Myanmar, not exactly the sorts of regimes we free citizens of the modern world would prefer to live under.

In 2012, resource availability has stopped increasing. That this is so is evidenced by the ongoing failure of prosperity governments to gain traction on their economic problems: Japan is in as much difficulty as Belarus as is Argentina. What the economists choose not to understand is that attempts to amplify growth accelerate depletion of the resources needed to support the growth at the same time: one such resource is credit. The establishment is not content to dig its own grave but frantically digs countless graves all over the place. The outcome of the process is to undermine legitimacy and the idea of ‘effective management’ itself. In place of Myanmar there is Somalia or Yemen, failed shadow-states hovering at the edge of utter ruin. This alternative is likewise not exactly representative of the sort of regime we would embrace if given a choice. Because of denial and refusal to accept the reality of resource depletion and act accordingly the effect is that we have no choice.

So begins not so much an age of revolution but of Revolving Futile Governments, each more pathetic/insane than the last, all promising what cannot be delivered. Like Oliver Twist in Dickens’ comedy, the beggar nations of the world line up at the empty soup kitchen looking for a ‘more’ that has vanished.

Here is Basket Case Number One:

Figure 1: it’s hard not to look at this chart from Jonathan Callahan’s Energy Export Databrowser and feel the pain of ordinary Egyptians. After all, none of them asked to be born. The huddled masses of Egypt yearning to breathe auto-induced smog are running up against the hard realities of fossil fuel depletion and voracious demand from well-positioned (ruthless) competitors. What emerges is a non-government-by-quagmire approach that leads to economic collapse and social upheaval then war. It is hard to imagine a better representation of peak oil on a chart than this. While Egyptian consumption is steadily increasing, Egyptian ability to pay for this consumption is steadily decreasing. At some point Egypt is unable to finance itself, then what?

Egypt must import food: the choice becomes what to feed, hungry mouths or empty gas tanks? Knowing the human race, the default answer is the gas tanks. Government after government will be thrown into the fire in search of one that can make the car manufacturers happy. Meanwhile, food can be had from international relief agencies by showing a few starving Egyptian children on television. More likely is for Egypt to be forced to trade both its petroleum supply and discretionary consumption to others for sustenance. A destitute Egypt will exist on international beggary, a handful of curious tourists and diminishing tolls from the Suez Canal. Why diminished? Because international shipping is another fossil fuel dependency, that is certain to shrink.

One way or the other, Egypt will live within its means. It will do so by choice, otherwise Egypt’s population- and fuel problems will solve themselves. Not something to look forward to.

Figure 2: Neither Mazama Science nor BP have data on Syrian petroleum consumption but it probably doesn’t matter. Looking at this chart it is easy to see why there is an all-out war underway. By destroying Syria’s consumption infrastructure and impoverishing its citizens all of its 375,000 barrels per day of production can be exported to the United States.

There are already rumors of NATO commando operations in Syria. Like Egypt, Syria is a place that has little to offer the rest of the world besides petroleum. It can gain food for its huddled, bombed-out masses by selling its reserves cheaply to Western bidders. Having its auto fleet crushed by tanks and blasted by artillery makes it easy. If the food trade comes up short, more can be had from international relief agencies by showing a few starving Syrian children on television.

Figure 3: Greece had new elections over the weekend to little effect. Both fuel consumption and imports are declining sharply, there are more declines to come. What fuel Greece can ultimately afford is what it can gain by way of its own non-petroleum output. The amount of fuel consumption a tourist and agrarian economy can afford is likely to be tiny, similar to the level of the 1960s.

At the beginning of the industrial period, there were few countries capable of living beyond their own countries’ resource limitations. Now all countries feel entitled to do so, restive populations demand it. This is a poisonous and self-destructive dynamic. Huddled masses look to America and the great European powers and demand an equal place/moment in the Sun. There are millions of young people willing to face machine gun bullets for the right to a flat screen television or a Toyota. This is a contest that is outside the collective imagination of the West. What pulls on Greece are the needs of the greater powers to continue to live beyond their means and the violent ambitions of the lesser nations to do so.

Physics says nothing, depletion accelerates place under the pressure of expanded demand. If fuel cannot be had from the ground it will be stolen from others. This is the brutal economics of less. Consider Greece: it cannot borrow because of the weight of its current indebtedness and the futility/stupidity of its leadership. It cannot borrow, therefor it cannot industrialize or ‘become competitive’. Destroy the Greek economy and its fuel demand is exportable.

Here is the ‘Niewe Colonialism’: there are no conquistadors or eccentric explorers with ZZ Top beards, pith helmets and leggings, instead there are suave Frankfurt bankers saying, “Nein” behind Bauhaus desks in fashionable offices, strings pulled by shark counterparts on Wall Street. As Greece unravels, its future is Somalia … or Syria. Meanwhile, food can always be had from international relief agencies by showing a few starving Greek children on television.

Figure 4: Spain has little in the way of petroleum resources, it has massive demand and declining means to meet that demand. It’s one-and-a-half million barrel per day petroleum consumption is a great prize. If consumption in Spain can be crushed, those barrels can be exported to the United States. Unlike the US, Spain cannot borrow in its own currency but must use ‘euros’ that are foreign to all users. Spain can be put into bankruptcy by its finance lenders refusing to lend. Without funds, Spain’s quasi-industrial economy falls apart … and is.

Spain has a new-ish government that flails, certain there are more governments to come through the revolving door. The endgame here is a country free of automobiles, unable to afford fuel. If the hungry inhabitants want fuel they will have to steal some from other European countries. Meanwhile, Chinese will drive using Spain’s fuel.

Figure 5: from here, France looks like the Bakken with less snow and better restaurants. Cutting French consumption to zero will send two million barrels of Russian and Saudi crude to the US. Now that France has a Red Socialist boss there is good excuse to cut off the credit spigot and bankrupt the entire country. In a year or so the frustrated French will be happy to trade their gasoline allotments to Wall Street — discretely, of course — for the means to bail out their own banking executives.

Keep in mind, if nothing changes in France, the outcome is French bankruptcy and a car-free France. Chances are, this is going to happen rather sooner than later as the ability of France to finance living large beyond its energy means evaporates. Of all the European energy deadbeats, France is the most vulnerable. Not only are its debts largest, its banks more exposed to bad loans, it is after Germany the most leveraged to the automobile. France needs no help to fail.

Figure 6: like the other countries, Italy’s consumption of petroleum has been shrinking. The cause is not conservation but national bankruptcy. Italy, Spain and France are the low-hanging fruit in the contest to steal fossil fuel demand from other nations. While Italy has some fuel production, there is not enough to support its bloated debt- and auto dependence. When push comes to shove there is little the Italians can do but wring their hands as their domestic demand for fuel sails away.

Keep in mind, if policy remains unchanged there will be more business- and national failures. The outcome is fuel prices that drop below what it costs to bring the fuel to market. There are more shortages, diminished demand and falling credit availability in a vicious cycle: this is resource deflation.

Here is Financial Times Alphaville blog:

Marginal oil production costs are heading towards $100/barrel

Kate Mackenzie (FTalphaville)

Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:

Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.

This is important because, as Bernstein analyst Neil Beveridge and colleagues note, the cost of producing marginal barrels of oil plays a big role in determining oil prices.

Analysts fail to notice what happens when the buying public is broke and cannot afford the high price of $120. What about too broke to afford $50? The same thing as if the price to bring new oil to market is $5,000! The oil stays in the ground until someone can pony up the cash. Without oil, the economy falters due to shortages and the price becomes even less affordable.

If the price is lowered from $5,000 to $3 per barrel, there is oil only if it costs less than $3 to get that barrel out of the ground. With oil harder to get in out of the way places, the cost is likely to be $3.01 … or much more. That leaves the crude where it sleeps until someone can offer equal worth for it. With returns on its use non-existent, real worth becomes more difficult to obtain. Stealing demand from others becomes more appealing than prospecting for unaffordable crude: the stolen demand represents oil in hand.

From the same article:

Gregor Macdonald

A wonderful post showing again that the price of oil is driven not be novel and arcane factors, such as speculation and financialization, but by geology, supply and demand, and the economics of extraction. The cost to deliver the marginal barrel in the post 2005 era, when global oil production stalled out, is crucially important. At bottom, the global market for oil does quite a good job at price discovery, taking in all of the various important factors. The market is quite aware of the decline in spare capacity, and these marginal costs. How much production does the world lose now, should oil fall to $75 a barrel? I can’t quantify, but it would surely lose a large chunk of future production at those levels as myriad projects would be shelved.

I note also the anger expressed in the comment section to Kate’s previous post about Peak Oil. The end of cheap oil, and the ceiling it creates on global supply of oil through a confluence of geology and economics, is a complex picture to digest and over the years I’ve come to understand that emotions run highest when people realize its very difficult to understand. However, let’s recall this was all predicted years ago: the limits on supply, the decline in flow rates, the terminal stage of Big Oil companies as they could no longer replace reserves, the explosion in finding and development costs, and the pressure on profit margins to the extraction industry. And finally, the problem of affordability.

My colleague Chris Nelder has called the tightening range between the high cost to develop the marginal barrel and the affordability of that barrel to society as the “Narrow Ledge.” That’s where we are right now. And based on the research cited in this post, the ledge is getting tighter still.

When fuel supplies are constrained, the only source of new fuel supply is the demand of other countries. That narrow ledge is sure to become a very contentious place as the cruel economies of less are played out.

Denial is everywhere, we refuse to go to rehab and kick the waste habit:

Life imitates art: we attempt to live up to candy-colored assumptions about ourselves, even as these are only images projected onto screens.

The Amy Winehouse wannabes insist we have managerial control over our problems. We do but we first have to go to rehab:

the bonddad blog

People Are Finally Figuring Out: Austerity is Stupid

From the Financial Times:

“We can only win back confidence if we bring down excessive deficits and boost competitiveness,” he said. “In a such a situation, consolidation might inspire confidence and actually help the economy to grow.”

The above statement shows why austerity is simply one of the dumbest policies on the planet. First, The EU region was already growing at a slow rate when people started to talk about austerity.

Go to rehab, Bonddad! We have zero choice about austerity which is driven by energy constraints and high fuel costs and a hyper-competitive credit environment. More demand pushes fuel prices higher, past what we can afford to pay even with borrowing. What is taking place in the world economy is the ‘pricing out’ of non-remunerative (frivolous) goods and services. This pricing dynamic takes no prisoners: there is no ‘plan’ that will return Greece to the community of wasteful consumers. If Greece is lucky and bold it will not turn into Somalia.

What the Greeks — and the Somalis — don’t realize is they are competing against China and the US for exportable fuel demand. The Europeans lack the fiscal-federal structure needed to compete with the demand kingpins who bring guns to a knife fight. The lower bound for energy demand in ‘wasted’ EU countries and the EU itself is effectively zero. Simply declaring an end to austerity policies is an empty gesture because any policy that doesn’t actively suppress demand allows events to violently smash it.

More denial:

Go to rehab Michael Hudson! The argument is that policy has been reduced to monochromatic bailing out of finance creditors by their customers regardless of the consequences (or absence of logic). The counter-argument is that any strategy that does not include conservation is irrelevant. Behind all the doors is austerity whether the policy makers choose to open them or not.

More denial from estimable Steve Randy Waldman:

Depression is a choice

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.

He’s right of course! We reflexively choose our cars over everything else … including solvency. We’ve created a universal set of fake ‘problems’ that can only be solved by first jumping into cars. The cars presume to ‘solve’ the self-created problems which in turn justify the cars in a reinforcing, self-bankrupting cycle.

Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation.

On the way to rehab Steve Waldman discovers end-game political economics is a Darwinian struggle with no winners only those who are prepared to lose less than others.

