Collapse Something or Other …

 

The Christmas present nobody wants sits under the tree: a worldwide finance crisis along with an establishment that appears to be coming apart at the seams.

The status quo is unraveling from all sides, at the top especially, where managers cannot conceal their panic:

Oops!

“Every banker knows that if he must prove he is worthy of credit, however good might be his arguments, in fact his credit is gone.”

— Walter Bagehot

The government marshals its forces of borrowing in order to prop up the lenders as per usual. Yet, the lenders have been propped up for years. The bosses demand lower lending rates even as these same rates are at- or below historical lows. What more can be done and to what end? The rates and props deployed during and after prior crises have contributed to the immediate peril as well as everything that has led up to it. There is no cure to be had in additional doses of the same poison that currently looks to kill us.

By questioning whether lenders are worthy of credit the Secretary sinks his own battleship: “Every banker knows …” well, perhaps not. He inadvertently reveals truths: that lenders are vital but are also vulnerable. Vital in that our economy does not pay its own way, it cannot. The industrial economy is reductive rather than productive: its primary ‘good’ is entropy. Business relies on the continuing increase of bank money to draw future resource capital toward the present. Without the lenders and the credit they provide the modern, industrial economy stalls then comes undone. If our economy could meet its own expenses out of cash flow it would do so. What the Secretary admits without doing so directly is our economy cannot afford itself.

That we cannot afford our economy is its immediate vulnerability. Asymmetries within the lending regime such as maturity mismatches make it fragile. The regime depends on a marginal agent or class of agents that sets conditions for all the others. Keynes notwithstanding, a certain level of borrowing restraint, something short of universal borrowing has little affect on the system as a whole. But, some percentage of economic agents must borrow with a fraction of that borrowing deployed to service and retire existing debts. Small leaks- or water over the top of a dike will not damage it but one small leak too many will wash the dike away. In the same way, a small percentage of non-performing loans or defaults is tolerable to the system, a portion of lender reserves and equity is set aside to resolve these as they appear. Then, there is one default too many for whatever reason … this is disaster! The ‘capital’ structure of the lender is upset; this calls into scrutiny the capitalization of all other lenders that are similarly situated. Uncertainty is rapid and corrosive, given time it widens into a self-amplifying spiral of insolvency. This is what occurred in 1929 and 2008 and what looks to be underway right this minute.

Compounding the problem, the marginal borrower is impossible to identify or for immediate institutional convenience is disregarded. The tiny leak with the potential to destroy the dike can be one of any (very large) number. Globalization has rendered the marginal agent opaque; official denial and central bank happy talk permits known problems to fester. The marginal borrower can be an individual or a firm, or a class like Chinese peer-to-peer lenders, Italian footwear manufacturers or Spanish residential real estate speculators and the banks that supply these with funds. Eventually, all of them together become marginal. Structured finance operates outside the reach of policy makers at the same time are tightly bound to all the others by way of swaps, corresponding- and exchange lenders, counterparty agreements, derivatives-based hedges and money markets. Like a flood, marginality propagates outward, with the ‘new’ marginal borrowers becoming major banks, dark money pools, bond- and derivatives market makers, national governments and foreign exchange. In any event, agents cannot be compelled to borrow and in a crisis refuse to do so. Insolvent, zombie-like walking dead firms which continue to borrow/lend in the aggregate are lethal to the regime: they can only offer the (fraudulent) appearance of a cure while delaying the inevitable reckoning. Accounts cannot be overdrawn indefinitely, it is impossible to borrow out of debt. “If something cannot go on forever, it will stop,” says economist Herbert Stein. No amount of marginal borrowers can rescue a system that is foundationally bankrupt.

… this is after hundreds of trillion$ have been borrowed around the world already. The simple fact of the trillions suggests the managers are inept and perhaps insane. Our debts have grown beyond human scale, even the billionaires all together cannot hope to retire them, in fact their borrowings have contributed significantly to the total. Along with their managers, these stupendous debts fade to irrelevance in the practical sense; they can never be repaid. They are empty claims against resources that have long since been converted into useless waste. Machines that are dependent upon credit for their very existence cannot repay, certainly not labor which is feeble; which is otherwise depreciated, subordinated and oversupplied.

This is all part of the current crisis, it may indeed be its entirety. Whether the markets are repricing (in)competence, (in)solvency, systemic bankruptcy or perhaps all of the above; it is too soon to tell.

Figure 1: What is our over-extracted world worth? The underlying problem is resource stripping and its consequences. If that is being priced in right now we are in big trouble. Chart by TFC Charts (click on for big). The current crisis could not be predicted as was the oil price plunge in 2014, but it was inevitable nevertheless. Our economy requires cheap oil to run but the cheaper oil is exhausted, what remains is unaffordable. Low cost credit has offered the (fraudulent) appearance of a cure … but it has only delayed the inevitable reckoning.

