From the, “Can’t anyone play this here game?” department: why doesn’t anyone @ the Fed know how much bailout money to shovel into the banking rathole? Why don’t they ask me?

While all this shoveling is (not) going on, the charade of having a real bond market must be maintained. “Why,” you ask? We might need one some day!

Doing some preemptive restructuring might be smarter than preemptive liquidity provisions. While the Fed shell game is taking place the real economy is eroding. At some point the erosion will reverberate in some profound way back into finance causing ‘involuntary restructuring’.

Then again, preemptive restructuring would mean the end of the Bernanke Money Laundry.

We have a situation where the Federal Reserve engages in a widespread international campaign to devalue the dollar, to make it cheap and generate revulsion overseas – 75% of US currency holdings are overseas – and to call it home where it can be swapped for worthless securities. 

Where the Fed’s primary dealers pump up equities markets to facilitate the laundering of worthless stocks such as AIG and C  into cash. Where the Fed buys Treasuries directly to turn the government debt market into a cash fountain. Where the Fed swaps dollars overseas to unknown proxies under unknown terms to benefit unknown parties. Where these and other practices could never be consistent with prudent monetary practices as the consequences have repeatedly led to default and money panics … yet the Fed does just these things!

Oh well … game is over and the Fed knows it. The media that plays along emitting the econ- noise and keeping the suckers hopeful. One trait the suckers share is the the belief that ‘they’ as individual will be able to exit the market in time if it turns against them.

I have two words for these fools: ‘Flash Crash”:

From the ‘How Am I Different’ department, is an old paper by Yegor Gaidar who was – for those old enough to remember – the acting Prime Minister of the USSR as it collapsed from superpower status. The cause, according to Gaidar: a defunct agriculture sector and rapid urbanization.

Wha …? I was told it was Ronald Reagan:

The Story of Grain

In a simplified way, the story of the collapse of the Soviet Union could be told as a story about grain and oil. As for the grain, the turning point that decided the fate of the Soviet Union began with the economic debate of 1928–29, when the discussion centered on what would later be called the “Chinese path” of development. (By several important economic and social indicators, the Soviet Union of that period and China in the late 1970s took similar approaches to reform.

At the time, the head of the Soviet government, Aleksei Rykov, and the chief ideologist of the Communist Party, Nikolai Bukharin, earnestly defended the idea of a path which included preserving private agriculture and the market, and ensuring financial stability—but holding onto the party’s political control.

The Soviet leadership ultimately chose another path. The solution preferred by Joseph Stalin was the expropriation of peasants’ property, forced collectivization, and extraction of grain. Judging from the available documents, the essence of this decision was relatively simple. Bukharin and Rykov essentially told Stalin: “In a peasant country, it is impossible to extract grain by force. There will be civil war.” Stalin answered, “I will do it nonetheless.” The result of the disastrous agriculture policy implemented between the late 1920s and the early 1950s was the sharpest fall of productivity experienced by a major country in the twentieth century.

The key problem confronting the Soviet Union was well-expressed in the letter sent by Nikita Khrushchev to his colleagues in the leadership of the party. The letter fundamentally stated: “In the last fifteen years, we have not increased the collection of grain. Meanwhile, we are experiencing a radical increase of urban population. How can we resolve this problem?”

How indeed? Gaidar goes on to link declining real agricultural yields with pressure on Soviet foreign exchange. While the USSR could stave off bankruptcy for awhile by selling its oil treasures, once oil prices declined in the mid- 1980’s the ability to swap oil for food vanished. At that point the Soviet empire collapsed under its own weight.

What Gaidar illuminates is a stunning question- not- asked: Howcum the Soviets didn’t reform agriculture? They stuck with the non- productive centralized Stalin model to the bitter end. Had the Soviets allowed reforms in the 1960’s would the USSR have collapsed? Nobody really knows because it wasn’t tried.

(Pssst: can the US reform its agriculture before fuel- cost induced deflation renders its industrial model unaffordable?) 