Steve Waldman assumes that Americans and others can simply choose to live beyond their means as we have for decades.

Steve Waldman insists managers’ “overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it.” The intention is to defend sunk capital ‘investments’ that are stranded by higher fuel and credit costs. The finance demand for repayment is never satisfied because investments fail to provide a return. These returns simply do not exist: we have simply decided that consumption/waste is production because somewhere, somebody gains by it.

The same thing can be said about armed robbery.

Here is why the incumbent creditors are protected and not just their purchasing power. (Mark Grant/Out of the Box newsletter/Zero Hedge):

Michel Barnier, the head of Europe Financial Services, announced this morning that he will soon be offering new rules for the debt holders of the European banks. Under the plans, senior debt-holders would face losses after shareholders and holders of subordinated debt had their investments wiped out.

Michel Barnier acknowledges without saying so directly that most of the assets at ‘banks in crisis’ are worthless: this is another large reason why bank restructuring has been avoided at all costs. Restructuring will wipe out all liabilities including depositors.

Write downs may also be applied to bank’s derivatives counterparties, it has been learned, which could be a disaster for other European banks as well as American banks. Counterparty risk will have to be evaluated again after his announcement. Barnier is considering forcing lenders to issue at least 10 percent of their debt in securities that would be eligible for bail-ins and he is also prepared to set out alternative scenarios for debt that could be eligible for write downs. The proposals will also include requirements for national governments to set up so-called “resolution funds,” financed by the banks, to cover costs from failing lenders apparently which will add to the liabilities of the European banks. Now one does not consider these types of measures in a vacuum so one would suppose that there are reasons for the implementation of these proposals and that they will go from academic to realization in short order. One more reason to avoid European financial institutions.

All administrative proposals to date are inadequate because they do not address the central ‘value’ issue: national ‘bail-in’ funds are meaningless conjectures as there are no funds to deploy, they have been ‘wasted’ or are flying out of the banks’ doors. Deposit flight puts more bank assets at risk in yet another vicious circle. The normal operation of the economy uses value — capital — as fuel, the process replaces the value(s) with debt. After centuries of burning value little of it remains, only massive accumulated obligations that can never be satisfied.

Here is an Peter ‘I Don’t Wanna Go To Rehab’ Huber in 2006: According to Huber, we have ‘huge, enormous, colossal, stupendous’ fuel resources. Do we or don’t we … and does it matter? Huber makes an economic argument that the spread between high-order energy sources and the lower-order variety will overcome EROI. His argument fails the test of time: the resources he claims don’t arrive on the market fast enough to avoid contests over them. Nations are outbid for fuel and fall destitute or they bankrupt themselves competing for fuel with borrowed funds.

More denial:

Go to Rehab Godfrey Bloom! Anyone who claims central banks are “printing money” and causing inflation is a peak oil denier. Here is a more studied approach to denial:

Rethinking peak oil

Lin Shi and Yuhan Zhang (Climate Spectator)

China Dialogue

In recent years, Chinese scholars have been embracing ‘peak oil’ theory in increasing numbers. The idea – first put forward by American geophysicist MK Hubbert in 1949 – is that individual oil fields, oil-producing regions and world oil production will display a ‘bell curve’: a steep rise in available supplies, narrow peak and subsequent rapid fall.

Peak oil theory holds a static view of the world, and its models ignore price effects: lots of oil discoveries and high production mean that prices and profits wane, and incentives for further exploration decline. But ensuing oil shortages then restore these incentives. When incentives exist, the industry will continue to produce and is likely to produce even more.

Get thee to rehab Lin Shi and Yuhan Zhang: the dynamic this duo fails to observe is that while a shortage provides incentives to drill, the effect of the higher price is to annihilate demand … of entire countries! Countries need cheap oil, their infrastructure is built assuming it. Without the cheap stuff the infrastructure is underwater: the debts taken on to install it cannot be serviced.

At least these analysts acknowledge the primacy of price in the oil equation. Both high and low prices provide incentives: low prices to waste more, high prices to extract more. However, the high-price incentive does little to moderate waste: it’s inelastic. Instead, high prices stretch fuel dependent enterprises until something breaks. At the same time the high prices increase the demand for credit. Because the fuel use is simply waste there is insufficient return to service or retire debt. This in turn requires ongoing debt monetization. What isn’t smashed by high fuel costs is clobbered with ruinous debt costs … or both.

The primacy of price in the oil equation: In dollar terms peak oil took place in 1998. The dynamic of high costs and a ‘waste gap’ that must be filled with unaffordable debt is ongoing: while analysts look out another ten or twenty years the effects they look for started to be felt in 2004.

Other analysts focus on phantoms such as the increase in total liquids and other forms of non-oil oil. Phantom-focus is simply another form of denial.

Here’s denial from climate science! (Skeptical Science) Who would have guessed?

On his way to rehab, Professor Alley supposes that renewable energy generators can replace conventional, fossil fuel versions at a negligible cost. Happy days are here again! Nobody has to die!

Either renewables replace fossil fuel waste or they don’t.

– If they don’t there is no point to renewables as the fuel waste enterprises will carry on as before, wasting fuel and loading carbon into the atmosphere. Fossil fuel waste will take place alongside the renewables (and their own embedded fossil fuel waste). The demand for more energy to waste is insatiable.

– If renewables DO replace fossil fuel waste the losses to the wasting enterprises will far exceed the cost of the renewables themselves. The auto industry and its dependencies represent 60% + of GDP. As has been seen over the past five years, reducing funds to- or cutting one dependency has effects that ripple across the entire economy: the bloated SUV is worthless without fuel as is suburbia.

– Meanwhile, the current level of ‘cash flow’ (which is what GDP represents) is what both enables and services the economy’s debts. Renewables therefor cannot replace fossil fuel waste, instead they are another fuel waste dependency (by way of debt). This is the same way sales of electric- and hybrid cars is internally subsidized within the auto industry by the sales of SUVs and giant pickup trucks. No truck sales means no electric cars b/c they are otherwise too expensive.

Speak of: the only pollution solutions must include getting rid of the cars, all of them along with car-related dependencies. The market is already solving the ‘car problem’. Europe is right now in the process of becoming car-free … the hard way.

The GDP cost is Massive. Cutthroat fuel competition using credit as a weapon is happening now under everyone’s noses and few are paying attention.

What economists and others don’t wish to discuss is when nations fail due to fuel shortage there is no chance of recovery. The reason is because no other nation will voluntarily surrender petroleum so that another can waste it driving aimlessly in circles. Should France fall it will likewise never recover or become a ‘growth’ economy as other countries will have to export their own petroleum demand to France.

Past time to kick the bad habits and go to rehab.

Hiding in plain sight:

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford

Q: How would you describe the economy?

A: It is a system that allows a select few to borrow immense fortunes. The rest of us … you, me, everyone else … repay the debts.

…

Q: That’s it?

A: That’s it.

 
The face of Peak Oil. [1]

We are in the middle of a crisis that has been ongoing for almost five years now: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?

A: Pensioners.

The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Ireland, Portugal, in the US … in cities and states pensions everywhere are under attack.

Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying pensioners? Technology is supposed to save us but the raiding of pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology won’t work, from the people who are in a position to know.

What happens after the retirements are pilfered? Who knows? Nobody has a plan.

The world is shocked to discover a shortage of capital, not for investments but to prop sagging balance sheets. Who could have guessed as capital has been shoveled into the furnaces of ‘development’ for decades? Only economists and bureaucrats believe that we never run out of inputs.

China’s Biggest Banks Are Squeezed for Capital

Neil Gough (NY Times)

China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital after an aggressive lending spree that was encouraged by the government.

Maybe they are profitable and maybe not. “Starved for capital,” suggests not. The operating idea is that capital is money rather than material inputs. These inputs are mispriced so that the money-equations used by industrialists add up to something ‘positive’. Cheating works until it doesn’t any more: substituting debt for unaffordable inputs doesn’t produce anything. Debt isn’t capital and self-delusion isn’t capitalism. Maybe we should call our economic system ‘Delusionism’ and be done with it.

Within the last year, seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion ) in new funds, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion.

Banks around the world have been tapping investors for new funds as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs.

Chinese bankers and business tycoons, each more corrupt than the last: raise that Red Flag high! The Chinese need capital because so many are stealing it and removing themselves overseas.

The problem is that paying out high dividends blows holes in their base capital. Thus, banks need to continue tapping the markets for fresh funds, often diluting minority shareholders by issuing new shares. The finance ministry, the banks’ ultimate controlling shareholder, always buys in, keeping its stakes topped up.

Somebody at the bottom always takes it in the neck. Today, it’s the minority shareholders, tomorrow it will be the senior bondholders or the pensioners or the schoolchildren forced to eat radioactive school lunches. This is part of an ongoing process, not a new feature within delusionism. It was invisible when everyone was busy getting rich: now that the abuses are visible it can only be on account that fewer are getting rich. The endgame heaves into view.

The amount of cash that is churned in the process is staggering. In 2010, China’s five biggest banks (the Big Four plus the Bank of Communications) paid more than 144 billion renminbi in dividends and raised more than 199 billion renminbi on the capital markets, according to GaveKal.

“This is the nonsense of it,” says Fraser Howie, a managing director at CLSA Asia-Pacific Markets, who is based in Singapore and is a co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “There’s an awful lot of money just going round and round from one pocket to another, giving the appearance of strength when it’s really not there.”

Fraser Howie cannot see what is under his nose. What else is he missing? How about Peak Oil? The owners of industrial enterprises borrow (steal) their fortunes and oblige the rest of us to repay the loans. The lending-go-round is the reason for industrial economies, their purpose in the first place. “Money just going round and round from one pocket to another,” is the theatrical production that is collateral for the loans. More appearances of strength means more loans — and bigger fortunes — for the owners. The churning of the bank funds is a feature, not a bug: modern finance villainy hiding in plain sight!

The public must accept the process at face value otherwise loans to ‘entrepreneurs’ could not be justified. There would be nobody able to commit to debt-service. As it is, the public has over-bought, the cost of fuel crowds out debt service. The solution is to chop off pensions with a samurai sword.

It’s not just Chinese banks that are starved for capital and it is not just banks. The world is capital constrained.

Europe’s Capital Flight Betrays Currency’s Fragility

(Bloomberg)

The euro area’s financial troubles appear to be flaring up again, as this week’s gyrations in the Spanish bond market show. In reality, they never went away. And judging from the flood of money moving across borders in the region, Europeans are increasingly losing faith that the currency union will hold together at all.

The flows are tough to quantify, but they can be estimated by parsing the balance sheets of euro-area central banks. When money moves from one country to another, the central bank of the receiving sovereign must lend an offsetting amount to its counterpart in the source country — a mechanism that keeps the currency union’s accounts in balance. The Bank of Spain, for example, ends up owing the Bundesbank when Spanish depositors move their euros to German banks. By looking at the changes in such cross-border claims, we can figure out how much money is leaving which euro nation and where it’s going.

Figure 1: Surprisingly, there is still capital in Greece and Ireland remaining to flee. Perhaps the last capital out the door in these countries will please turn out the lights.

This analysis suggests that capital flight is happening on a scale unprecedented in the euro era — mainly from Spain and Italy to Germany, the Netherlands and Luxembourg. In March alone, about 65 billion euros left Spain for other euro- zone countries.

The idea that Europe’s current incremental approach has the advantage of saving money is an illusion, and not just because the disintegration of the currency union could trigger a global financial meltdown. As the capital flight figures demonstrate, the stricken nations of the euro area are bleeding private money and becoming increasingly dependent on taxpayers. In all, the debts of struggling banks and sovereigns to official creditors such as the EU, the ECB and national central banks now exceed 2 trillion euros, much of which would be lost if the debtor nations dropped out of the currency union.

