I make no excuses about not having the qualifications to be an economist, I never studied economics in school, in fact, I am unschooled. I never finished high school.

Ironically. the vast majority of ‘real’ economists are less qualified than I. They missed the last crisis even though it was ‘stick- out- like- a- thumb’, ‘walk- down- the- street- butt- naked’ inevitable.

Education is wasted on some people!

What is even more ironic outrageous is that of the handful of ‘real’ economists that made the ‘crisis cut’; almost none mention energy constraints, energy costs, the rapid rise in energy costs, the effects of energy costs on the economy before the crisis began … and the inevitability that still- rising costs of energy will precipitate a second deleveraging event!

Nobody listens to me, I’m an idiot! Another crash is going to take place real soon. Can I make myself any clearer? Close your dollar- short positions now!

The ‘Peak Oil’ people will say that peak oil is in the future, or just happened last year. They will then say that the outcome will be, “price spikes”. I tell them that the oil peak was in the past because of the price spiking over the past ten years. From $12 to $80 is a spike where I come from … I don’t know how it is in your neck of the woods! Anything over $35 has been enough to cause real economic damage since World War II. What is so different about this time?

When oil lately jumped above $35, the economy faced recession, just like it did in the ‘seventies and the early ‘eighties. The pundits would say that the real cost of $35 oil is less in 2009, but I point out that our oil consumption infrastructure is less productive than it was in those earlier periods. From the ‘return on consumption’ standpoint, we are mired in the 1950’s and 60’s. Our economy provides so little return on energy use that we are reduced to marketing abstractions. We don’t create energy profits or make production investments with our oil use. We don’t view oil as capital. We simply waste it on an expanding scale.

Our investment relationship with crude oil is identical to a junkie’s investment relationship with heroin.

There are many economists calling for an economic relapse; the focus is almost entirely on the expansion of credit or government/central bank interference. Yes, there is a too much credit extended; only a small percentage of what is outstanding will be repaid or charged off. Yes again, the government can be daft and bureaucratic and corrupt, it always has been. At the same time, almost all credit in existence is now either guaranteed by the same ‘credit- worthy’ governments and central banks or hidden safely off- balance sheets. Money depreciation tends to be on the side of the borrowers. Given enough years, the large, unmanageable loans of the now will shrink in real terms to become easily manageable loans, even forgettable loans.

In a quadrillion- dollar economy, what’s a few trillion here and there? Put into perspective, excess credit devalued by money expansion is of a piece with the historical trend of self- liquidating claims. The same trend constantly extends more and more credit. The entire world is in debt and it still spins. That perception is sufficient to remove the liquidation tensions from the existing and newly- created debt.

Credit issues are really a distraction away from the more pressing resource constraints. Energy is safely put out of mind behind two reassuring truisms: technology and substitutability.

Technology will save us. How, exactly … is open to question, but technology has succeeded so far. Well … hasn’t it?

Technology is another abstraction- for- sale. Technology cannot marshal anything at the scale required to allow our consumption infrastructure to function as it does today. It takes more than some ‘content’ or gigabytes to push an 8,000 lb SUV at 90mph on the highway. There is no techno- quick fix … or slow fix either … that can provide that power.

Every ‘conomist larns in skool that money will substitute for just ’bout anything! If $80 per barrel won’t give us enough production, $100 a barrel will! Problem is that the $100 will bring forth the oil but it is then too expensive to ‘use’ as we use it now and show a profit. Almost all the discussion about oil price revolves around the investment cost of extraction. Little thought is given to the issue of what the recovered oil will be used for … and at what level of profitability. The assumption is that use/pricing will quietly fall into line behind the cost of production.

Hmmm, there appears to be a small problem with that assumption.

Meanwhile, back at the financial ranch; ‘persons’ who have some of those previously- mentioned abstractions are redeeming them if they can. The mighty American securities markets have become places where credit and derivatives are laundered into cash. An example of laundering credit in a market is a speculator buying a house for $850,000 with an $800,000 mortgage. When he sells the house for $1.3 million, he retires the mortgage and keeps the difference, he’s laundered $800k in credit into $450,000 in cash.

Real estate has recently lost value, the market cannot launder credit any further. The action has shifted to equities, bonds and lending derivatives’ markets.

Credit- laundering has usurped the price- discovery purpose of the markets. It explains the continuous rise in securities prices which facilitiates the exchange. The central banks’ recycling of funds into base money forms the process of providing as much cash for redemption as possible. Cash recycling is reserved for the gamblers, not for the overall economy which is constrained by high oil prices. To the central bankers, the real economy is beyond assistance.

