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DrumBeat: August 7, 2007
Posted by Leanan on August 7, 2007 - 8:52am
Topic: Miscellaneous
Despite oil's record high last week, forget about crude going to $100 a barrel.Prices have already dropped about 7 percent since last week, and are likely to fall even more in the coming years.
That's the consensus of analysts, who say rising production, the advent of biofuels, and conservation measures will likely lead to lower oil prices by 2015.
But how much lower is subject to wide interpretations, and estimates rage from $20 to $60 a barrel.
Carolyn Baker - When Collapse is No Longer Science Fiction: Choosing Hospice Work Instead of Hope
Within the past month, America has witnessed two dramatic events which have illumined the devastating demise of its infrastructure-the New York City steam explosion in mid-July and the collapse of the I-35 bridge in Minneapolis, on August 1. And in the same span of one month, a Chief Justice of the Supreme Court "collapses" with a seizure. Now, in neon lights, we have the word "collapse" writ large across empire even as the overwhelming majority of Americans refuse to face the collapse of every institution in the nation: the economy, healthcare, education, religion, transportation, energy, political systems, and so much more. In fact, the word "collapse" is now being used in American journalism with increasing frequency to describe the ubiquitous crumbling of nearly all facets of our society. Yet as most progressives with the exception of Oprah, along with middle America, avoid talking about the ghastly plot of the recent novel "The Road" or steer clear of discussing information such as that contained in the documentary "What A Way To Go: Life At The End Of Empire", they have only to turn on CNN and see that collapse is no longer something imagined by Stephen King or wild-eyed, doom-and-gloom "conspiracy theorists". Collapse is here, it's now, and it's going to exacerbate, and Minneapolis is a metaphor as well as another gruesome literal example of civilization's grotesque self-annihilation.
2008 – 2012: A Critically Important Period - Migrating to New Energy Paradigms Part 4
There are three possible outcomes:If the Members of the United States Federal Reserve Board persist in their ill advised strategy of pumping cash into the system as a substitute for wealth building activities, the chart will break up above the top trendline, and the world economy will likely enter a period of asset hyperinflation.
If the Governments of the world continue to support the Fossil Fuel Industries, but the US Fed recognises the folly of its monetary strategy and tightens the money supply, we are likely to experience a break down below the lower trendline. Under these circumstances, the debt mountain is likely to implode, and the derivative mountain along with it.
If the Governments of the world move rapidly to migrate the world economy from its dependence on fossil fuels to appropriate new energy paradigms, then it may be possible to trade out of the problems by causing the world's markets to enter a long term (20 years +) trading range. During this period, the new energy paradigms can give the world economy a shot in the arm, and true wealth (as opposed to money) can be created. Some of this wealth can be diverted to repay outstanding debt.
The struggle for Iraq's oil flares up as Kurds open doors to foreign investors
Baghdad is trying to reassert central control of reserves run by Kurdish authorities.
Iraqis Favor State Companies To Develop Oil Sector - Poll
Most Iraqis believe Iraqi companies rather than foreign firms should take the lead in the development of the country's vast oil fields, the world's third largest, according to a poll released Monday.
Money pipeline is drying up for some biofuel projects
The biofuel industry is thriving on governments’ push for alternatives to foreign oil, though ethanol still accounts for only 4 percent of the nation’s gasoline use. Tax credits and renewable-fuel mandates also are politically popular, especially in the Midwest, where many of the new plants would be built.Too many, some warn.
China almost pips Japan as world No.2 oil importer
China came close to becoming the world's second-largest crude oil importer last quarter, as North Asia's refinery maintenance season slashed Japan's imports but failed to limit galloping Chinese demand, data showed.
Nigeria: NNPC Plans Two More Refineries
The NNPC says it is working with some International Oil Companies (IOC) to establish two new refineries with capacities for 200,000 barrels daily each.
Japan refiners buy Venezuelan crude after two decades
Japanese refiners have purchased Venezuelan crude for the first time in about two decades under a long-term deal that offers both countries greater diversity.Nippon Oil Corp bought 500,000 barrels of light sweet Santa Barbara crude, a rarity among Venezuela's largely heavy grades, while Idemitsu Kosan Co bought 400,000 barrels, the companies said in statements released yesterday.