What isn’t mentioned is the flight out of euros into other currencies or assets such as US equities. Wait until the euros start flowing out of France. Bloomberg will have to draw a much larger chart.

 

 
What have you … done for your car, today? [2]

Resource nationalism should be giving more billionaires reason to pause. The game has instantly become much more interesting:

Argentine government to pay Repsol ‘zero pesos’ for YPF seizure as Spanish oil company issues legal warning

Fiona Govan (Telegraph, UK)

Spain’s Repsol has threatened legal action against any company that attempts to invest in YPF following its expropriation by Argentina last week as the government expressed determination to “pay nothing at all” in compensation to the Spanish oil company.

The move would discourage external partners from providing the investment YPF needs to exploit vast shale oil deposits discovered within the Latin American country and is the latest attempt by Repsol to fight back against the illegal seizure of its subsidiary.

“We reserve the right to take legal action against any party investing in the YPF and its assets following the unlawful expropriation of the company,” Kristian Rix, a spokesman for Repsol in Madrid, told the Daily Telegraph on Monday.

The Spanish energy company believes billions of dollars are required to develop Argentina’s prospects including at least €25bn a year over the next decade to exploit the Vaca Muerta shale discovery made last year.

Resource colonialism on a foundation of paper promises and graft will prove to be worthless as the distances to overcome are too great and leverage of the colonialists insufficient. The Argentine example is appropriate for the various biofuel plantations landgrabbed in Africa and elsewhere by the Saudis, Chinese and others. When the locals decide the renege on the contracts and expropriate the ‘goods’ there will be nothing the ‘New colonialists’ — and their Blackwater-esque goons — can do about it.

Hiding in plain sight: peak oil.

Nobody mentions that the reason for the Greek economic unraveling and that of the Eurozone is caused by peak oil. The blame is fixed on Greece’s debt exceeding it GDP by a few percentage points. Ditto the other countries under siege around the world.

Figure 2: Chart by Jon Stewart/the Bonddad: Greece borrowed euros hand over fist for ten years to import fuel that increased in price 600% since the beginning of the euro. All the other countries in Europe (except Norway and Denmark) did the same thing. Why did the price increase from $20 per barrel to $120? Because of diminishing supply relative to exploding demand. Meanwhile, Greece earned absolutely nothing from burning/wasting the fuel. Greece also has little in the way of non-fuel output to pay for imports: it’s ‘Uncompetitive’.

The Greeks were conned into believing that they could live like Americans. That they could borrow as do other large debtors at very low cost. That they had exorbitant privilege and could roll over their debts as they came due just like other ‘reserve currency’ states. They believed they could monetize pyramiding debt the way the Japanese and other large debtors do.

They would have been able to do so if the Eurozone was a country instead of a Ponzi scheme with the euro a sub-prime mortgage, if the industrial economy wasn’t a debtonomy and capitalism a delusion. Greece gulped the Kool Aid and ignored its own absence of real output and the structural deficiencies of the EU. Greece’s lenders did the same thing: once these lenders got cold feet and strangled cash flow the credit Greece depended on was cut off.

No credit and fuel is cut off, the Greek cash flow diminishes further, there is less output in a vicious, self-amplifying cycle. The outcome of peak oil process is Greece, destitute.

It’s also Ireland, Spain, Belgium, France … and Syria. Those who believe that the endgame of peak oil is Mad Max are wrong. The outcome for the unlucky is ten- times worse. The movie warriors did not have armor or heavy artillery and the willingness to turn it loose on civilians.

[1] Unidentified cinematographer, ‘The Character Humongous from the film, Road Warrior’.

[2] Unidentified photographer, ‘Syrian armor on the streets of Homs’.

Figure 1: Unsupportable cost of fuel and $125-per-barrel is the bridge too far. Chart by TFC Charts.

Prices for crude oil are both too high and too low at the same time. High prices are eroding demand while too-low prices threaten petroleum production.

It appears the bear markets for crude since 2008 is still in force. There is little buying pressure above $125 per barrel. It is possible for a catastrophe to destroy demand worldwide but rather it is likely for a retest of the $125 per barrel price one more time in the near future. within six months or a year. After that the price will decline because the world’s credit system will be visibly coming apart at the seams and demand in the major consumer countries: Japan, US, China, India and EU will be collapsing.

This demand unraveling is taking place right now and the process will accelerate as the historically high real crude prices bankrupt demand not just temporarily subdue it: note Spain and Japan.

Without credit and customers the auto industry will consolidate: nations whose output is dependent upon auto manufacture and sales will be unable to service debts taken on to support the industry. Since auto manufacturing and its real estate and construction dependencies is the world’s single largest enterprise, failure of large components will have outsized negative effects on GDP. These effects in turn will feed back into manufacturing in an accelerating vicious cycle.

Meanwhile, the decline in fuel barrel prices below cost of extraction will cause fuel shortages. This is why every decline in fuel prices is dangerous as the lifting cost for new crude oil and ‘substitutes’ is already at the threshold of what customers can afford to pay.

Demand is financed until costs become breaking. Last spring when crude prices skyrocketed there were riots around the world as fuel-related costs made food unaffordable. Who paid the ‘ultimate price’? Greeks, Egyptians, Syrians … of course, their demand is now exported to core states such as the US.

Conventional analysis suggests that declining prices are good for the (waste-based) economy, of course they are! Here is some ‘Brand X’ analysis:

Oil prices edging downward bodes well for U.S. economy

Brad Plumer (Washington Post)

Oil markets appear to have stabilized in recent days, thanks to a boost in output from Saudi Arabia and other crude producers, according to two new reports.

Many car-industry analysts, for example, have been encouraged by the strong U.S. auto sales in March. But they warn that if gasoline prices stayed high, those sales could drop in the months ahead as consumers put off new vehicle purchases.

“If gas prices were to keep rising, that would eventually cut into overall sales,” said Sean McAlinden, an economist for the Center for Automotive Research.

Of course, even if the oil market stabilizes, prices will remain relatively high by historical levels: Adjusted for inflation, crude prices are higher than they were during the oil shocks in the 1970s.

But there are some signs that the U.S. economy is slowly adapting. James Hamilton, an oil expert at the University of California at San Diego, has long argued that oil prices mainly only cause serious economic harm when they reach new peaks. When that happens, consumers tend to get nervous and put off buying automobiles and other goods. Yet if oil prices are merely returning to previously highs — as is the case right now — then the impact is blunted.

Still, Hamilton’s research also suggests that drops in the price of oil have only modest effects. “One very well-established observation,” he has written, “is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms.”

What conventional analysis does not grasp is demand is satisfied in one place at a relatively low cost because demand elsewhere is quashed. The wider dynamic has the US driver paying less for gas because the driver in Spain has no gas at all. When the Spanish economy collapses the demand represented by Spanish drivers is permanently exported to the US. Yes, this comes across as ‘good’ for a handful of auto manufacturer executives: failure in Spain is ‘good’ for the economy as a whole only to the point when US drivers cannot bid for fuel themselves … because of problems in Europe.

This point is accelerated by failures outside the United States: the world economy does not exclude the US when it is convenient for American motorists.

It never occurs to analysts that the price fails to reach the very highest levels or remain there because the economy outside of the gasoline pumps is malfunctioning. This incredible malfunctioning effect is due to the fuel prices that are high enough to discourage customers but not high enough to represent an actual fuel price shock. Fuel demand is inelastic until it blows up, then it is gone. The decline emerges in final demand for all goods and services not just fuel. Here is crowding out as funds flow toward fuel away from items that embed it … items that also have become too expensive!

Instead of a consumer paradise that continually offers ‘having it all’ the consumer must prioritize within a shrinking budget. He can afford to fill his tank but will not buy another car or a new house (particularly if he hasn’t paid off the first car and is underwater on the old house).

This dynamic is in place right now, not in some uncertain future as suggested by economist McAlinden, perhaps not in his town but certainly elsewhere in the greater world.

Prices decline due to the refusal/inability of customers to meet them: when customers don’t pay for long enough time (and credit lines are exhausted) businesses fail. In 2008, thousands of (real estate related) firms that were dependent upon $20 per barrel fuel failed along with a large part of suburbia itself: there is no more $20 fuel. In 2012 these firms are gone and the economic necessity of $20 fuel for the entire economy is reduced. Businesses can cope with higher prices but not the highest prices: enterprises dependent upon $75 and $90 fuel are under price pressure as customers retreat. These enterprises include fuel producers themselves which see shrinking profit margins.

According to the conventional analysis the declining prices are always good like sunshine. Extended sunshine is a drought. Declining prices make finding and lifting fuel unaffordable. Analysts focus on minuscule changes in output here and there while ignoring the overall trend of flat output and the inability of credit-rationed demand to fund the extraction of new ‘unconventional’ oil to replace what is already gone.

The problem is structural, there is less fuel available everyday relative to relentlessly increasing demand. Supply has leveled off. The end of the day has zero-available fuel at a price that anyone can afford. The outcome is national bankruptcy as is seen in Greece: which country fails last is meaningless. Without substantial changes in attitudes, all the countries, one after the other will fail. The marketplace hasn’t begun to explore the meaning of the term ‘permanent shortage’ which is going to emerge as a rude shock to all concerned.

Conventional analysis insists that the central banks are printing money and the result is hated cost-push inflation. If this was so prices would never decline as long as new money was being created and in fact, new money is indeed being created … just not by central banks.

$200 Oil Coming As Central Banks Go CTRL + P Happy

Submitted by Tyler Durden on 02/24/2012

We have been saying it for weeks, and today even the WSJ jumped on the bandwagon: the sole reason why crude prices are surging (RIP European profit margins: with EUR Brent at a record, we can only assume the ECB will pull a 2011 and hike rates in 3-4 months even as it pumps trillions in PIIGS, banks bailout liquidity) is because global liquidity has risen by $2 trillion in a few short months, on the most epic shadow liquidity tsunami launched in history in lieu of QE3 …

During credit expansions, all else being equal, prices increase along with the ability of the users to meet the price. Ipso facto the prices would not rise otherwise.

Fuel has become unaffordable as the ability of users to meet fuel price diminishes as most use of fuel does not produce a return. Currently, taking on more debt does not produce a return, either. This can be thought of as a credit-driven ‘reverse wealth effect’. It is fuel rationing by diminishing productivity of credit.

Central banks are collateral constrained, they cannot print money: they cannot create new money. The Federal Reserve Bank/System is a reserve bank not a commercial bank. Central banks do not make unsecured loans, they cannot or they cease to be central banks. It is hard to believe that anyone would think that central banks make unsecured loans. If they did so there would be no central banks and the entire credit system would have collapsed a long time ago.

Central banks validate collateral. For them to do otherwise would have money panics without end as there would be no lenders of last resort. No collateral would be worth anything during periods when worth of collateral is most challenged.

Here, the correspondent bank demands collateral from a client bank which is technically insolvent. Because the client cannot offer sufficient collateral the request for credit is denied.

The central bank makes the same demand for collateral even for overnight loans. Central banks are risk intolerant and cannot extend unsecured loans. Central banks can extend credit against impaired collateral but cannot do so against no collateral. Because loans by the central bank are collateralized, the balance sheet of the central bank is always (theoretically) balanced: the balance sheet of the bank expands as balance sheets elsewhere contract. Because there is no ‘new money’ from the central bank there is no funds to push prices. If bank funds do push prices it is because prices elsewhere are left alone.