A few years ago, the oil price that triggered crises was over $100 per barrel. We have been creeping toward a crisis for the past several months at $80 per barrel. Time and waste leave us less wealthy than we pretend to be …

Figure 2: Compare the likely crisis price suggested a few months ago. We clearly cannot afford $75 oil, higher prices are out of reach. At the same time, the drillers cannot stay in business selling their product below cost. What is common = access to credit which turns out to be the means by which resources are allocated. The customers are broke.

“Take an online survey and answer all your own questions!”

23 thoughts on “Collapse Something or Other …

  1. AugustusGloopius

    Thanks for the article. With all this outstanding debt, do you think the Fed will lessen or even halt raising rates? I just wonder how long the shale plays can continue to have access to investor money as rates go up and/or as oil demand goes down.

  2. Eeyores enigma

    I get the impression that TPTB wants to get more money into the hands of the greater population so that they can keep paying their bills/debts but there is no palatable way to do that. Some are talking about debt forgiveness but IMO that is the last thing they would do. Time for a very big distraction.

    1. Front Range Mike

      Yeah, like a government shutdown and endless fear mongering about a border wall. A wall that is a perfect example of Steve’s premise about industrial entropy. Plus, it’s real expensive to boot! It may be the leak too far in the dike.

  3. Creedon

    Rising stock market equals leveraged investment. High interest rates; no leveraged investment; low or zero interest rates equal rising stock market. Nothing is marked to market.

  4. Mister Roboto

    Well, the previous crisis was brought about, in part, by the WTI price of petroleum being at $100 a barrel or significantly above (peak price almost $150) for a year, with the price being at $120 or above for six months within that period. This time the sustained WTI price was $65 for a six-month period and $70 for a month within that period, peaking very briefly at $75. How things have changed in a mere eleven years!

  5. Ken Barrows

    Gas prices dropping (forget rising extraction costs). Interest rates falling (on the long end). Trump with his big brain has done it again /s/

  6. Creedon

    If the oil price is halving every ten years, that would put the price at about 30 dollars in 2028. 120 dollars/barrel in 2008, 65 dollars/barrel in 2018, 32.5 dollars a barrel in 2028. It’s questionable whether the petrodollar will exist in 2028. The Russians and Chinese are trying to find a way around it.

  7. NoFrackingWay

    How fast, how far down?

    http://ieefa.org/ieefa-update-2018-ends-with-energy-sector-in-last-place-in-the-sp-500/

    “The bottom line: for the second straight year, the stock performance of the energy sector was at or near the bottom of the S&P 500 – and in 2018, it was solidly in last place.”
    BEHIND THE CURRENT TUMULT LIES A LONG-TERM DOWNWARD TRAJECTORY. THE OUTLOOK IS DECIDEDLY NEGATIVE.
    “The demand side has historically given the oil and gas sector a happy face. But demand is now increasingly roiled by slower and less energy-intense economic growth, by market penetration from renewable energy alternatives, by energy efficiency, by new storage technology and by more limited use of automobiles.”

  8. Reverse Engineer

    Survey now with 600 Respondents, 212 from r/collapse, 136 from Cassandra’s Legacy, 99 from TBP, 76 from the Doomstead Diner, 17 from Economic Undertow, 13 from Our Finite World. 75% with a Bachelor’s minimum, 13% Doctoral level. Survey still OPEN, you can still get your opinions in and be counted with the 600.

    http://www.doomsteaddiner.net/blog/2019/01/13/2019-collapse-survey-results-the-500-who-are-the-kollapsniks-the-demographics/

    The Charge of the Light Brigade
    By Alfred, Lord Tennyson
    I
    Half a league, half a league,
    Half a league onward,
    All in the valley of Death
    Rode the six hundred.
    “Forward, the Light Brigade!
    Charge for the guns!” he said.
    Into the valley of Death
    Rode the six hundred.

    II
    “Forward, the Light Brigade!”
    Was there a man dismayed?
    Not though the soldier knew
    Someone had blundered.
    Theirs not to make reply,
    Theirs not to reason why,
    Theirs but to do and die.
    Into the valley of Death
    Rode the six hundred.

    III
    Cannon to right of them,
    Cannon to left of them,
    Cannon in front of them
    Volleyed and thundered;
    Stormed at with shot and shell,
    Boldly they rode and well,
    Into the jaws of Death,
    Into the mouth of hell
    Rode the six hundred.

    IV
    Flashed all their sabres bare,
    Flashed as they turned in air
    Sabring the gunners there,
    Charging an army, while
    All the world wondered.
    Plunged in the battery-smoke
    Right through the line they broke;
    Cossack and Russian
    Reeled from the sabre stroke
    Shattered and sundered.
    Then they rode back, but not
    Not the six hundred.

    V
    Cannon to right of them,
    Cannon to left of them,
    Cannon behind them
    Volleyed and thundered;
    Stormed at with shot and shell,
    While horse and hero fell.
    They that had fought so well
    Came through the jaws of Death,
    Back from the mouth of hell,
    All that was left of them,
    Left of six hundred.