More than a quarter of America's oil flows through southern Louisiana. Too bad the land is slowly sinking into the sea....Some 25 square miles of Louisiana have been collapsing into the gulf each year for three-quarters of a century. A total of 1,900 square miles, roughly the area of Delaware, disappeared between the 1930s and 2005, and another 217 square miles were pulverized into liquid by Katrina and Rita. And that land loss, says Ted Falgout, who has run Port Fourchon for 28 years, poses a growing threat not only to the people who live here but also to the U.S. energy supply.
"We're on a train wreck here," says Falgout. "We have not designed the energy infrastructure - or any infrastructure - [to handle land loss]."
The problem afflicts all of southern Louisiana. As land turns to water, it is exposing thousands of miles of oil and gas pipelines that were built underground and were not designed to withstand water or waves.
"There are places where a pipeline that was laid in marsh, well protected, is now in five or six feet of water - in an open bay that is subject to a vessel coming across and hitting it," says Falgout. "That's the thing that [oil companies] are spending their money on right now. It's so huge that they're just putting out fires."
Africa: Three Hard Truths About the World's Energy Crisis
When it comes to the future of energy, the world needs a reality check.Contrary to public perception, renewable energy is not the silver bullet that will solve all our problems. Indeed, in the decades ahead, three hard truths will generate turbulence in the global energy system.
Iran's refinery problem reflects global fuel shortage
The National Iranian Oil Company expects oil revenue to reach a record of more than $52bn in the current financial year. The problem is that much of the state's revenues are draining away in subsidies to support a largely closed economy lacking foreign investment. One of the most pressing challenges to the government lies in the country's lack of refined fuels.
Oman’s oil production in January-May drops 5.3% to 713,000 bpd
Oman’s Ministry of National Economy said yesterday crude oil production dropped 5.3% in the first five months of the year as the country’s ongoing output decline extends into the sixth consecutive year.Omani oil production averaged 713,000 bpd in the five months ending in May, down from a daily rate of 753,200 barrels in the corresponding period in 2006, according to data published on the ministry’s website.
Output was lowest in May at 708,300 bpd, the data show.
IMF Fears Energy Crisis in Albania Will Damage Growth
The IMF expressed worries on Monday that the energy crisis that has swept Albania will have adverse effects on economic growth.“The energy crisis presents a great danger for Albania. It affects all medium-term economical indexes and could create a hole in this years budget,” it said in a press release.
Chavez, Kirchner secure energy deal
Venezuelan President Chavez and his Argentinean counterpart President Kirchner have sealed a treaty on energy security in Buenos Aires.The agreement on Monday follows a series of deals between the two countries that are working on stronger ties to strengthen relations within South America.
Beijing dips its toes in troubled waters
For millennia, China's great rivers have snaked their long, meandering courses across the country, providing the life-blood for Chinese civilization: water. Along the banks of the Yellow River to the north and the Yangtze to the south, 5,000 years of history and culture have unfolded, with agriculture flourishing in an otherwise inhospitable terrain and trade bringing prosperity and dynamism in its wake.But the effects of severe pollution, large-scale damming and climate change are combining to spell catastrophe for the rivers, with deeply worrying implications for the millions of Chinese who continue to depend on them.
Venezuela's Chavez Lobbies South America
Venezuelan President Hugo Chavez sought to expand his petrodollar influence in South America as he launched a four-nation tour Monday to promote his country's entry into a regional trade bloc and to offer energy and financial deals to allies.
What's the Funding Outlook for DOE's Geothermal Program in 2008?
The Department of Energy (DOE) Geothermal Technologies Program was funded at only $5 million for the fiscal year 2007, compared with $22.3 million in 2006. To you and me, $23 million might sound like a lot of money. But putting this number in perspective, America spends more than $13 million per hour on foreign oil, according to the National Resource Defense Council (NRDC).