Note the critical period in Soviet decision making was during the late 1920s, this was also critical time around the world. What was taking place was not a flash crash but a ‘fash(ion) clash’; one side was the ‘traditional’ or dispersed model which evolved over the centuries from geographic necessity and meager capital accumulation. On the other was the centralized industrial model which shortened distance with steamships, telephones, wireless and airplanes. The centralized model allowed the concentration of all kinds of capital which was its marginal advantage over the dispersed model.

Concentration failed the Soviets even as it temporarily promoted an illusion of dangerous wealth and power. Stalin was a robber baron, a Georgian soviet Andrew Carnegie without the libraries and the Hall. The ability to marshal capital gave the Soviets a transitory advantage that lasted only as long as easy capital was available for it to concentrate. Once it had burned through what it could physically control, the USSR was finished. Short of conquering the world on the cheap – which it tried – it had no means to access more capital.

Sound familiar? How am I different, indeed:

Parallel to ignoring agriculture reform was the Soviet’s failure to extend the reach of its currency. This is what really did them in. When current account difficulties manifested themselves in the later- 1980’s the Soviets had little choice but to to borrow dollars as its currency was not convertible. It had survived by swapping oil for dollars but low oil prices left a deficit that could not be filled by printing rubles. Without oil the USSR had nothing to trade except some gold which the Soviets foolishly thought had outcome- altering value. It didn’t and the USSR was bankrupted by a costly geographic empire it was obligated to support but couldn’t.

It was also confounded by its history of bullying and aggression which won it few friends from international financiers.

The US is burdened by identical bullying and waste issues but is supported by the valuable dollars it manufactures. Planet Bernanke must keep this in mind as he considers the propaganda drive to devalue them. He might succeed …

Meanwhile, from the ‘Sucker Is Born Every Minute’ department, Art Berman gives an analysis of shale gas production over @ The Oil Drum and rips those rose- colored glasses off!

C’mon, Art, don’t hold back, tell us how you really feel!

Shale gas operators have consistently told investors that their projects are profitable at sub-$5/Mcf (thousand cubic feet) natural gas prices. Yet company 10-K SEC filings show that this is untrue. They have invented a new calculus of partial-cycle economics that excludes major capital draws for land costs, interest expense and overhead. They justify these disclosure practices because excluded costs are either sunk or fixed and, therefore, supposedly should not affect their decisions to drill. Their point-forward plans are made at shareholder expense since the dollars spent were very real at the time, and their costs cannot be charged to a profit center other than the wells that they drill and produce.

A multi-year evaluation of production costs for ten shale operators indicates a $7.00/Mcf average break-even cost for shale gas plays in the U.S. taking hedging into account (Figure 1). In other words, shale gas plays are not low-cost but comparable to conventional and other non-conventional projects. Despite claims to the contrary, the gas-price environment has been favorable over this period, in part because of hedging, and poor performance cannot be blamed on price. Over-production has changed this dynamic and hedging will not benefit operators in the second half of 2010 or in 2011, and possibly not for several years forward. This emerging trend will test the shale gas business model and show that it is unsustainable. The same ten companies that we evaluated have cumulative debt of more than $30 billion of which three have combined debt of more than $20 billion.

The point that is made over and over again here at EU is what matters in energy is ‘availability at a price’. It doesn’t matter if a barrel of oil is available if it costs too much money to use it. This feeds back to the costs of production.

What presses on natural gas prices is the decline of housing and US manufacturing. Having an additional ten million vacant houses represents gas that isn’t used. Excess capacity and slack demand keeps gas- fed factories shuttered. In these sectors, free gas would not provoke demand just like cost- free money will not provoke borrowing.

Here, the gas sector is a precursor to the oil sector. High oil prices have had their sport with the industries dependent upon cheap fuels of all kinds. The outcome is lower gas prices as goods- production is insufficient to bid fuel prices higher. The auto use sector can still support higher oil prices at least for a little while but the sensitive sectors are natural gas customers. What is taking place is a sector spill- over. Natural gas is impacted by high oil prices that render houses unaffordable along with (factory- produced) goods intended for them. It’s only a matter of time before high oil prices render the rest of the fuel- use infrastructure equally unaffordable which will take oil prices lower.

Here is the gas producers’ swindle. Sez Art:

Right!