At the end of ‘It’s A Wonderful Life’, George Bailey’s bank is bailed out by depositors just like in the Real World. Unlike the real world, the depositors in the movie are overjoyed to have the opportunity to bail out a bank. Keep in mind, neither Bailey’s nor Potter’s banks will grow in the conventional sense — neither will the economy — unless they both extend unsecured loans to borrowers without collateral. Creating unsecured credit — printing money — is the function of commercial banking, the credit markets and finance. So far, this establishment has done a good job: generating $55 trillion in US total debt, most of it since 1980.

It’s A Wonderful Economy: what is there to show for these trillions? A trillion barrels of crude oil has been ejected worthlessly into the atmosphere along with billions of tons of other irreplaceable resources! Not only was the debt taken on for nothing, so is the fuel burned and the resources wasted. Who benefited by way of this wonderful process? A handful of ‘Prominents’ and ‘Kombinators’ died rich …

Governments can print money — issue fiat currency without liability — but they universally refuse to do so. This is because governments are dependent upon the banking system and because organic credit is the foundational condition necessary for industrialization. The reason there is increased liquidity is because the private finance sector has increased unsecured lending.

The government promotes risk socialism. Finance doesn’t need any help raising money, it only needs a sanction and a permanent deficit somewhere within the economy, this deficit is a service of the government. Finance feedbacks are faulty: prices rise due to increases in private credit until something breaks. Here is where the financial philosophy of ‘no limits’ reaches limits. What risk socialism means is that any breakage is not the responsibility of finance but of happy depositors. This is the sanction that allows finance to make new loans: ‘other peoples’ money’ that is Occupied by One-percenters.

The banks lend to fund asset speculation: prices rise because it theoretically isn’t different this time! Every recession in US history has ended with market expansion and increased credit availability across the board. It is reasonable for credit providers — and markets — to assume that credit demand will increase as it has after previous recession. The ongoing increasing government(s) deficits assure a corresponding increase in private surpluses (wealth). At bottom, nothing matters other than increased wealth for the well-connected at all others’ expense.

The auto industry has the capacity to provide every human a new car. The ‘home-building’ industry can house all 7 billion of us. The problem isn’t capacity. There aren’t enough humans with something of worth to offer in order to keep the current capacity effectively utilized. Something to offer in this case means credit worthiness. Ours is ‘Planet Deadbeat’. Most of the world’s citizens are not just broke but negatively wealthy – under water. Those who aren’t may as well be, they won’t spend. The problem is that the private sector loans to fund fuel waste cannot provide a return so that additional lending is necessary. Finance clients burn capital and go into debt in order to do so. As finance extends new loans they are extending new bad loans. None of the loans can be repaid and the disappearance of capital insures there will be less credit available for any purpose in the future (including to fund conservation).

It is important not only to be aware of events taking place in the Eurozone but also to watch Japan. The costs of fuel have been supported in Japan by its industrialists’ ability to transform some of Japan’s fuel imports into exportable high-worth goods such as automobiles and personal electronics. Unfortunately, Japan’s establishment has painted itself into a corner as the auto business works at cross-purposes to push its own real energy costs past the point of affordability. Meanwhile, the personal electronics train has left the one-time Japanese giants behind. For instance, legacy ‘innovator’ Sony has surrendered its once-lucrative Walkman franchise to Apple. Post-Fukushima, the timing is terrible for Japan which needs some sort of export surplus to afford to remediate its reactor problems.

Unfortunately, Japan is condemned by conventional analysis. If it continues to gain an export surplus Japan will use it to subsidize more counterproductive ‘growth’ and leave the reactors to tend to themselves.

Figure 2: Gold futures continuous monthly chart from TFC Charts. Gold ‘investors’ are having fits because the price doesn’t continue to skyrocket as desired. Instead, the gold market is taking a breather. Right now there is no reason to believe the gold bull market has ended as conditions that would support a bull market are still in force.

Keep in mind that the gold futures market is becoming a general purpose hedge for currency trade around the world. That this is so is manifested by efforts by governments in India, Turkey and Vietnam to ‘manage’ domestic bullion trade for currency reasons. It is likely that institutional currency traders are using the gold and silver futures markets to do the exact same things (but on opposite sides of the trades).

The biggest issue in the gold market right now would be the euro and what it is really worth. The currency market says the euro is worth $1.31. The banking and credit system suggests (insists) the euro is worth $0.00. The petroleum market says something important is going to die: $125 allocated for each barrel has to be diverted from some other account. At the same time, euro-stress on euro-banks means the hunt for capital is on. This leads to margin calls and forced sale of assets which includes gold held by banks. Unsurprisingly the market for gold is being pulled in all directions and the price moves are sideways within a period of correction/consolidation.

As the problems in Spain emerge and the French elections take place there will be more asset dumping, there will also be a flight out of euros and toward safety. The net result will be less credit available and deleveraging across the Eurozone.

The real bottom: nothing matters other than the world is running out of cheap petroleum. What remains is unaffordable.

Next goes Europe, itself. The Greek default closes the book on Europe in its current form, which is a lost cause. It is the end of the beginning: there is not going to be any ‘recovery’ or way back from the abyss that is now engulfing the continent. Some fragments here and there might save themselves for a little while, then like sparks from a bonfire be swept away by the wind. The crisis must now burn itself out: Europeans, look to yourselves and may your turkey-God have mercy on your souls. (From ‘God, Peak Oil and Turkeys’)

What is interesting about this time of year besides having to deal with the tax man (“Render unto Caesar that which is Caesar’s) is the opportunity to gorge on Titanic-mania. With the famous sinking taken place 100 years to-the-day yesterday, the Titanic-mania is set to overload. Titanic and hockey playoffs are almost enough to compel a trip to the local ‘Best Buy’ for a 53-incher. Add pizza and life in the gibbering madhouse called the U. S. of A. becomes entertaining!

Watch that ocean liner filled with arrogant, rich morons hitting an iceberg over and over again, what’s there not to like?

Reformers could manage the same thing today: load a giant cruise ship with ‘entrepreneurs’, bankers, auto company executives; innovators, politicians and hedge fund managers and send it out with Captain Jack Sparrow looking for an ice field. Sorry, five life boats. If no ice is to be found after a day or two (climate change) the Navy can fire a missile into the ship and the Iranians can be blamed. Any ‘complications’ and the lawyers would be loaded onto a giant cruise ship … etc.

Fixing what’s wrong with America is remarkably easy, if you put your mind to it.

There are many reasons why the Titanic is the perfect metaphor for our times: the enterprise was (and is) gigantic, hubristic and overdone. The managers were (and are) greedy and stupid, the end had (has) the quest for the ultimate in luxury and decadence blowing up in everyone’s faces.

Here are some Titanic factoids:

– The Titanic was one of three more-or-less identical sister ships built by the Belfast shipyard Harland and Wolff for the White Star Line’s transatlantic trade starting in 1909.

– The White Star Line was owned by banker J.P. Morgan within a trust called ‘International Mercantile Marine Company’ which also owned a number of other international passenger shipping companies. This made the Titanic an American-owned ship. Morgan was booked to travel on his new toy but took ill and remained in England chickened out at the last minute.

– Surprisingly, neither Morgan nor the shipyard nor White Star Lines’ manager J. Bruce Ismay, or the line itself were brought to account for the disaster: Morgan and others for negligence, the yard nor its suppliers for defective or sub-standard materials. It is hard to see such a disaster taking place today without legal complications and billions in lawsuits.

– White Star manager Ismay was pilloried in the Hearst press for not going down with his ship, he was publicly scorned as a coward for the rest of his life. Today, the managers and owners of sinking ships are expected to be in the first lifeboats after having hurled all the women and children first over the side (which is where that term ‘women and children first’ originates).

– The Titanic was the second of the three ships: the Olympic was first, the Titanic second, the third was to be named ‘Gigantic’ but the name changed after the sinking of Titanic to Britannic. The Olympic had a long 25 year-career as a transatlantic liner, the Britannic was sunk during World War One and was never in paying passenger service.

Unknown photographer, Shipbuilder Magazine, 1911, ‘Grand staircase on RMS Titanic’. Note the clock at the center of the landing: even in the middle of the ocean among the super-rich there is no escape from the tyranny of the clock.

– The Titanic was altered during construction to be slightly larger than the Olympic. There were other cosmetic changes made between the ships but all were designed to be floating luxury hotels with elaborate public spaces within the ship. The Britannic was not fitted out when World War One began, after a short layup it was converted to a floating hospital. Consequently, many of its first-class amenities were not installed.

– The three ships were developed to compete for the transatlantic trade with Cunard’s Lusitania and Mauritania as well as the Hamburg-America Line’s SS Deutschland and North German Lloyd’s SS Kaiser Wilhelm der Grosse. The largest part of the trade was the ferrying of European immigrants to the United States. At the same time, ships were the only means of travel between continents and competition for the first-class customers was intense.

– The three ships were not designed to be the fastest ships but rather the most comfortable, even for third-class passengers, who had access to good food and hot-and-cold running water, for instance. It was supposed that the first time many of the third-class passengers saw a toilet was on board the Titanic.

– The officers on board the ship during her maiden voyage were veterans of ocean liner crossings. The captain, Edward John Smith, was a mariner for his entire 38 year career, 25 years as master on White Star passenger ships. As Commodore or senior captain, Smith had earned the right to command new White Star ships on their maiden voyages. Captain Smith was something of an ocean liner klutz: he was involved with several close calls with collisions including a near-miss with another iceberg in 1902. During the port-out of Southampton on the way to Cherbourg the prop-wash of the rapidly-moving Titanic pulled another, smaller ship, the SS New York, from her moorings almost causing a collision in the port which would have ended the voyage. Tugs were able to pull the New York away from the Titanic at the last minute.

– The Titanic was a technological marvel of her age, a self-contained floating city: considered to be unsinkable due to her sixteen watertight compartments, telegraph wireless communications, internal telephone system, hot and cold water throughout the ship, electric heating and lighting for the passengers all on a ship as large as an eighty-story skyscraper laid on-end, one that could move across the ocean at 28 miles per hour.

– The ship was at the bleeding edge of what shipyards of the time could produce. Titanic’s hull was assembled out of hundreds of one inch thick steel plates sized approximately 6 feet by 20 feet. These plates were overlapped and riveted together and onto the ship’s frames. The hull areas in the center of the ship where the boilers and engines were located were given triple-rows of steel rivets, the ends of the hull were given double rows of cheaper iron rivets. Both the steel and iron rivets were found later to be defective, of low-quality material. Likewise, the steel plates were determined to become brittle when chilled. It is likely that both rivets and the plating cracked during the collision. The ship was divided into watertight compartments with the bulkheads given automatic doors that could be operated from controls on the bridge. What the Titanic lacked was high-volume pumps that could keep up with flooding within the compartments. There was certainly steam power available to drive large pumps that could have kept the ship afloat longer and under less strain even if she could not have been saved.

– The German and Cunard ships were faster but the White Star giants were more efficient: Titanic’s power plant required 650 tons of hand-shoveled coal be fed into its boilers every day, 350 tons less than its older counterparts.

– There were reports of a smoldering coal bunker fire aboard Titanic’s number six hold that the stokers were hoping to put to use in the boilers which might have been a reason for the ship’s high rate of speed through the ice field.

Everyone knows what happened on the evening of April 14th, 1912: the ship hit the iceberg in the North Atlantic a glancing blow, the first six watertight compartments were breached and the ship slowly sank taking the lives of over 1,500 passengers and crew.

Fast-forward to the present and there is the ‘Titanicaca’ which has all of the hubristic characteristics of the previous version with none of the grace and style. It’s made of cardboard and duct tape wadded together with false promises. It looks great on the outside but the inside is an unimaginable mess. It’s too large to control properly underway, it does not have pumps needed to manage liquidity. Like the first version, the passenger list includes feckless elites who cannot be bothered, unscrupulous ‘fixers’ and racketeers with the third-class sections filled with always credulous ‘television believers’.