Senate Clears BLM Director After Interior Blinks on Roan Plateau
The Interior Department on Friday gave the state of Colorado more time to comment on the oil and gas drilling plan for the Roan Plateau, clearing the way for the Senate to approve the nomination of Jim Caswell as the Bureau of Land Management director.Sen. Ken Salazar (D-Colo.) lifted his procedural "hold" on Caswell after hearing from Interior Secretary Dirk Kempthorne. Salazar was using the BLM nomination to secure concessions on the bureaus's oil and gas operations.
In areas vulnerable to hurricane risk, rates have been rising in recent years and they will continue to do so. This is because the frequency and severity of catastrophic storms is expected to grow for decades to come.
Saudis slap big hike on heavy crude oil prices
Saudi Arabia has raised the official selling prices of its heavier crudes in September by more than expected for Asian buyers, setting Arab Heavy at its highest in two years, traders said yesterday.The world's top oil exporter also raised prices to Europe but cut the OSPs sharply for all its crude supplies to the United States. For Asian customers, Arab Heavy was set at a discount of US$3.60 (HK$28.08) a barrel to the Oman/Dubai average, up 70 percent from August and at the strongest level since July 2005, exceeding the top end of forecasts in a survey last week.
"Refiners in Asia are all after medium and heavy crudes. It's very economical for them now," a seller said, referring to the relatively cheaper heavy crude grades compared with lighter Brent-linked crudes.
Oil continues decline from record levels
Crude oil prices slid further Tuesday on concerns about the U.S. economy as investors sold to lock in profits from last week’s record-setting rally.Gasoline steadied after dropping more than 10 cents.
The price declines began Friday after the government issued weaker-than-expected employment numbers. That data added to the sentiment from a series of other government reports that analysts say suggest the economy might be slowing.
Analysis: Venezuela's oil takeover
Efforts to nationalize Venezuela’s oil and gas sector have increased government revenue by $5.8 billion a year since 2004, according to President Hugo Chavez.In a national address last week, Chavez said, “You can’t have a socialist economist model … without including oil,” a reference to his recent efforts to wrest greater state control of the country’s petroleum sector.
Drilling Down on Higher Oil Prices
There is already some oil scarcity, current prices being several times what they were just a few years ago, but a great deal more lies before us. While we wait for the future to unfold let’s visualize what real oil scarcity will look like. So far scarcity is causing poor people and poor countries to be priced out of the market when a portion of their usual oil purchases go to a richer country that is willing to bid more. There are now on the Energy Investment Strategies website a growing list of news articles about developing countries which are experiencing energy shortages, some of which are at least partly caused by insufficient oil supplies.
States leading the way on renewable energy
Back to the bigger picture, though: will Congress have the vision to do what half the states have done already? Or, does that fact lessen the need for federal action? I'm guessing many utilities would like the federal standard, not only because it sets a lower goal (which I'm assuming would override state initiatives), but also because it creates a uniform standard. On the plus side, though, it would show some national resolve for moving towards a cleaner energy future. Still, I'm tempted to say let the states continue what they're doing, as they're setting more ambitious goals, and focusing on the energy sources that will serve them best (i.e., wind in Illinois). The feds may not catch up... but maybe we won't need them to do so...
Nine Eastern Coal States Form New Coalition
The Eastern Coal States Coalition has paid at least two visits to Congress since late June, and the members will continue to keep a close eye on how federal lawmakers focus on mine safety and other industry issues.
If you didn't know we're paying outrageous prices — not just at the pump, but geopolitically, and in blood—to fill up our Hummers and S.U.V.s, you've probably been willfully ignorant. Neither we Americans nor anybody else has a God-given right to cheap oil, and it seems like astonishingly bad judgment bordering on lunacy to build our entire economy and infrastructure on a rapidly depleting natural resource without hope of replenishment. But here we are, and A Crude Awakening is a jolting look at how we got here, and the almost unthinkable consequences of any of the bad options that lie before us for the future.
Climate bill shaves $533 billion off economy
A Senate bill to cut U.S. greenhouse gas emissions would raise energy prices and also reduce American economic output by more than half a trillion dollars over two decades, according to a government report released on Monday.