    VI
    When can their glory fade?
    O the wild charge they made!
    All the world wondered.
    Honour the charge they made!
    Honour the Light Brigade,
    Noble six hundred!

    RE

  9. Creedon

    The collapse community has been wrong. I hang my head in shame. We’re looking at ten years of chaos, insanity, oil shortages, rising and falling stock markets and slowly disintegrating currencies. We are all fools and the future is grim.

  10. Ken Barrows

    We are halfway to collapse. The 10 year UST will never rise above 3% for more than six months. TPTB will juggle balls in the air until they cannot. And if I am wrong then someone actually created wealth.

  11. ellenanderson

    You all may be interested in the most recent C-Realm podcast where KMO (a truly wonderful interviewer IMHO) takes on JHK and kinds of rocks him back on his hills, I think. KMO believes we need to worry a lot about AI because peak oil is not going to take the system down in time to spare us from the impacts of AI. I would be interested to hear what anyone here makes of that and also what JHK thinks.
    Anyway, as someone who has tried with little success to organize for the left, I am encouraged by the organizing job being done by POTUS.

    1. Volvo740...

      I think KMO went on to do a bunch of prep, counting on peak oil coming soon. That didn’t pan out, at least not in the way he anticipated.

      But I think the PO community was pretty much correct. The world is slowly collapsing, and it has everything to do with peak oil. KMO says there has been nothing to see, but try telling that to the crumbling middle class, or the people tenting through the winter outside Seattle. 10 years ago there were no tents – now they are everywhere. Cause and effect is always tricky to tell, but let’s say the US had not had a peak in 1974, and continued to increase oil production until today. Would Detroit be better off? I think so.

      The other point is the timing. Just because the peak got pushed out a little doesn’t invalidate the long term view, which remains bleak. Predictions are still, that in 40 years there is very little oil produced but opinions vary from imminent collapse to 50 more years of production. Time will tell, but even 40 years is a pretty short time frame, and then on top of those issues you have the environmental challenges that just keep growing. So I see no reason to come out NOW and say that it’s not happening.

  12. ellenanderson

    Here is a really good post on farming and meat eating from theautomaticearth:
    https://www.theautomaticearth.com/2019/02/eat-less-meat-and-save-the-planet/
    Final paragraph:
    “So try to be at least as smart as an illiterate medieval peasant and grow your food the natural way: locally, seasonally, independently, with happy animals in a rich green world of fields, trees and farms enriched with thousands of subvarieties of biodiversity in hedgerows so rich they have yet to be fully cataloged. A far cry from the hardened, drilled, paved, expensive, destructive, unsustainable, dangerous, lethal, impoverished way promoted by the scientific experts and the journalists who cover them. ”
    Steve – I am not going to sign up for Twitter but I do check out your feed every now and then.

  13. ellenanderson

    @Volvo – KMO says he made some life choices he regrets. Not sure what they were. And I don’t think he is denying peak oil, but he is ranking it on a relative basis. Relatively speaking, he seems to say, the iphone and social media have been more influential and more responsible for social/political/economic changes. What I am wondering about is the AI worry. Is it the military application of AI (via drones) or the further reduction of jobs? He says that peak oil is not going to happen in time so we do have to deal with AI.

  14. Eeyores enigma

    Peak oil definitely happened for gods sake. Just because it isn’t mad max right now is no indicator of peak oil being put off.
    Peak oil looks quite a bit different that most thought mainly because of trillions of dollars thrown at it and an amazing ability for ignorance, denial, misdirection, and hopium. Most POers thought that money mattered…it doesn’t and it is questionable as to whether or not it ever will, at least for the first worlders and at least before some other element of collapse renders it moot.

    As Steve has shown on numerous occasions there there are plenty of other countries where money does matter and what does a country historically do when they come under energy constraints? WAR.. HuH… Good God Y’all…WHat iS it GooD For?

  15. Creedon

    As some one who has spent years trying to figure out what the limits to growth are. let me say that we are entering a period of what would be called hyper inflation if we were a society based on cash. As Steve has said we are a society based on debt. Doug Noland says that the national debt is now surpassing 22 trillion, the Chinese are now once again rapidly putting money into their debt system. Charles Hugh Smith has charts up on his website showing the national debt and taxes growing exponentially. When the line on the national debt is going straight up, how sustainable is it. Charles Hugh Smith, John Williams and Michael Kreiger are all saying we are now at the beginning of a new recession. The central bank answer to this recession will be to lower interest rates back to zero and restart QE. The federal reserve was very quick to back off on increasing interest rates. The debt system has to be fed and we are getting close to the debt line going straight up. Collapse doesn’t happen over night. It takes time. TPTB have no way to adjust, because this is all they are capable of doing.

  16. Ken Barrows

    The Federal Reserve is thinking about capping yields? I don’t know how long TPTB can keep this up, but from a historical perspective, collapse is knocking. 100 years of rock bottom interest rates and no inflation coming up! You can have both with…collapse.

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