At the end of 2009, only abstractions have any substance.

Eventually a balance of savvy traders will come to the same conclusion I have here. They will recognize the markets as money laundering operations for gigantic, government- sponsored Ponzi– finance schemes. Speculators ‘in the queue’ will not rock the boat, hoping to get out the door intact.

The ‘smart money’ is probably already out. The categories left behind will be the quick (to execute) and the slow. The slow will be ruined, the quicker will have withdrawn from the markets with some of their funds intact.

We have then … three shams. The credit sham, the credit- laundering sham and the ‘ignore the oil price’ sham. Which pops the bubble?

Nobody can say what caused the 2007 bubble to pop. A couple of hedge funds that invested in sub- prime mortgage derivatives were closed due to redemption (I think … ). This started a race to exit leveraged derivatives which soon absorbed all available liquidity. The Fed conned itself into believing the problem was just an underwriting issue with California mortgages … and cut rates anyway! What else would they have done?

Hyman Minsky would suggest the exuberance leading up to the hedge fund denouement created conditions for its own demise. during the runup to the crisis, Ponzi finance took root. During the crisis itself, the participants of failed firms sought only to imitate the safe exit of their more astute contemporaries who closed their positions before the crisis. A redemption rivulet sprang out of derivatives shortly before there are any obvious sign of distress.

Minsky’s Ponzi mechanism is alive and well, with the Establishment allowing favored participants exiting via derivatives markets – profits intact – while those less favored remain behind to be destroyed. The current rivulet of redemptions – or river, actually – is taking place in plain sight, Central banks create funds to allow financiers to launder credit into cash in the stock and bond markets. The Fed sanction gives a false sense of security to these markets. This is unlike the anxiety felt in the real estate markets in 2006 as sub- prime- loan defaults were causing mortgage originators to fail.

The openness of the redemptions suggests that financial denouement will not begin in the markets. There is too much shared interest in keeping the scheme running as long as possible. Since most market participants are professionals, there is enough discipline to prevent a panic … at least for the time being.

A better trigger would be the point where sufficient oil consumption- platform costs are stranded so as to prohibit profitable use of the platform itself. This stranding would become manifest as an increase in business failures across the board, whether these are credit- sensitive or not. At some point, stranded costs reach an inflection point where the failures begin to amplify themselves in positive feedback loops.

One loop being the erosion of the scale required to for the whole to subsidize the costs of some of the parts. This would be (un)employees being unable to produce goods at a profit for businesses and being unemployed, unable to purchase the same goods from any source. Another loop is the change in marginal utility of the good being priced. Both aspects orbit around a perceived scarcity premium that attaches itself to oil with any significant rise in price.

Government revenues are also effected. Keep in mind that most business failures involve small businesses; these do the most hiring – and firing – and do not usually bother with official bankruptcy. They simply close their doors. The Bureau of Labor Statistics ‘birth- death’ model is no help, being a statistical artifact rather than a concrete database of created v. failed businesses.

In this model, depletion does not register as an out- and- out fuel shortage, in fact there may be large inventory overhangs along with high prices. The price increase dynamic provides the incentives for the expanding inventories. Costs are distributed throughout the entire platform. While most can afford the direct costs of diesel fuel or gasoline at the pump, they may not be able to afford a car or boat or jet ski, or the taxes to repair roads and bridges … or keep schools open, These platform elements are essential to the function of the economy: the sale or making of houses, airports, stores, plastic goods, computer hardware, electrical wires, bolts, food and most other goods that have an oil energy component. Within this context, oil is priced away from being nother commercial commodity to instead becoming a ‘money- like’ (or currency- like) substance. The intrinsic value of oil becomes greater than the aggregate value created by its consumption.

Eventually, oil will be too expensive for consumption, it will be useful for high- value added (high energy productivity) uses, such as for chemical feedstocks or pharmaceuticals. The entire current oil consumption infrastructure will then be stranded. There will be plenty of cars, but no gas for them. It will be too costly to sell refined oil as motor fuel.

Unfortunately, depletion does not allow for ‘luxury’ silver linings or returns to auto- inspired nostalgia. Depletion is relentless and unstoppable. The outcome of the next deleveraging leg is probably future deleveraging legs. Only when oil use is directed toward investments with a concrete return – with an strikingly smaller consumption footprint – will there be an economic recovery. That is a tall task, but it certainly can be done. One step would be to eschew all oil imports and ration consumption sharply so as to sell some US oil overseas for hard currency (gold? Silver? Rare earth metals?) . With depletion becoming a world- wide phenomenon, this outcome becomes more and more likely.