Gore: Polluters manipulate climate info
Research aimed at disputing the scientific consensus on global warming is part of a huge public misinformation campaign funded by some of the world's largest carbon polluters, former Vice President Al Gore said Tuesday."There has been an organized campaign, financed to the tune of about $10 million a year from some of the largest carbon polluters, to create the impression that there is disagreement in the scientific community," Gore said at a forum in Singapore. "In actuality, there is very little disagreement."
World hit by record extreme weather events in 2007: WMO
Many parts of the world have experienced record extreme weather conditions including unusual floods, heatwaves, storms and cold snaps since the beginning of the year, the UN's weather agency said Tuesday.Preliminary observations also indicated that global land surface temperatures in January and April reached the highest levels ever recorded for those months, the World Meteorological Organisation said in a statement.
A new Round-Up has been posted at TOD:Canada.
Will the Fed cut interest rates to alleviate the developing credit crunch, and will it have the desired effect if they do? Can lowering the cost of credit overcome risk aversion and the fear of cascading default? If not then the Fed will not be able to prevent the contraction of the money supply and the spread of contagion amid a sea of margin calls.
In Canada, oil sands fever continues unabated and a drilling frenzy may be shaping up in the Arctic. One political leader urges the defence of Arctic sovereignty, while another holds talks on North American Union well away from the public eye. In Ontario, businesses are paid not to consume power.
On the climate front, northern infrastructure faces a serious challenge as melting permafrost undermines it's foundations, while Australia experiences a 1000 year drought.
Finally, we remember that 62 years ago, the world was waking up to the beginning of the nuclear weapons age.
Mish doesn't think a rate cut will help. The MMMMB (Ministry of Miracle's Magic Miracle Bucket) is empty!
http://globaleconomicanalysis.blogspot.com/2007/08/will-rate-cuts-save-e...
Yes, and I agree with him. I ran that link in my post, and it was that I was alluding to in the intro.
Stoneleigh,
I think you underestimate two things:
1. the power of the Federal Reserve System;
2. the determination of the Fed to prevent debt deflation.
For all intents and purposes, the Fed has unlimited power to fight deflation. They can legally lend unlimited amounts of money to whomever they think needs it to avoid a financial catastrophe. Although they typically lend only to banks, their charter does not limit them to this kind of lending.
All the members of the Board of Governors of the Federal Reserve System live in the shadow of the Great Depression. To a large extent, the Great Depression was caused because the Fed at that time was worried about inflation and stood by and did nothing while banks folded by the thousands. There is unwavering resolve among members of the Board of Governors that never, never again will the Fed twiddle its thumbs while debt deflation destroys the U.S. economy.
Given their powers and given their will, I think the odds against debt deflation are nine to one, because the Fed will always accept more inflation as a necessary cost to ward off the possibility of debt deflation. Thus I think the chances of a cascade of failures of major financial organizations is almost nil. Businesses will continue to borrow, consumers will continue to borrow more on their credit cards, the government will go merrily on its borrowing way to finance ever greater deficits.
I cannot visualize a scenario in which the Fed allows a debt deflation; Bernanke has said as much with his famous "helicopter" statement. Metaphorically speaking, the helicopters are loaded and the rotors are spinning; and the Fed has all the helicopters it could ever possibly need.
Inflation, normally hard to keep down, is assumed to be easy to initiate. Much like starting a fire with wet wood, in a climate of pessimism it can take a lot of matches.
How many matches Bernanke has and his willingness to deploy them doesn't convince me of whether or not a fire will ensue. This is why timing is so important in order to avoid the downward momentum getting beyond the rate of helicopter deployment.
Compounding the credit bubble is the oil chicken coming home to roost and the general perception that we are 'losing the war', whatever that means. The future of both those aspects will not be altered in the public mind by throwing money about. False confidence, like any confidence, takes time to build. There isn't any - time that is.
I agree with you in the classic sense, but this is looking like 1973 all over again, but for real this time. Vietnam was about ego, and OPEC was arbitrary. Now its really about oil. Really about oil. Adding more money won't change the fundamentals.
