<The European Gas MarketThe Oil DrumDrumBeat: August 2, 2008>

314 comments on Peak Oil and the Financial Markets: A Forecast for 2008--July 31 Update

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andybts on August 1, 2008 - 11:50am Permalink | Subthread | Parent | Comments top

I keep thinking that the differences in types of mortgages might mean that the US is more likely to follow an hyperinflationary bail-out program than the UK. Although I still think the UK will inflate the money supply in propping some organisations up, and will face a rapidly weakening currency, making most of the goods we purchase as imports much more expensive. Sadly this now includes the most important things, like food and energy.

As I understand it, negative equity is less financially disruptive in the UK, as mortgagers can't so easily just hand back their house keys and walk away, free of debt (as they can in the US).

Another influencing factor though is that defaulting is much more complicated politically, and technically than monetizing debt to pay obligations. Defaults trigger events in credit derivatives markets, which may cascade out of control. Inflating/bailing is easier in the short term and the impact takes longer to be felt, so it's harder for people to know who to blame. Not sure this makes it inevitable, but seems more likely to me - in debtor nations anyway.

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Gail the Actuary on August 1, 2008 - 12:33pm Permalink | Subthread | Parent | Comments top

It seems like countries will try to inflate their problems away, as long as they can. Once they run into to many barriers, they may have no option but let nature take its course.

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andybts on August 1, 2008 - 1:22pm Permalink | Subthread | Parent | Comments top

What kind of barriers do you foresee? Do you think they will be forced to stop by foreign creditors withdrawing funding? This might be the case, but I can easily imagine hyperinflation first, what do you think?

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Gail the Actuary on August 1, 2008 - 2:22pm Permalink | Subthread | Parent | Comments top

I think that the amount of debt defaulting will just become overwhelming. There will be bank defaults that cannot be covered by FDIC and FSLIC assets. There will be the big auto makers and the airlines. At some point, the State of California may default on its debt.

Before it comes to this point, there may very well be problems with creditors withdrawing funding, interest rates rising, and the exercise of balancing the budget becoming totally impossible. There may even be the problems with oil availability that I mentioned, and keeping the pipelines running. If folks at the ends of the pipelines were to get left out, this could be a very bad situation.

I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long.

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DelusionaL on August 2, 2008 - 8:44am Permalink | Subthread | Parent | Comments top

"I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long."

This situation has me totally perplexed. We are going to do bailouts- that we can foresee, but is that money going to evaporate somehow? I just can't get my head wrapped around this one. It seems like a transfer of increasingly worthless money to the wealthy but they too will be dragged down. Like killing the goose who lays the golden eggs.

Comments?
D

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Gail the Actuary on August 2, 2008 - 10:13am Permalink | Subthread | Parent | Comments top

Money is created when people / businesses / government obtain loans and spend the proceeds. The amount of these loans looks like it will be dropping precipitously, as the various borrowers default on loans and lenders become increasingly wary of making new loans.

The government may try to bail out lenders, but even with all of this new money, it will be difficult to replace what has recently been available.

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notintodenial on August 2, 2008 - 2:07pm Permalink | Subthread | Parent | Comments top

DelusionaL,
I have read that using the Case-Schiller numbers so far, about 1.3 trillion dollars of 'hallucinated wealth' (hat tip to JHK) in the form of US residential housing equity have evaporated already. Mish Shedlock, Enrico Orlandini, and other respected analysts believe that the deflationary cascade will overwhelm the capacity of the US gov't credit rating to bail out.

We shall see.

Errol in Miami

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Iconoclast421 on August 5, 2008 - 1:59pm Permalink | Subthread | Parent | Comments top

It is difficult to understand how and when the inflation will change over to deflation. For one thing, it happens simultaneously. (Food and energy prices have been rising while suburban real estate equity has been vanishing.)

The thing to keep in mind is that most of our assets only have full value if we're not all trying to sell them at the same time.

Another key point is that as state budgets go into deficits, they will likely choose to defund pension plans and sell off assets at bargain basement prices.

For starters, everyone should check out Chris Martenson's Crash Course. Just google:

end of money crash course

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