As was the case with the original Titanic, the current version has struck a submerged object and the first five watertight compartments are flooded. The analysts have rushed below to inspect the damage and make assessments; the ship is doomed, sinking is assured it is only a matter of time. How much time? It could be tomorrow or next year but likely sooner (Bloomberg):

Energy

Watch those oil prices dive, last week the Brent price was over $125 per barrel. There are no more Saudi Arabias to offer crude, only demand that has bellied-up and sunk.

Up on the bridge of the Titanicaca, the EU, ECB and IMF managers have completely lost their grip on reality. The multiple captains have ordered staff to go below and steal all of the passengers’ property that isn’t bolted down. Someone asks where the staff is going to put the property on the ship where will be safe? The captain standing in the corner does not answer but stares off into the distance muttering ‘Ice … I hate ice …” The officer returns: stealing turns out to be impossible because all of the property is underwater. Next, the officers order seamen to scurry below and cut off the flooded compartments labeled P.I.I.G. and S. with hacksaws. The idea is the ship without a bow will reach its ‘destination’ much faster than it would, otherwise.

Meanwhile, the ECB officer is bailing out the various compartments with a bucket running from one to the other and back frantically. The water hurled from the bucket flows right back into the Titanicaca. Of course there aren’t enough lifeboats: the various upper classes of passengers are taking what they can carry and battling their way into the boats. One is named ‘Swiss franc’; another is named ‘yen’ and another, ‘Singapore dollar’; others are, ‘US dollar’, ‘Treasury securities and equities’, some are named ‘gold’ and ‘silver’. Not everyone is going to make it: those missing the boats are putting on life-jackets made out of lead weights: ‘real estate’ and ‘EU sovereign debt’.

Meanwhile, the third class passengers are locked up in the hold. The captain has ordered then to suck the water out the ship, the tools assigned to them are soda straws stamped ‘Made in China’. The straws must be bought and paid for before use but the Chinese are willing to extend credit if good collateral is offered.

What to do?

Are the lower class passengers ready to mutiny and put the officers off the ship or do they desire to take the first-class passengers’ place, so as to better rearrange the deck chairs? Since they are the only ones able to fix the ship’s problems it is really up to them to decide what to do. If they behave as the first class has done the ship will sink. If they attempt to make things right the ship might sink but they also might succeed. If they do nothing there is certain failure. Here is a dilemma that the passengers are ill-equipped to cope with. The passengers must not only act outside their narrow personal interests but also against how class interests as these are ordinarily defined as gains excluded from others. It is also outside decades of ‘television training’ which demands that individuals serve the system in order to be rewarded for their efforts at some unspecified point in the future (never).

When an ocean liner starts taking on water, what governs whether it’s “women and children first” or “every man for himself”? According to a report in the Proceedings of the National Academy of Sciences lead author Benno Torgler, men’s altruistic versus self-serving behavior depends on how quickly the ship sinks.

How quickly the ship sinks, indeed …

Coordinated recessions in the US and the Eurozone
can’t be ruled out and nor can a collapse
of the dollar, civil unrest in Russia or more geological
events such as those seen in Fukushima
last March…. in short, the list is long …

Grant Williams

100 years ago today, one of history’s most (in)famous swans took flight: on April 10, 1912 the RMS Titanic departed White Star Line’s Southampton dock, toward Cherbourg then Queenstown, Ireland. A mere five days later the ship joined tens of thousands of other wrecks strewn across the bottom of the world’s oceans.

 
The gap between what an enterprise ‘earns’ (zero) and what it must pay for inputs becomes unbridgeable. That is, the cost of credit needed to make these enterprises ‘profitable’ is too high. This is why the world’s industrial economies are collapsing with nothing at all to be done to stop them.
 

Nobody could have seen it coming. The Titanic was unsinkable. It was commanded by the line’s most experienced Captain. The crossing between Ireland and New York was routine. There was no expectation of bad weather. The only issue was a coal-miners’ strike in England that did not allow the Titanic to take on as many passengers as she was designed to carry.

There were problems, of course, there always are. One thing leads to another, there is the cascading series of small failures that — by themselves — would not cause the swan to take a nose-dive, taken together were fatal. The entire Titanic enterprise was constructed upon a foundation of false- or not-quite-true assumptions. Captain Smith did not order the ship to slow as it approached the ice-field. Smith believed his ship to be unsinkable and assumed that any encounter between Titanic and ice would be of no consequence. The ship’s duty officer gave the incorrect order to reverse engines as the ship approached the iceberg. This rendered the ship unresponsive to the helm. He had only been on the ship for a few days and could not know how the ship would respond to orders from the bridge. He assumed the Titanic would maneuver the same as other, similar White Star ships.

The flight officer of Air France flight 447 performed an improper maneuver to correct the slight roll his aircraft after airspeed indicators caused the flight-control computer to switch itself off. The officer over-reacted to the changing attitude of the aircraft inadvertently pulling the nose of the aircraft up. The outcome of his error — the result of icing pitot tubes — was a high-altitude stall and uncontrollable descent of the airplane.

The operators of the Three Mile Island Number Two nuclear power station did not realize that the pilot-operated relief valve PORV indicator was giving irrelevant information: that the primary circuit relieve valve solenoid was not energized. It wasn’t but it didn’t matter, the valve itself was stuck open. A gauge that indicated the temperature downstream of the valve was not visible and the operators were not trained to look for it. By the time the error was realized — by a new shift of control room operators hours later — most of the cooling water in the reactor pressure vessel had been blown through the open valve onto the floor of the reactor containment by steam pressure. The outcome was the release of radiation into the environment and the loss of a multi-billion dollar reactor.

– An incestuous financial and regulatory relationship between the reactor operator Tepco and the Japanese government,

– A fundamentally unsafe reactor design,

– Cheaply built reactors too near the sea level so as to save relatively small amounts of money,

– Crews made up largely of poorly trained, poorly paid ‘contract’ workers often press-ganged into reactor service by Japanese Yakuza gangsters,

– No operating manual on site, no rigorous emergency training for critical staff,

– Inadequate safety equipment: missing or non-existent dosimeters, hazmat suits, respirators, even flashlights at site,

– Insufficient battery backup for emergency cooling systems,

– staff who ‘forgot’ spent fuel pool in reactor building number four, who ‘forgot’ 10,000+ tons of lightly radioactive water in waste-handling building that could have been used to cool the reactors rather than seawater,

– Unclear chain of command and confusion over roles immediately after the earthquake,

– Inoperable reactor vents which resulted in no cooling for reactor cores for extended periods (and probably resulted in steam pressure pushing water out of the cores). The result of these little failures — add a massive earthquake and tsunami — is the ongoing calamity at Fukushima.

Finance failure is little different from others: there is a chain of false assumptions that, by themselves are insignificant, but together lead to disaster. One assumption is that credit and business have a tendency toward expansion. This is silly because thermodynamics insists otherwise. Our strategy to overcome natural physical laws in 2012 is for central banks to recycle credit and pray.

The central banks are the last line of defense for finance’s Titanic. Water leaks in faster so the bankers can bail. The strategy is to keep bailing, to keep lending more and more credit, which is what the ship does not need. Every bucket bailed by the bankers winds up somewhere else inside the ship.

Put a dirty car through the car wash what comes out the business end isn’t a new car, it’s the same old jalopy with the dirt scrubbed off. Meanwhile, every trip through the wash adds the cost of a new car to the bill that must be paid sometime in the future. The harmless assumption is that the washing process will end soon and that the bill will be paid by magic as it has always been paid in the past. That there will be a general increase in the amount of available credit on private debt markets.

A tiny problem is that industrial enterprise does not pay for itself. Except for taxi drivers and deliverymen, driving a car and all the trillions invested in the ‘experience’ around the world does not produce a return. It is pure waste for its own sake that must be propped up with bottomless debt- and energy subsidies. This is the reason for the tens- of trillions of dollars worth of debt taken on in the first place. If industry could pay for itself it would have! There would be no debt because returns earned by industry would have retired it!

The outcome of subsidized waste over the term of decades is repricing of inputs due to decreasing rate of supply relative to the scalding increase in demand. The gap between what an enterprise ‘earns’ (zero) and what it must pay for inputs becomes unbridgeable. That is, the cost of credit needed to make these enterprises ‘profitable’ is too high. This is why the world’s industrial economies are collapsing with nothing at all to be done to stop them.

Central banks provide credit against collateral. Their efforts fail because of the waste-based economic system that falsely labels non-remunerative activities as ‘production’.

Since industrial enterprises cannot pay their own way there is no relevance to central banks’ strategy. Because industry cannot earn, all industrial collateral is worthless.

Central bankers swap impaired assets for ‘new’ assets, the swapped assets are buried on the central banks’ balance sheets. The impairment has been temporarily shifted from one account to another, not eliminated. The expansion of the central bankers’ balance sheets accompanies the shrinkage of private sheets elsewhere. Meanwhile, more finance assets become impaired because the central bank swaps do not represent either new business or new credit, only buckets of liquidity sloshed from one part of the Titanic to another.

A problem is the slowdown in the expansion of private credit, much of which is unsecured. What is called a ‘boom’ is an expansion of un-collateralized or under-collateralized credit. This includes credit cards, student loans, HELOCs and poorly/fraudulently underwritten mortgage/business loans as well as loans within (shadow) banking secured against phantom/re-hypothecated collateral. There is no business activity that provides a return except for Hyman Minsky’s Ponzi finance schemes. Loans must be retired with new loans. Meanwhile, collateral worth shrinks across the board.

Central banks are collateral constrained, that is the nature of central banking. A bank making unsecured loans cannot be the central bank. Otherwise, collateral would be of indeterminable worth: all banking would eventually cease because there would be no unambiguously worthwhile collateral or ‘risk-free assets’.

The purpose of the central bank is to defend the worth of collateral. It takes onto its own balance sheet collateral that the market refuses. By doing so it insures there is always a bid for it in the marketplace. This is a form of institutionalized moral hazard: because the central bank takes on collateral at par the other banks are given the incentive to do the same. Banks become secure enough in the quality of the collateral offered … to lend against it, at least that is the desire.

There are two basic money systems in this world: the debt money system and fiat money. The term ‘money’ includes both currency and credit. Both systems are binary: the debt system binary is ‘asset = liability’, the fiat binary is ‘issue = tax’.

In the debt-money system the central banks don’t ‘print money’: currency increases as government securities are exchanged for at-par loans from the bank. The loan from the bank becomes currency in the hands of the government. In a fiat money system the government issues currency without offering security or borrowing. Because the government is the issuer, security is presumed: consider Abraham Lincoln and the ‘Greenbackers’. Unfortunately, governments choose not to issue fiat currencies. Otherwise the massive overhang of dead-money debt could be swiftly reduced, there would be no generalized increase in the money supply (inflation) as applying currency to existing debt would extinguish both.

Dead-money liabilities that exist on ledgers are phantoms: taken on as collateral they do not exist in any meaningful form. Companies borrow trillions to buy hydrocarbons. Where are these hydrocarbons so that they might be repossessed by the lenders? In the atmosphere in the form of CO2 and nitrous oxides. Let the bankers repossess these gases. More accurate liability is the damage CO2 does to the atmosphere and the life support system, let the bankers possess these liabilities as well.

Any banker stupid enough to make pointless and destructive loans is well deserving of ruin and much worse.

The bankers would see this as a form of repudiation as it indeed would be. Issued currency would be no different from the loans themselves, created with a push of a button on a keyboard: printed money for printed loans! It is the force of the lenders’ habitual oppression combined with reflexive cowardice on the part of governments that sanctifies the bankers and their ‘money’ over everything else.