Exactly. In the case of Bernanke's helicopter, there is only so much air as you go up in altitude. That's why they don't use helicopters to get to the space station.
In the case of the Debt engine, the 'air' is the Perception of Perpetual Growth. Banks loan money (supposedly) because you are going to be worth more than you are at the moment they loan the money. Sub-prime believes that the house will increase in value to cover the interest on the loan (the only real value to a bank: the principal is just a present number, whereas interest is Future Income).
It's all about the future, yet nobody is asking the children what they want. Most of them would say "I want Mommy and Daddy to play with me, to cook pancakes, and to get me a puppy." That's it. The wisdom of children is more than the Fed. Most of the things encouraged by the Fed's low interest rates are going to fail without cheap energy. Most of the policies of the Oil Men in Washington are working to MAKE THEM FAIL through HIGHER Prices for energy in order to line their pockets with all that cash that consumers SEEM to have, since they haven't slowed down on buying gas at 3 times it's recent cost. Why? Because they are so in debt to the banks to pay for the house they bought when money was easy to get.
Remember: Energy is the air for Bernanke's helicopter. If he gets cold and shuts off the fan (an old test pilot joke), his helicopter is going to crash on top of the refinery that is fueling his helicopter. It can't come down to a soft landing. Any reduction in altitude is a knife in the eye of Growth Perception, and any increase in altitude(lower interest rates) increases the costs of resource inputs, requiring higher altitude. He's reached the altitude ceiling of that helicopter and it's heading strait for a big, black mountain called Peak Oil.
And that, my friends, is beautiful prose for the day. Back to farming for me. The chickens are hungry.
"If you want Change from the corporatocracy, keep it in your pocket. "
I forgot one little note to Mr. Bernanke:
Put your head between your knees. You know why.
It's all about the future, yet nobody is asking the children what they want. Most of them would say "I want Mommy and Daddy to play with me, to cook pancakes, and to get me a puppy." That's it. The wisdom of children is more than the Fed.
Warning: Somewhat off topic.
Children have a very pure, caring morality. In part, because the adults around them inculcate it, basic principles of fairness etc. are important. Few tell young children, it is just great to rip off those other kindergarten kids and make money and hit other kids to make them obey. For another part, adults want children to believe they live in a stable, safe world, where morals count, because, to bring up their children, they need everyone to respect certain principles, *otherwise they can’t bring them up.* Then, there is also the basic perception of fairness, of evil, of hateful actions, of damage, or violence, that children just seem to grasp. (Naive justice.) That is a constant of human life. Yet, the basic principles are later abandoned, both by the children, and their parents. (Not in all cases of course.)
Here is Rachel Corrie in her 5th grade speech. Her destiny was exceptional, her speech is simply typical.
Corrie, youtube
Thanks for that Noizette.
That was great and in my opinion very relevant.
When I see bad behavior from anyone young or old I automatically think that the parents must not have taught them well.
Dick Cheney’s mom should put him over her knee.
On the other hand, it is considered 'cool' by some, and a mark of individualistic non-conformity to have a bumper sticker proclaiming "My kid beat up you honor student"
"God bless the child that got his own....
That got his own....'
Interesting message in that rather old jazz "hymnal."
Well, I took those as a humorous response to the "My Kid is an Honor Student" business, which deserved to be lampooned, kind of like putting, "Star Fleet Academy" or, "School of Hard Knocks" stickers on your rear window.
Continuing the Helicopter analogy...
I don't think Ben has the skill to try AutoRotating.
As you know AG, Ya only get one chance at AutoRotaing...
JC
AutoRotation reminded me of the Jesus nut (the big one on top that only Jesus can put back on) and then I saw your initials and it all went "click"...
The globalist helicopter might just meet Mr Grail.
:-)
Hello Don,
I would say Bernanke has already been round in his helicopter, but he dropped free debt instead of free money, and the consequences of that will (IMO) become apparent this year.
