Black Friday was a term once associated with money panics and stock market crashes. Now it is a shopping spree day. How times have changed!

The situation in Eire points out again how the Establishment has painted itself into a corner. On one hand the workers of Ireland — like their associates across the length and breadth of Europe — are saddled with unsupportable obligations. On the other, the obligations cannot find home with those who have the means to absorb losses. Countries cannot force speculators to lose money.

Rather, they cannot force speculators that have lost money on one set of speculations to speculate further. Speculators are like baby deer, which must be coaxed by ruinous interest rates levied on their putative customers to take the bottle of nourishment.

Since the EU and the IMF have crafted a bond- holder bottle for Irish creditors, the deer turn their attention to Spain. As in Eire, unless the creditors can be assured that they will be made whole at the expense of Spanish labor, they will refuse to buy Spanish bonds at rates that do not reflect the increase in risk.

Meanwhile, if workers are seen by the baby deer as financially or physically unable to fill the bottle, the creditors have another reason to refuse to buy the bonds. It’s ‘damned if they won’t and damned if they can’t!’

The Euro- credit system is in a self- feeding positive feedback loop:

Allied Irish Banks Plc and Bank of Ireland Plc’s senior debt slumped on concern the government will force some of the cost of bailing out the country’s banks onto senior bondholders.

European Union and International Monetary Fund officials are taking legal advice on how senior bondholders can share the cost of Ireland’s 85 billion-euro ($113 billion) bailout without triggering lawsuits, the Irish Times reported today, without saying where it got the information. Negotiators plan to finalize the aid package on Nov. 28 before markets re-open after the weekend, an EU official said on condition of anonymity.

Allied Irish’s 750 million euros of 5.625 percent senior notes due 2014 plunged 4 cents on the euro to 73 cents, a 5.2 percent decline, according to composite prices on Bloomberg at 1:25 p.m. in London. Bank of Ireland’s 974 million euros of 4.625 percent senior unsecured notes maturing in 2013 fell 4 cents on the euro, or 4.8 percent, to 81 cents.

“While junior bondholders always faced the prospect of taking a haircut on their investments,” senior bondholders “have been sacrosanct” until now, Eamonn Hughes, an analyst with Goodbody Stockbrokers in Dublin, said in a note to clients today. “It is clear that more radical solutions than simply pumping more equity into the bank system are in the offing.”

The issue is whether Ireland’s workers can pay off debts owed by Irish developers and bankers to German speculators.

With those who can emigrating and austerity crushing business activity it is hard to see how this is possible. The servicing shortfall represents risk that must be directed to others. The time remaining to find a bottle- holder for all this risk is shrinking fast. The outcome is a busted euro and a bankrupt Eurozone. Some risk has been shifted to the European Central Bank (ECB) while the EU negotiators eye senior creditors.

It is really hard to see how any of this is going to work as the baby deer are becoming harder and harder to coax.

The act of bankrupting peripheral Eurozone members is ultimately bankrupting to the baby deer. The countries are watching to see who defaults first and by doing so upends the euro bottle cart. Peripherals wish to exit the euro but cannot as they are crushed under massive euro- denominated debts that would have to be repaid in euros. An exiting country reviving its old currency would have to use that (depreciated) currency to buy presumably much more expensive euros. What sort of market would exist to facilitate this trade?

If the euro was stronger — made so by the exit of one of Eurozone’s deadbeats — who would accept the old currency except at some approximation of par? Central bank paper issued by the defecting nation would be useless to purchase hard euros. The euro- defector would be on its own … right?

So would the defector’s old euro- creditor! Baby deer would go from being assured by Brussels that he will get his bottle made whole … to being stiffed! The baby deer bottle would be smashed on the sidewalk!

Screw you baby deer!

Deer would have no choice but accept a haircut (harakiri cut?) and by doing so establish a currency exchange rate between the euro and the defector’s old currency! The less of a harakiri cut, the more parity between the euro and the old currency! Baby deer would be pushing for a full bottle. Currency parity would undermine the rationale behind the euro.

There is nothing to prevent the defector from later on feeding the deer with devalued currency that the deer would take and like. The baby deer won’t lend anymore but who cares? The defector can borrow from its own citizens like Argentina or Japan does and give the finger to the baby deers!

Once one defector nation forces a harakiri cut by this means all the other peripherals will instantly defect from the euro and force the same restructuring upon their own tapeworm- like baby deers. This would be the end of the euro: why endure it when the other currencies allow so much deer- crushing ‘flexibility’?

Potential defectors are Italy, Spain, France and Belgium itself! Hello, drachma, punt, peso, lira and franc. Countries would devalue and unemployment would drop. The Europeans would enjoy a short economic revival. The ‘progress calendar’ would be turned back to … the mid- 1980’s. The dollar would revive and Europe would fall into a severe energy crisis. Oops!

Everything has a price tag.

The various Euro- currencies would trade @ a steep discount to dollars as devaluation to assist employment would make oil more valuable. Since there is no baby- deer leverage or too big to fail aspect to the dollar/oil trade the hapless Europeans would have to pay a large premium for fuel or for dollars! Fuel in Europe would be hard to find!