Here is more from Modern Monetary Theory and Philip Pilkington:

MMTers make the claim – following in the footsteps of Abba Lerner – that the government budget should not be subject to any sort of arbitrary balancing constraint. Instead Lerner and the MMTers advocate that the government budget balance should be conceived of strictly from the point-of-view of real economic variables. Thus, if there is unemployment the budget should be unbalanced, while if there is high inflation due to output capacity being outpaced by demand the budget should be moved closer to balance or even, in certain cases, into surplus. Lerner referred to this approach as ‘functional finance’.

The reason that both Lerner and the MMTers feel confident in making this case is because they hold that a government that issues its own currency and allows their exchange rate to float is not subject to any budgetary constraints. They can essentially issue new money – together with government bonds, if they so wish – until they begin to see inflation. Inflation, then, is the only real constraint to a government that issues its own currency and maintains a floating exchange rate.

If the government issues currency, why would it issue new bonds? To provide a risk-free asset that can ‘finance’ activities (healthcare and pensions) that would be otherwise costly to fund directly. The economy would escape the ZIRP trap: the central bank would have no need to defend ultra-low interest rates as the demand for near-money would keep excess currency from entering the economy.

However, if a developing country tries to spend up to the point of full employment while maintaining a floating exchange rate they are, as stated above, likely to see devaluation and inflation take place as the weakened currency chases more and more imported goods that the country’s own domestic industry cannot produce.

Agreed …

As incomes rise through government spending programs (and potential rises in real wages) people will be more inclined to seek out goods and services that were previously thought of as only available to a small stratum of the population. Devaluation and inflation are then almost inevitable.

Subsidizing waste as resources shrink is bankruptcy in a can. Analysts are stuck with the assumption of credit-stifled demand for consumer goods such as cars and tract houses. The problem is insufficient supply of the inputs needed to run that demand.

When the market-driven price for energy inputs decline it is because demand has been bankrupted somewhere within the system. In the ‘good old days’ of the early oughts, the demand was local, now the destroyed demand is entire countries, swept away in the matter of weeks.

The high-priced crude strands economies and trillions of (borrowed) ‘investments’ that were made assuming $20 crude in perpetuity. The higher the crude price is over $20, the longer this price holds, the more destructive the outcome is.

At the same time, a price low enough to allow increased demand on the waste side is too low to bring new oil to the marketplace.

But think about this for a moment; if we adhere to a purely functional view of finance then we have far more options available than might appear at first glance. We can actually use government fiscal policy to guide domestic investment decisions and ensure that the goods and services people desire as their incomes rise are produced at home rather than abroad.

There is but a slim chance to use finance to move away from consumption/waste and to restructure. The race is on between ourselves and the efficiency of our machines now set on ‘swan dive’.

Dear Sir and Madam,

My name is Jurre Hermans. I am 10 years old and live in the Netherlands. I am quite worried about the eurocrisis and look at the TV news daily. The eurocrisis is a big problem. I think about solutions. Since I read in the newspaper about your price, I thought that I would like to submit my idea. The idea might fit. So here it is:

I made a picture of my solution and I will explain it to you.

The situation in Europe has reached the point of embarrassment, when a 10-year old boy has as good a strategy for dealing with Eurofailure as the professionals. Says Jurre:

The Bank gives all these euro’s to the Greek Government (see topleft on my picture). All these euros together form a pancake or a pizza(see on top in the picture). Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza …

We can call this the ‘Pizza Policy’. The Greek’s creditors get the (theoretical) pizza, the Greeks get ‘unhappiness’, worthless drachmas and a kick in the pants.

Youngest entrant

An eleven year old boy from the Netherlands has received a special mention from the judging panel of the Wolfson Economics Prize for his application to the prize.

Jurre Hermans, a school boy from Breedenbroek in Gelderland Achterhoek, was the youngest entrant to the Wolfson Economics Prize. He decided to enter the prize after watching Jeugdjournaal, and because of his concern about the Eurozone crisis. Jurre’s paper, complete with diagram, proposes that Greece should leave the euro. Greek citizens would exchange their euros for drachmas and anyone caught moving euros abroad would be penalised financially.

He will receive an €100 gift voucher for his efforts.

€100 gift voucher, good at any McDonald’s. Jurre’s platform is shockingly similar to German Finance Minister Wolfgang Schäuble’s: knock those Greeks down then beat them with clubs with nails sticking out. Jurre certainly has a job waiting for him at Goldman-Sachs or at the US Treasury as the euro will certainly be long gone by the time he comes of-age.

The only hole in the Jurre-Schäuble argument is the Greeks lack the euros to repay anything in meaningful amounts. This shortage of euros IS the credit crisis not the outcome of it. The absence of euros feeds on itself: the shortage multiplies demand for available euros and their cost in credit markets. Euros are hoarded or removed from the marketplace which pushes credit costs higher still. This isn’t debt-deflation so much as it is a deliberate policy of credit strangulation.

Keep in mind, the ECB with its LTRO- and the discount window operations cannot create new credit only recycle or re-allocate what already exists. Its balance sheet expands because private-sector balance sheets shrink by equal amounts elsewhere. What economists ignore is central banks are collateral constrained: they can accept zero-quality collateral but cannot lend against zero collateral, otherwise there is no central bank.

What would end the rationing scheme and the credit crisis would be the addition of more euros or any other form of liquidity. Since credit isn’t a natural resource and can be created in virtually unlimited quantities, shortages of credit are matters of policy or corruption. In the Eurozone, the absence of liquidity is the small matter of an absent fiscal structure. There is no European ‘federal government’ to provide euros. Only the national governments and the private sector can create credit: the private sector refuses and precious rules inhibit the nations themselves from doing so themselves.

In credit economies, access to credit rations access to resources as well as other goods. Shortages that take place are blamed upon ‘deadbeats’ who ‘purposefully choose’ not to meet their obligations. As credit vanishes, demand for it increases to infinity. Credit demand becomes impossible to satisfy, this leaves demand for the goods to be exported to the creditors who gain the ‘moral claim’ to consume in the borrowers’ place.

The borrowers fail to make good because of the denial of credit on the part of private creditors with interests to promote. Out of this failure the creditors’ claim against the borrower becomes perpetual. The only means by which the borrower can make good is now possessed by the creditor who refuses to release it. Because funds are borrowed in order to waste resources, debts cannot be satisfied unless the borrower is able to waste more which requires more borrowing.

Here is where the edifice of so-called capitalist economics collapses under its own weight: waste as the center of industrial activity is presumed to be ‘productive’ even as the wasting- borrowing process bankrupts the entire enterprise. The leverage regime acts against itself as agents borrow themselves into ever-deeper holes that they can only pray to be allowed to borrow their way out of … which of course, they cannot do.

From this particular vantage point, the euro becomes the instrument of bait-and-switch credit fraud like a sub-prime mortgage. Policy failure on the part of the European Union is to not have a lender of last resort: the fact of such an absence after ten years of euro speaks for itself.

The cost of credit scales inversely to the amount of debt an enterprise can take on. Inversely scaled credit cost is the competitive advantage the ‘too bigs’ possess over the ‘not quite so bigs’ who must pay more to borrow. Sovereign debtors are expected to outlive (or to execute) their creditors even as economic ‘growth’ (inflation) reduces the real amounts debtors must retire or service. Because sovereigns are the largest debtors they claim extraordinary privilege … of not having to repay debts but to infinitely roll over and monetize them. Because sovereigns are the ultimate consumers of credit, national debts are too great for any economy to repay even when it has gone far down the road to Ponzi financing. At some distant point in time both the borrower and the lender have been migrated to the (sovereign) balance sheet which allows the loan to be extinguished. Alternatively, debts are repudiated.

The sovereign is vulnerable: the borrower must take on debt denominated in the country’s native currency. Otherwise, all of his debts are external, at the pleasure of repayment on the lenders’ terms in the lenders’ currency! Here is the set trap at the center of the eurozone: no country within the Eurozone who carefully follows its rules has the use of its own currency. The euro is no-nation’s currency and all debts denominated in euros are external debts. Each Eurozone country is held hostage to private lenders: in a practical sense every European country is a colony of the finance industry.

It is that industry that sets money rates at any given time because there is no public competition, no alternative bid. Governments lack the structural means to control their own destinies. If ‘investors’ collude so as to refuse to lend for any reason at all … there is no agency to lend in their place and compel a bid.

Because there is a bid, the Japanese can borrow at low rates with debt/GDP ratio of 204%. Because there is no European bid, the political economists Reinhart and Rogoff can effectively pronounce a death sentence on Greece’s debt to GDP ratio of 130% even though such a thing is irrelevant to a sovereign. Nevertheless, the Greeks are are cut off from private credit. Had Europe a real lender of last resort rather than the current fake, there would always be a bid for the national debts and there would be no debt crisis to speak of.

What the foregoing insists is that European nations cannot survive their human or corporate creditors … which is astonishing and suggestive. The demand is exercised that Greece in a multi-year recession must repay finance-level debts that are beyond the ability of any economy to retire and to do so at once without any support. This indicates that Greece is expected to expire: there is no other possible explanation.

At the same time, private lenders are in extremis because of habitual poor credit underwriting both within Eurozone and elsewhere. Add the strains of unrequited repayment demands made upon Greece and the others credit spreads have deteriorated and risk has increased making all lending unprofitable.

The financiers and core states of the Eurozone have changed the rules in the middle of the game, from allowing Greece and the other peripherals to roll over maturing debts at reasonable rates of interest to cutting off credit and calling outstanding loans. Here is Greek default, imposed upon it by the rest of the Eurozone.

Greece has been a nation for thousands of years, certainly a ‘modern’ Greece would be expected to survive long enough to manage its debts. It could do so if it could access credit at Germany’s rates of interest.

If Greece had a government worthy of the name, the Greek treasury would issue fiat euros and use them to put citizens back to work. A government worthy of the name would dare the financiers in Frankfurt, London and Wall Street to do anything about it as there is nothing that they could do.

Wolfson Prize, you ask?

About the Wolfson Economics Prize

The Wolfson Economics Prize will be awarded to the person who is able to articulate how best to manage the orderly exit of one of more member states from the European Monetary Union.

There is now a real possibility that political or economic pressure may force one or more states to leave the Euro. If the process is managed badly it would threaten European savings, employment and the stability of the international banking system. The Wolfson Economics Prize aims to ensure that high quality economic thought is given to how the Euro might be restructured into more stable currencies.

The Wolfson Economics Prize, worth £250,000 (€286,000), is the second biggest cash prize to be awarded to an academic after the Nobel Prize. Deadline for submissions will be January 31st 2012.

Who is Wolfson?

Simon Wolfson, Baron Wolfson of Aspley Guise (born 27 October 1967) is a British businessman and currently chief executive of the clothing retailer Next and a Conservative life peer …

As if there is any other kind of life peer … Here is a sampling of entries:

Roger Boodle, A Practical Guide To Leaving The Euro:

Secrecy versus openness

In theory, keeping a country‘s planned exit secret for as long as possible would help that country to minimise – or at least delay – the disruptive effects likely to be caused by the disclosure of its plans to leave.

Such effects might include: large capital outflows from the country as international investors and domestic residents withdrew their funds; associated falls in asset prices and increases in bond yields; runs (i.e. large and rapid deposit withdrawals) on banks in the country, perhaps causing a banking crisis; and negative effects on consumer and business confidence.

Thousands of words from Mr. Boodle but not one mention of energy in his entire proposal.

If we assume the costs caused by the additional legal uncertainties are equivalent to just 10% of annual external trade in goods and services, a typical euro-zone country might face an additional hit of 4% of GDP. But the disruption in the immediate aftermath of an unanticipated exit from the euro could be much greater.