The Fed has acted as midwife to a credit expansion (by holding the cost of credit artificially low), but a credit expansion (as opposed to a currency inflation) can only continue until the debt which created it can no longer be serviced. I would argue that we are at or near that point now.
I don't doubt that the Fed will cut short term rates as well as attempt some sort of bailout. What I do doubt is that they can succeed for long in preventing the money supply from contracting, let alone increasing it, in the face of risk aversion spreading like wildfire. Financial panic can remove liquidity faster than the Fed can pump it in, as we've seen in recent weeks. The Fed's normal game plan depends on incentivizing ready, willing and able borrowers and lenders. If risk aversion or debt serviceability curtail either the willingness or the ability to borrow and lend, then this strategy becomes impotent.
In addition, the Fed can only cut short term rates to zero. As the Japanese discovered, zero is not low enough when the money supply is contracting (ie deflation, following von Mises and the Austrian school), because real interest rates (nominal rates minus negative inflation) can remain punishingly high. Also, under such circumstances longer term rates may remain stubbornly high despite cuts in short term rates, as a reflection of risk aversion. A high rate in nominal terms would be very high in real terms under such circumstances.
I realize that the Fed has other magic wands, but I think they'll do too little too late. Ultimately I don't see them being able to overcome the power of a financial panic (not that we're there yet, and I don't expect us to be until probably the fall). By way of analogy, what the Fed will try to do is to cure a hangover by having a few more drinks - eventually the patient dies of alcohol poisoning. Hence the thought that you can't solve a problem by doing more of what created it in the first place.
Stoneleigh - I agree with you about the interest rate bottom; Japan actually went negative for a while.?? What didn't happen was a contraction of the money supply. It was a contraction of velocity, that irascible bugbear of central bankers.
Offering money at negative rates doesn't assure that borrowers will show up to take it if they think that assets will depreciate faster than the negativity. What if they gave a party and nobody came?
It's hard to develop a hundred thousand dollars worth of action out of a forty thousand dollar wage. Inflation of the money supply without corresponding wage inflation won't turn around a mass consumer economy such as the US. The housing bubble is exhibit A of wage/asset debt disconnect.
There may not be an answer. There wasn't in Japan. For those solutionocopians out there, my sympathies, but this is looking like a classic paradigm shift right about when I would have expected it. Such things have a life of their own to lead. And they never play out quite the same way as the last.
Petro: You make good points, but the Japan example is misleading. Japan has always had a strong current account surplus which has provided strength to the Yen even with very low interest rates. The USA is actually in a situation similar to that faced by Argentina, not Japan. Japan was able to have a deep recession combined with a strong currency- it is very unlikely the USA can do the same. The structural weakness of the dollar makes deflation less likely to persist if it can occur.
Argentina borrowed in dollars, not in local currency. Poor economic management (a delusion by Menem for short-term illusory prosperity) and this mismatch of income to liabilities resulted in the breakdown.
US has the luxury (so far) of borrowing in a currency which can be debased at its own choice---though with consequences.
As it turns out---Argentina has been growing and doing well economically for the last few years after normalizing to true market values. Export of agriculture is strong.
But now, populist and foolish intervention for populist reasons is resulting in another external "debt" crisis, for fossil fuels.
I know. I was hoping that the conundrum of reserve currency/ largest debtor wouldn't cloud the issue. In all probability, the days of US reserve currency hegemony are already over and only the process of how we move to a multiple reserve system is yet to play out. I was hoping for an orderly and managed transition, but the majority of our leaders seem willing to go down with the ship.
Between the Euro and the rise of China, the writing on the wall is now almost fading from age. John K Galbraith refers to the period of the first World War as the 'great ungluing'. It was in 'The Age of Uncertainty', a very fine read. The scene seems set for another such age.
Japan never really dealt with it's bad debt problem and so hasn't been through what's facing the US now, despite nearly two decades of difficulties during which it burned through a huge surplus building things like 4-lane highways to nowhere in a vain attempt to stimulate the economy. I would argue that their problems are far from over though, and that the impact on their money supply (as opposed to problems with the velocity of money) lies largely in their future. They have yet to face the unwinding of the yen carry trade for instance, and the dislocation that will inevitably bring.