To connect dots: ongoing lending crises in Europe lead to a euro crisis which leads to currency- related energy shortages in Europe!

As has been mentioned here in different places the only solution is conservation and restructuring. That means rethinking personal transportation …

One bit of evidence for market chaos and deflation to come is the appearance of backwardation in the fuel markets. This has already appeared in the Dubai oil market but has been noted elsewhere:

Oil to Enter Backwardation `Rapidly’ on Rising World Demand, Barclays Says

Justin Carrigan, Bloomberg

Oil markets are poised to enter backwardation, with prompt-delivery prices higher than those for later supply, as demand for crude increases around the world, according to Barclays Plc.

“Global spare crude capacity has fallen this year and is likely to end the year at only a little above 5 percent,” a team led by Paul Horsnell, head of commodities research at Barclays Capital in London, wrote in a report yesterday. “We expect a more volatile and backwardated market to emerge rapidly.”

West Texas Intermediate crude, the U.S. benchmark grade, hasn’t been in backwardation since November 2008 on the New York Mercantile Exchange. The January delivery contract traded 56 cents below the February contract on the Nymex at 10:40 a.m. London time today. Oman futures on the Dubai Mercantile Exchange went into backwardation Nov. 15, with the January contract trading at $83.50 a barrel today, a 3-cent premium to February.

Hmmm … Barclays needs a better analyst. Rising prices would be reflected in contango as the the higher futures prices would be met by spot prices that increase to meet the futures price. Contango represents a bull market in crude and increasing inflation.

A short- term ‘bump’ in regional prices would not cause backwardation because the overall world market trend would not change. In November, 2008, the Great Recession was underway and the oil bubble- price was collapsing from $147.

Oil futures prices serve two mutually opposing masters. One is inherent to futures contracts which has all months moving in lockstep with the physical price. The futures price tends toward a premium to the spot price because of the ‘risk’ price of the contract measured against the ‘risk- free’ price of the physical good. When the spot price of a barrel jumps $2, the various months’ contract prices also jump $2. The contracts and spots track each other.

This is part of the markets’ value- discovery process. Traders discover the lowest- risk price for future oil deliveries relative to the current physical price (which is discovered by the futures’ price … it gets incestuous).

Meanwhile, when the contracts mature the physical price and the contract price converge. These are the two opposing forces; the premium determined by risk alongside the convergence in price that takes place when ‘future’ becomes ‘present’.

The outcome is that both or either futures or spot traders have to make the ‘adjustment’. Since physical traders on futures markets are inherently hedged — taking offsetting positions in both markets @ maturity — there is no money lost.

In a bear market, futures contracts fall to meet spot prices. Futures traders compensate by bidding distant month contracts lower to meet the anticipated spot price. This is backardation. It indicates deflation whereas contango is an inflation bet.

Many futures markets do not have either phenomenon. Perishable goods such as foodstuffs do not experience it. Precious metals rarely experience backwardation. Contango in fuel markets has been a good ‘wealth’ indicator. Since 1998, higher bids for fuel meant more available funds and higher margins on output. The rich can afford higher prices; this is true for both handbags and fuel. When oil prices decline the cause is either increases in supply — something that will only take place in Michael Lynch’s dreams — or effective demand decreases.

Effective demand is willingness to purchase along with the means to actually consume.

This last part is very important! Actual consumption is becoming very expensive. Only a massive enterprise can take physical crude and make profitable use of it. The sunk costs of that enterprise determine whether use of the crude is profitable.

A speculator can buy then sell his commodity interest for currency and take a profit if he is lucky. His profit is dependent upon the entire fuel enterprise turning a profit. If the ‘system’ is unprofitable, so will be all the speculations that depend on it!

The cost of massive surplus infrastructure plus massive speculation has been increasing prices leading to system bankruptcy. The outcome is a medium- or long term bear market in crude. The dynamic is identical to what took place in housing leading to a peak in 2006. Credit and the ‘wealth effect’ of asset price inflation pushed house prices high enough to undermine the system and drive house prices lower. There is no difference between what is taking place in crude and and in housing … and in fact in other markets such as metals.

This deflationary outcome is what longer term backwardation would suggest. It is a very clear warning sign that the dreaded ‘Double Dip’ is almost here.

Connecting more dots ……..

I suggested watching for backwardation in September. At the time contango was shrinking. Oil prices are very high right now as + $80 prices cause economic nausea. The price is paid — as with the various bank bailouts — by businesses and individuals @ the bottom of the food chain.

An outcome is the decline of available credit. With credit gone the means to bid up fuel prices and ration by price vanishes. What is left is rationing by physical shortages as well as administrative rationing. Since the latter is a last resort in the Ayn Rand world we inhabit the realistic means of fuel allocation will be actual physical shortages. As the euro unravels, the likelihood of Euro- shortages increases. Since these are the consequence of impaired earning power the shortages are likely to be permanent!

Meanwhile, shortages are appearing in diesel fuel in China and elsewhere as diesel is shipped to China to meet its transport needs. The possibility exists of knock- on effects on China coal production and distribution. Peak oil effects all other forms of activity and energy production.

Peak oil is simple, like a leaky bucket … or a baby deer.