There is as much or more secrecy to propositions as there is to nuclear power … and for the same reason. The truth would have persons running for their lives. It is far better, as our 11-year old economist suggests, to force or mislead people into serving the interests of moneylenders. This will not work if people discover their ‘destiny’ as economic fodder ahead of time. Here is another secrecy pimp, Not Really Niel Record:

If member states leave the Economic and Monetary Union, what is the
best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?

[Author’s Name withheld]

I make six practical recommendations in the essay:

Recommendation 1: Germany (possibly together with France) establishes a secret Task Force, with a Charter to design proposals for planning and managing possible Eurozone Exit. Ideally France would join to give legitimacy – but secrecy and speed is essential, so only a token joint operation may be possible.

Recommendation 2: Whatever the results of the Task Force’s deliberations, firm plans and proposals should be in place by 30 April 2012, or as soon thereafter as is practicable using all means at the Task Force’s disposal.

Recommendation 3: The Task Force would propose to the Council of Ministers that the Euro should cease to exist on the day of the Exit announcement, to be replaced by new National Currencies.

Recommendation 4: The ECB would be closed and its functions terminated with immediate effect. All its functions to be transferred to the relevant National Central Banks (NCBs). Its balance sheet to be shared out pro-rata to NCBs by reference to the ECB shareholding proportions and (for banknotes), NCB banknote issue …

Notice how utopia arrives tomorrow … as soon as the monarchy has, “managed to provide the soundest foundation for the future growth and prosperity of the current membership.” What must come first is the tonic: robbery. As long as the boarded up nuclear reactors don’t melt down, all is good … until tomorrow!

Adjusting finance so that failure is not self-induced is necessary. Doing so now will buy valuable time: Europe and the rest of the world are gripped in an energy crisis. By not coming to terms, the economics profession marginalizes itself. This is understandable to some degree: the greatest of all human enterprises, the culmination of millions of years of evolution is to take good capital and throw it into the fire. The few managing the fire reward themselves for their cunning. The economists’ job is to rationalize this monstrosity: to convince the public that two-plus-two equals twenty-two. That they succeed is unsurprising, the world seeks to be deceived. After all, success and prosperity are sure to come … tomorrow.

Figure 1: EU auto registrations for the past year (from ACEA). It is possible that registrations might recover, but hardly likely when consuming countries such as Spain and Italy are now on the euro credit stringency chopping block. The demand for fuel in peripheral countries is removed. This is done by creditors cutting off peripheral access to euro-denominated credit. Those remaining with credit have the means to then ‘import’ Spanish- and Italian domestic fuel demand for themselves without any monetary or credit penalties.

It’s cars versus jobs and people. Car is winning today but will ultimately lose.

Purposeful deflation is energy conservation by other means.

This is not completely arbitrary as the conservation impulse is not optional. It will be enforced by events or otherwise. There is nothing that can be done to stop or slow conservation. It is driven by entropy which is a physical law.

Instead of jettisoning car industry and keeping the EU, the union jettisons Greece to keep the car industry. The EU stupidly thinks the crisis is ‘fixed’. At some point Germany exits the EU which is then destroyed: at the end of the day there is no EU and no car industry, either.

Greece failed rapidly, the other EU states will collapse even faster, so will the UK which must import fuel. This is the crisis, Europe must import almost all of its fuel and has borrowed heavily to do so. There is no return on the burning of the fuel, the outcome of this dynamic is bankruptcy and national economic collapse.

Once countries start failing there will be full-on finance crisis. There will be fuel shortages as are appearing now.

Fuel shortages will be permanent. The cost of fuel will be greater than the return on wasting it or the cost of borrowing to waste it.

European economic reforms:

– Energy conservation shall be the centerpiece of policy aims everywhere on the European continent,

– Shared sacrifice: industries will bear accrued costs of waste instead of countries and citizens. The ongoing strategy sacrifices countries for the temporary benefit of banking and motor vehicle-related industries. This shall be reversed: to save the people, jettison the machines.

– Any and all monetary tactics that come to hand shall maintain necessary services: food, clothing, shelter, useful — not wasteful — activities. This includes but is not limited to forensic analysis of the outstanding debts followed by restructuring, finance transaction taxes, punitive tariffs and exclusion of Chinese and petroleum imports, consumption taxes, common bonds, demurrage money, fiat national currencies with the euro as a continent-wide reserve currency and more.

– Break the waste-debt cycle: debts are to be taken on only to promote conservation. To discourage waste, all legacy dead-money debts shall be written off and creditors bankrupted without exception. Those who lend to promote and enable waste must be made example of. Otherwise, new forms of credit subsidies for similar enterprises will emerge as tomorrow’s waste will be justified by the debt-residue from yesterday’s waste.

For those who might think the third and fourth propositions are at odds, the vital services would reflect payments to those who do not waste: payments made to those who don’t have automobiles, who do not make use of health ‘services’, who do not have children, who do not consume. These payments are investments that provide real returns: petroleum that is not burned today is made available for higher-value use in the future.

The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480 million on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to “observe the following sequence of very recent headlines: “Japan trade deficit hits record”, “Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports”, “Brazil Posts First Monthly Trade Deficit in 12 Months,” then of course this: “[US] Trade deficit hits 3-year record imbalance”, and finally, as of late last night, we get the following stunning headline: “China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil.” So who is exporting? Nobody knows …

How about Saudi Arabia, analytical dudes?

Europe’s problem is a waste-based economy not currency imbalance. No amount of tinkering adjustments will fix Europe without stringent energy conservation. The cost of borrowing to buy fuel thence burned up for nothing has destroyed Europe. What is left is the post-mortem.

Analysts and managers discuss credit problems in the Eurozone. They pretend/hope the economies are fixed and that growth will start soon. The same analysts and managers discuss crude oil prices and make excuses. There is no chance of the managers connecting the credit problems-crude oil dots. The blame for crude prices is fixed on central banks, the same central banks that have presumably ‘solved’ the European economic problems.

It may be that the recent petroleum mini-spike is starting to wind down. There have been a series of these small spikes then retreats since the ‘Big One’ in 2008. The premise here is that prices rise due to supply constraints then fall as the customers sit on their wallets … or go out of business. Unlike the ‘Brand X’ analysts, it says here the tie that binds economies to oil prices is the bank, not the gas pump.

Figure 1: Brent crude front month by way of TFC Charts: The market is really at a crossroads, here. If funds can be found to push the price higher, it would signal a trend change. Right now, the current spike has not exceeded last year’s high price of $128/barrel. It may never arrive: most of the world is facing financial difficulty … broke!

A trend change would indicate new credit/more credit. What is the collateral, the crude itself or the instrument by which it is destroyed? Where is the capital? The central banks can push out credit but their expanding balance sheets correspond to shrinking balance sheets elsewhere. The banks cannot create new capital only additional claims against what meager capital remains. New credit emerges from impaired banking. Smaller banks are either careful and unwilling to make risky investments or are capital constrained which is a reason why they are small. There are few endeavors that are investment-worthy: certainly nothing that wastes as the costs are too high at today’s prices. Waste-cost-revulsion is a simple dynamic but has overtaken the world’s economies. Central banks and governments cannot induce businesses to lose money which is what waste does today.

The price in euros is higher today than it was in 2008: the 2013 euro futures contract is the same price as the current month, how could it be otherwise? Would anyone hold euros if the currency futures were in backwardation?

Figure 2: Crude priced in euros: ‘It’s a Boy!’. Chart by EIA: the oil producers seem to have differing opinions about the euro and the dollar. this may reflect oil producers’ opinion on what the euro is worth today compared to what it might be (or not) worth tomorrow. Whether or how they might be hedging is impossible to say: this would effect the current price in euros to some degree. There has to be some realization that the risk of a vanishing euro is more than insignificant.

The oil producers might be simply charging the Europeans more for their oil than they are charging Americans.

A purpose for the euro was to give ordinary Europeans (Greeks, Spanish, etc.) an organic, hard currency alternative to the dollar. It gave them brain-damage instead: with either a euro shortage or a potential defunct euro, the crude market is poised to take a massive hit. If the euro fails, much of Europe’s bid will simply vanish. Survivors with little to sell will have to buy dollars in brutal currency markets. With Irving Fisher-esque intentional debt-deflation currently underway, the outcome is European states having to rent euros in brutal credit markets.

This becomes a distinction without difference: there will either be no more euros at all or too few euros in circulation except within banking. This potential absence may be why crude markets are looking soft. As with the other mini-spikes, the declines that follow are signs of demand unraveling and bankruptcies rather than increased petroleum supply pushing prices down.

Despite the deflation the flood of euros into crude is obvious. It may be that China is swapping its euro cache for crude. The worst-case scenario for China would be for its banks to be caught holding hundreds of billions of worthless euros. What we may be seeing is ‘currency hot potato’ with China trying to exit a massive currency position, dumping euros at a discount. China would put oil into strategic reserves just as it stockpiles copper and zinc. The China-euro dumping would explain the price push we have seen. The Chinese are careful: too much euro dumping would be suggestive of a dead euro. China can’t buy enough crude to make up for the loss of European crude customers and precipitating a run out of euros would be self-defeating. A slowdown in euro sales may be what we are seeing reflected in the softening price.

How many euros does the Federal Reserve hold as a consequence of its ongoing swap operations? Probably a lot but not enough to move any of the markets. The US isn’t buying crude with euros. It is hard to say what the US refiners are ‘buying’ with the Brent/WTI spread at nearly $20 per barrel.

Figure 3: Silver has been extremely volatile, it has also exhibited some ‘bubble’ characteristics. Keep in mind, in debtonomics there are no such things as bubbles, only periods when credit expands faster or slower along with short periods of credit shrinkage. Asset prices follow credit availability so price increases depend on whether the finance sector believes silver is a good hedge against something or other.

Silver was hammered by selling as industrial users’ customers sat out the market and monetary longs were faced with margin calls. A credit shrinkage scenario following a petroleum price decline/crash would have silver near $20 an ounce.

Silver will be worth something because it is ‘portable wealth’ that does not rot, burn or crinkle. Silver-the-metal is resistant to ‘computer error’. It is hard to see silver at $50 again any time soon. More likely are margin calls and bank failures in countries as the euro unravels even as citizens rush buy physical silver as a hedge against … euro unraveling. If/when the euro turns to dust, there will be a myriad of currencies arising to take its place. First among them will be the national currencies as well as the dollar. Second will be various local currencies, scrip and older silver and base-metal coins. Unofficial exchanges will emerge with rates for the coins based on metal content.

To provide the illusion of ‘stability’ there might be gold backing of national currencies but this is likely to be a form of public relations. That is, any convertibility will be strictly limited. It is far more likely that the new currencies will be wildly inflationary: existing external euro debts will be repudiated (see ‘Greece’). Internal euro debts will be re-denominated into the new currencies then repaid (overnight?) with newly issued national currencies. The aim will be to cram down debts to a manageable level (zero). There will also be float problems. Countries won’t have enough currency in circulation because citizens will be buying hard currency such as the dollar with the national varieties. This trade will take place in black markets: the hard currencies will be in increasing demand. The worth of the new currencies will decline accordingly as issuers put more new bills onto the streets.

Forget about credit, the only source of credit will be citizens who will have just been robbed and the IMF. The only banks to survive will be those that have good relationships with both depositors and borrowers. With currency upheaval even the best-managed banks may find themselves without the tools to work with.

European nations will counterfeit their neighbors’ currencies. The combination of currency arbitrage and the absence of restraint will generate massive amounts of inflation. Europe is likely to experience a lawless period. The establishment has failed and left a gaping leadership gap, it’s also a criminal enterprise. There will have to be a reckoning from which a new establishment to emerge. The outcome will be a conservation economy whether it is desired or not. Couple the lack of useful or worthwhile currencies, the shortage of ‘hard’ currencies and an accompanying desire to hoard them, low producer prices will ‘shut in’ crude at the wellhead. There will be shortages. Instead of rationing fuel by way of credit, the fuel will be physically rationed, instead.