Japan never really dealt with it's bad debt problem
As 'we' like looking at everything from energy - how much of the trouble could be from rising energy costs? Has anyone done an analysis?
You can prevent a hangover indefinitely by taking more and then even more drinks: I think that is what the Fed will do. We are addicted to cheap and readily available credit; the Fed dare not take away the punchbowl now that some at the party are getting anxious.
I assume you are familiar with the term "liquidity trap," where lenders refuse to lend or borrowers refuse to borrow. This is the famous case of "pushing on a string" with monetary policy impotent. Although a liquidity trap seems to be what is in your forecast, I consider the possibility of our stumbling into one as remote. Why?
Because Americans are used to borrowing and lending--and then to borrowing ever more. I do not think financial organizations will suddenly refuse to lend out of fear, because I think they will retain confidence that the Fed can and will prevent financial collapse. It is all about confidence and expectations: If fear and panic take over, then we could indeed get stuck in a liquidity trap and have the Mother of all credit crunches (with the Great Depression being the Grandmother).
So I will try to spin a story of financial collapse:
1. The Dow Jones Industrial Average crashes down through five thousand, then falls to three thousand and even one thousand in a matter of weeks this coming October.
2. Brokerage houses and investment banks fail AS THE FED STANDS BY, PARALYZED BY FEAR AND INDECISION because the dollar is in free fall in the international financial markets.
3. By the millions, American home owners give up on the American dream of home ownership and let their homes go into foreclosure without a fight because
4. Massive cyclical and structural unemployment have thrown twenty million Americans out of work.
Now theoretically this could all happen. But the key premise, which I've screamed out in capital letters is that the Fed stands by and twiddles its thumbs. By creating liquidity the Fed can permit debt expansion. Expansion of debt and credit necessarily expands the money supply. Expansion of the money supply is inflationary, not deflationary.
Over the next dozen years I'm betting on worsening inflation, at least to double digit levels and possibly far beyond that level. As the price of oil rises the Fed will have a choice to either
1. Restrain the growth of credit and money so as to restrict inflation or
2. Expand the growth of credit and money so as to avert deflation and depression.
Helicopter Ben is not going to fight inflation at the risk of triggering another Great Depression. (By the way, the case of Japan twenty years ago was very different from the current situation faced by the U.S. Also note that Japan has had a controlled and gradual deflation that has not stopped its long-term economic growth, though it did slow it down a great deal.)
"I do not think financial organizations will suddenly refuse to lend out of fear..."
What makes you think it isn't already happening?
http://www.chron.com/disp/story.mpl/front/5032292.html
"I do not think financial organizations will suddenly refuse to lend out of fear..."
Another example:
Mortgage problems hit Houston market
http://www.chron.com/disp/story.mpl/business/5032292.html
Triumvirate of collapse - Economy, Ecosystem,
Just came across this one at the RoundUp
http://www.iht.com/articles/2007/08/05/bloomberg/bxmortgage.php
Now theoretically this could all happen. But the key premise, which I've screamed out in capital letters is that the Fed stands by and twiddles its thumbs. By creating liquidity the Fed can permit debt expansion. Expansion of debt and credit necessarily expands the money supply. Expansion of the money supply is inflationary, not deflationary.
Unstated in this is conversion of the debt/credit into consumer spending. The bull market from 1982, culminating with the stock market bubble of the late 1990s, was converted to consumer spending because the resulting "wealth effect" from capital gains in the 401(k)s convinced Americans they did not need to save. Cheap credit blew a real-estate bubble that appears to be deflating now and was converted to consumer spending through equity withdrawals (see, eg, Calculated Risk's charts on GDP with and without mortgage equity withdrawals). While the increased spending was the result of cheap credit, the consumers didn't see it as taking on increased debt -- in both cases, the households saw their net worth increasing.
The Fed can set the stage for cheap credit, but they have little control on where it will flow, and whether or not it will end up as consumer spending. How does the Fed get it into the hands of the consumers without having it show up as explicit debt in their household budget?