From this time forward the important outcome to be aware of is any oil consumption ‘problems’ with credit or foreign exchange will ricochet through the economy to remove support for new petroleum prices and supply. What supports prices supports the means to meet them.

The European management has been able to white-wash the Greek collapse and pretend business as usual. Absent from the discussion is energy constraints and Peak Oil, the other Mediterranean nations are quavering, there will be no hiding the truth.

NOTE: Massive contretemps online between Paul Krugman, Randall Wray, Steve Keen and Scott Fullwiler. The argument started with a bit of bloggy nonsense from Krugman about Hyman Minsky. This led to Krugman’s description of banking and creation of assets/loans … a description of lending that made sense in the 1800s. This fits into our ongoing discussion over here @ Debtonomics. Links are here or can be found at Fullwiler’s article.

The economists really don’t have a clue. Not one mention of peak oil anywhere …

Eduard Manet ‘Monet Painting in his Floating Studio’. Those living in the 19th century before the widespread use of petroleum fuels certainly had it short, brutish and nasty. The painter Monet actually had to row himself and his wife by hand to where he would spend the day painting and being entertained. It is hard to imagine how difficult and unpleasant life was before unleaded gasoline, how far Americans in particular have advanced since 1874. Note the factories belching coal smoke in the background: a shorter, nastier, more brutal ‘lifestyle’ for tens of millions — World War One — was only forty years away.

It’s clear what is taking place both in the United States and elsewhere is a sea-change or more accurately, THE sea-change, the ‘Great Slide’. The ancient virtues of unlimited free parking and quaint segregation of work away from leisure are useful only when petroleum is worth very little more than what can be gained by its waste. This narrow difference can then be made up with inexpensive debt: as the margin widens debt becomes unaffordably costly. Debt becomes unable to bridge the ‘waste gap’ between what fuel costs and what the waste of the fuel returns.

The system as designed: cheap inputs + cheap credit = marginal system returns.

This leaves out the returns to ‘entrepreneurs’ that are independent of marginal system returns to a large degree.

Now: expensive inputs + expensive credit = negative system returns.

Negative real returns here weigh down the entire interconnected system. Increasing the amount of credit within the system increases both input- and credit costs. Credit does not exist (or is allowed to exist) outside the system: the expansion of debt cannot outrun increased input costs — which are a feedback outcome of debt expansion. There are obvious limits to credit forcing, beyond these limits system returns are unaffected.

Debt itself has become the obsession du jour: the problem is not the sufficiency of debt or even its costs but the defective structure within which debt subsidizes profitless waste. We love our waste, it makes us feel human: right now the world’s economies are at the point where debt can just barely stretch to fill the waste gap. We can just barely afford the costs of the debt, provided we put to use every sort of extraordinary tactic to manage them. We add more debt, we borrow our way out of it, we shuffle it around: running faster and faster to remain in one place.

Debts can be managed this way only because the state can always run faster: as long as there is a marginal return somewhere within the debt-y universe the system will continue to lend to itself ever-larger nominal amounts. Unfortunately, the real capital that the debt is supposed to represent diminishes while the claims made against capital increase. The efforts to manage debt by ‘renewing’ it become counterproductive. Adding debt becomes another form of waste with costs that cannot be met.

A decline in nominal price of petroleum is no cure: temporary declines allow price-thwarted demand to rush back into the markets and push up the price. This decline-push dynamic remains in force until the ability of customers to meet the high price price is exhausted, when the credit runs out. The producers must then lower the price to meet a diminishing cash market. What supports a price also supports the ability to meet it, the waste gap persists and continues to expand. Marginal costs swell to become the entire costs. Before that point is reached the system stops working as inputs cannot be had at prices users are able to afford.

Demand shifts from the purchase of goods to the purchase of fuel to support legacy ‘investments’. Demand destruction takes place first within the goods-producing sectors rather than in energy sectors, it takes place even as fuel prices decline. Demand declines faster because the fuel-waste goods production is a dependency upon low priced fuel. At current prices, the entire consumption infrastructure — built assuming $20 crude in perpetuity — is underwater.

In 2008 the WTI price spiked then collapsed. The fuel price could have been supported at very high levels for a long time, but not all prices across the entire economy. Fuel prices undermined marginal businesses particularly those related to automobiles, real estate and off-balance sheet financing. To satisfy demand represented by the existing auto fleet, funds were shifted away from the purchase of new cars and houses in far-distant suburbs. Fuel not purchased in exurbia was purchased instead in China and India.

Right now the price for fuel is still high even as the economy unsurprisingly displays signs of a severe slowdown within China and its dependencies, the European Union, Japan and the United States. Cannibalism works that way: the cannibal gets fat at the expense of his ‘lunch’. Given the choice between driving a car and having a functioning economy (that depends to a large degree on driving) the choice is made to drive.

The current regime runs aground on its costs. These are increased by (driving-created) scarcity and over-reliance upon credit to keep driving more. We allocate ourselves into a sinkhole. Wherever one takes the time or pleasure to look, the cost of driving exceeds what the customer is able to pay doing everything else. Having emptied our accounts at the gasoline pump, the returns on our non-driving endeavors are insufficient to service the debt needed to drive … or do much else.

What is underway is a margin call against the entire unproductive enterprise.

James Jacques Tissot ‘Seaside (Portrait of Kathleen Newton)’. The largest real improvements to take place during the middle-19th century and afterward were sanitation and clean water supplies in cities and better understanding of disease. Tissot’s mistress Kathleen Newton died by her own hand in 1882 at the age of twenty-eight, the consequence of her tuberculosis infection. Tuberculosis also claimed Monet’s wife Camille at the age of thirty-two.

Tuberculosis is an illness that is largely treated today with antibiotics. Unfortunately, the widespread recent use of the same antibiotics as additives to animal feed along with the improper (placebo) medicinal use has allowed antibiotic-resistant superbugs to evolve. There are now forms of tuberculosis that are unaffected by any drug. The end result is to undo the entire improvement, to bring conditions outside to the point where they were before antibiotics appeared.

This sort of dynamic takes place across the entire economy: we uncover or create an ‘improvement’ with one hand and mismanage its use with the other. We constantly act at cross-purposes to ourselves.

As the system winds down, what next? Everyone is looking for a way to manage future risks while being completely in the dark as to what forms the risks will take.

Unknown photographer, ‘Street in Uzès, France’ (New World Economics). The pre-petroleum Neanderthals of the 16th century and earlier certainly knew how to build beautiful towns.

Energy waste for its own sake pushes aside everything unrelated to itself. This consigns all but a few fragments such as the occasional Uzès to the ash-heap of progress. We frame the fragments even as doing so puts them out of context. While the markets attempt to make measure, the markets themselves fail apart. Everything we rely upon to do our critical thinking for us is resource-dependent and undone by negative real returns.

Richard Duncan’s original, 1995 conceptualization of the rise and fall of industrialization. We are what we consume per-capita sez Richard. This is completely paradoxical: we have created for ourselves a petroleum-driven dark age that we have but the smallest chance of escaping! The problem isn’t the primitive, it is our mis-managed progress. Propaganda pimps modernity as the race toward a scarcely-to-be-believed wonderland of Chinese made crap consumer goods sure to arrive tomorrow. The record of one industrial failure after another speaks for itself: if we are done in it will be on account of our stupendous successes revealed as the follies they turned out to be.

The entire Futurama concept runs aground on its own absurdity. How is sitting stalled in traffic or not stalled within an environment created specifically for machines progress? How is sitting behind a wheel for three hours any different from sitting behind a sewing machine in a sweatshop? The answer is the sewing machine produces a (small) return for the sewer while the wheel is a privilege purchased at an unaffordable price.

Any sort of civilization beyond what is unraveling around us — or any higher form elsewhere — would certainly be driven by inner resources rather than what can be bought in a store.

Any higher intelligence in the universe would be unrecognizable to moderns who can only consider civilization within the context of self-destructive industrialization: weapons and conquest, machine exploitation and lazy transformation of resources into waste for no purpose other than to make someone ‘rich’ who is a bit greedier than the others … The artifact of any civilization more advanced than ‘ours’ would be the rendering of the universe devoid of life or even the possibility for life to exist. How, in fact, we now perceive the universe to be: an enormous vacuum buzzing with radiation and the occasional black hole.

Those searching the radio spectrum for signs of intelligence in the universe peer under the wrong rocks: ‘Advanced civilization’ would manifest itself as a bizarre negative space-like non-space guarded by silent well-cloaked microorganismic killing machines. Perhaps this is what our precious God concept represents when distilled to its essence: the conquest of life by death (machines) out of envy.

Our God tricks us: everything and everyone else within modernity lies, why not God?

The belching factories and a handful of billionaires put twelve Americans on the moon, after the same factories and billionaires killed tens of millions in a world war. The astronauts drove a car in circles and hit a couple of golf balls. They didn’t even play a legitimate game of golf: the entire enterprise was a pointless cold-war finger to the rest of the ‘undeveloped’ world. “We can put a man on the Moon but …” We can’t think to do anything else because our empty anticulture does not allow anyone to come up with something better. An actual civilization would have sent Monet on the moon in a floating studio, but our gulag-on-wheels stuffs nascent Monets into investment banking instead, ‘greeding them down’.

Modernity’s first demand is the annihilation of art as being subversively human and anti-modern. So far that strategy has been a resounding success …

Our space adventures enabled bigger rockets upon which our wonderful entrepreneurs mounted larger numbers of more accurate thermonuclear warheads. Add to that the incurable illnesses and multiple total wars, the cannibalizing the natural world in the chase for resources and much more of such progress will be the end of us. The sooner we use up our energy supplies the better.

The waste gap widens: the USA has ‘invested’ trillions into guaranteed capital losses. Notice that the Chinese have followed. The Soviets bankrupting themselves trying to outspend the US on military hardware. The Chinese bankrupt themselves outspending on autos and high-rise office buildings.

The entire system requires restructuring, not just bits and pieces.

The emerging system: valuable inputs = zero-risk use.

Expensive credit = narrowly distributed returns

Inputs would be so valuable that the entire enterprise would be designed around managing the risks associated with their possible economic loss. Better uses would be found for resources or they would remain unaffordable in the ground. There would be no ‘consumption’ of non-renewable resources, only non-consumption uses would provide sufficient returns to meet the high costs of accessing them. The implication is an economy that is more wealthy rather than less wealthy: an economy which carefully husbands rather than squanders capital and makes highest and best use of it.

What will be required is a return on resource use rather than subsidized waste.

Credit would be tasked with amplifying the increase in capital by any means necessary. This might mean borrowing to pay individuals not to waste or to not generate certain kinds of demand. This also suggests an economy that becomes wealthier over time allowing even high-cost credit to pay for itself.

At the end of the Age of Waste it must be noted that all of the materials considered to be in dire short supply will still exist but not in ‘industrial quantities’ or in concentrations that are economical for industry to waste. It will simply not be possible for billions of people to waste resources for negative real returns. The absence of industrial inputs does not mean the absence of inputs. Even after a century- and a half of waste, over half of all the discovered fossil fuel will remain in the ground, along with gold and silver, potash and phosphorus, rare-earth metals: there will be topsoil and water too, and much more besides.

Easy resources are transformed: into both ‘by-products’ and life-lessons: whoever uses resources in the future will have to bring more to the table besides carelessness and the ability to wheedle his friends into lending to him. Any material use will have to pay for itself on its own account. No more grand delusions about risk-free growth paid for by ‘nobody in particular’ because the structures to support such nonsense will be impossible.