I am assuming that if you give the American consumer a chance to spend more, then he or she will do so. By pumping more cheap credit into the system, I think the Fed can keep the real economy perking along; in other words I do not see much of an increase in unemployment during the next twelve months.
To make U.S. consumers afraid to borrow and to spend, you just about have to have a significant increase in unemployment rates. In other words, if real economic growth goes negative, then the elements for a vicious circle of fear and panic and debt deflation and declining real GDP becomes possible. But the real rate of growth in GDP is positive--maybe a bit slower than a year ago, but still well into positive territory. And this positive economic growth is happening despite a rotten real estate market and weak sales for new vehicles--which I find truly remarkable.
I do not assert that Depression and deflation are impossible, only that--given the data we now have--they are extremely unlikely.
On the other hand, a severe stagflation such as we had in the late 1970s and early 1980s is entirely possible and is, in my opinion, rather likely as a response to Peak Oil. Thus I can see zero real economic growth along with double digit inflation and the prime rate back up around twenty percent. We've been there before, we can go there again.
But in my opinion, the conditions that gave rise to the Great Depression simply do not exist any more, and while Peak Oil will (I think) choke off real economic growth, the nominal GDP and the money supply can both go on increasing for years to come. True, stagflation could theoretically mutate into depression, but I think it is much likelier to mutate into increasing rates of inflation.
Debt is a monster. We can kill the monster with major and abrupt and unexpected increases in the rate of inflation. The Fed knows that. When push comes to shove, I think they will kill the debt monster and capitulate on the fight against inflation. Indeed, Ben Bernanke has said as much in his infamous "helicopter" reference: There will be no deflation on his watch.
A real world observation...
A major bank, of which I have a credit card, has been offering me 0% loans for 5 months, or 4.99% for the life of the loan. ($200 processing fee)
Yesterday, I got an offer in the mail lowering that to 3.99%. for the life of the loan.
I'm not sure why the rate dropped 1% when credit markets are supposedly tightening...
Garth
Garth:
My CC gives me those same offers. They have a nasty hook in them. Read the fine print.
What they do is charge exhorbitant rates for ordinary balances. They will set up a special teaser rate for that one "loan".
Any subsquent charges against the card ( purchases, accrued finance charges, etc. ) will incur the exhorbitant rate, and you will NOT be able to pay it off until you have first completely paid off your teaser loan, as they will credit any payments you send them against the freebie teaser first.
While you are enjoying your "cheap" loan, they are enjoying charging you exhorbitant fees for the "ordinary" part of the CC balance which there is no way for you to pay down until you have your teaser account repaid.
Its a baited cat trap. My advice is to shred those offers.
Steve
garth,
part of what hardhat says is true and part is not. i have bought houses using these types of loans(and i wont bore you with the details). yes by all means keep your credit card purchases separate from these "loans". and as long as you perform as you agree, they really will be at 3.99 or 4.99 for the life of the loan. ask a lot of questions before you borrow any money from them i.e what is the minimum payment ? assuming you deposit the "checks" in your bank, find out when the money will actually be available (typically 11 business days, i think)
currently i have a total of 4 cards, one of which i use for ordinary purchases, which i pay off each month. i hope to get them all paid off by year end.
one problem with these loans is that they are considered revolving credit, and in short the only revolving credit that will do your credit score any good is the ones you have already paid off.
I think you are essentially on target with your prediction of a return of 1970s-style stagflation. However, what is happening with price levels and currency exchange rates and financial markets will mask a more profound underlying trend: As the real price of energy in all forms (and along with them energy-intensive or energy-linked essentials like food) continue to rise inexorably, the real prices of everything else (including wages) must also inexorably fall. The GDP pie can only be sliced so many ways, and a bigger slice for energy leaves smaller slices for everything else.
Thus, while it won't technically be anything like the Great Depression, when you focus on what is really happening with all those non-energy pie slices, the practical effect as far as the daily lives of most people is concerned will be declining wages and declining living standards -- pretty similar to what folks experienced during the Great Depression. This time around, people are going to feel increasingly poo